1.1. Introduction to money
1.1.4. The Bretton Woods Agreement and the end of the gold standard
Following the demarcation of the gold standard, forty-five countries signed the Bretton Woods Agreement, the first global monetary agreement, under which the majority of the world’s currencies would be anchored to the US dollar, and the United States undertook to convert its currency into gold at the request of any of the world’s central banks, at the rate of 35 dollars per ounce of gold. This system placed the US dollar in a leading role, as the pivot on which the world system turned.
With the growing inflation that came upon the world after the Second World War, the central banks of many countries bought dollars, mainly from Latin America, causing the United States to begin to experience inflation, which was exacerbated by the enormous amounts of paper money being printed to fund the war with Vietnam. In 1971, US president Richard Nixon reneged on the Bretton Woods Agreement, and so ended the era of a dollar linked to precious metals in favour of a floating exchange-rate regime. This measure put an end to an era of stability and the period of the greatest economic prosperity and productivity in the history of the US dollar. The dollar never again recovered the strength it enjoyed during that period.
The collapse of the international gold standard was the most important cause of the economic ruin of the West. For some, the gold standard was the faith in the monetary system; for others, it was a naive idea. But both were agreed that banknotes were valuable because they represented gold; and gold was valuable because it signified labour, according to the socialists; or because it was useful and scarce, according to the orthodox economists.
Today, the US dollar is merely a legal-tender currency, backed by government authority, by the people’s faith in that authority and nothing more. Paper dollars backed by gold and the silver certificate dollar were long ago replaced by the Federal Reserve dollar. On the paper dollar itself, the phrase “Pay to the bearer on demand” has been replaced with “In God we trust”.
Today, every country has a central bank in charge of issuing paper money or the national currency and distributing it to the commercial banks. By means of an agreement between the central bank and the government of the country, the central bank is conceded the right to create money in exchange for supplying the government all the funds it needs. The consequences of such a concentration of power are more than considerable, as will become clear later in this COURSE.