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16 :1
People could bring gold or silver bars at the Mint (the agency
responsible for coining money) and they would get gold or silver
dollar coins in exchange.
• Example:
Country Currency
Germany Silver
UK Gold
France Bimetal (silver & gold)
Gresham’s Law implied that it would be the least
valuable metal that would tend to circulate.
GOLD STANDARD SYSTEM: 1875-1914:
“Gold constitutes treasure, and he who possesses it has all he needs
in this world”. Columbus
Pegged at $35/ounce.
Gold
Collapse of the Bretton Woods Agreement:
However, by the late 1960s, there was a dollar oversupply
in the world economy. This turnaround was due to the US
balance of payments deficit, which in turn was caused by
expansionary fiscal policy. The spending of the US
government increased for three reasons:
(i) The war in Vietnam;
(ii) Welfare expenditure; and
(iii) The space race with the USSR (send humans to
the moon by the end of the 1960s).
As the world economy grew, more international money
(dollar) was demanded. To supply that, the US had to run a
balance-of-payments deficit (how else can the rest of the
world get more dollars?) But if the US continued to run a
BOP deficit, it would loose credibility as a sound currency
country. That was the fundamental dilemma.
The amount of gold that the US had would soon be much
less than the amount of dollars held by other countries. This
meant that the US could not guarantee conversion of
international dollars into gold, if all foreign central banks
tried to cash in.
In the end, the US opted to run a BOP deficit, which led to
the loss of credibility and the collapse of the Bretton
Woods system.