WEBVTT NOTE 64. Epilogue to Part V 1 00:00:00.000 --> 00:00:02.760 Epilogue 2 00:00:02.760 --> 00:00:07.880 The Bretton Woods Agreement established the framework for the international monetary system 3 00:00:07.880 --> 00:00:10.480 down to the early 1970s. 4 00:00:10.480 --> 00:00:16.880 A new and more restricted international dollar-gold exchange standard had replaced the collapsed 5 00:00:16.880 --> 00:00:22.080 dollar-pound gold exchange standard of the 1920s. 6 00:00:22.080 --> 00:00:27.200 During the early post-war years, the system worked quite successfully within its own terms, 7 00:00:27.200 --> 00:00:32.040 and the American banking community completely abandoned its opposition. 8 00:00:32.040 --> 00:00:38.800 With European currencies inflated and overvalued, and European economies exhausted, the undervalued 9 00:00:38.800 --> 00:00:44.120 dollar was the strongest and quote, hardest of world currencies. 10 00:00:44.120 --> 00:00:49.520 A world quote, dollar shortage prevailed, and the dollar could base itself upon the 11 00:00:49.520 --> 00:00:55.520 vast stock of gold in the United States, much of which had fled from war and devastation 12 00:00:55.520 --> 00:00:57.080 abroad. 13 00:00:57.080 --> 00:01:04.200 But in the early 1950s, the world economic balance began slowly but emphatically to change. 14 00:01:04.200 --> 00:01:09.520 For while the United States, influenced by Keynesian economics, proceeded blithely to 15 00:01:09.520 --> 00:01:15.720 inflate the dollar, seemingly relieved of the limits imposed by the classical gold standard, 16 00:01:15.720 --> 00:01:20.680 several European countries began to move in the opposite direction. 17 00:01:20.680 --> 00:01:26.560 Under the revived influence of conservative, free markets and hard-money-oriented economists 18 00:01:26.560 --> 00:01:32.520 In such countries as West Germany, France, Italy and Switzerland, these newly recovered 19 00:01:32.520 --> 00:01:38.120 countries began to achieve prosperity with far less inflated currencies. 20 00:01:38.120 --> 00:01:43.200 Hence these currencies became ever stronger and quotes harder, while the dollar became 21 00:01:43.200 --> 00:01:46.640 softer and increasingly inflated. 22 00:01:46.640 --> 00:01:51.720 The continuing inflation of the dollar began to have two important consequences. 23 00:01:51.720 --> 00:01:58.160 First, the dollar was increasingly overvalued in relation to gold, and second, the dollar 24 00:01:58.160 --> 00:02:03.760 was also increasingly overvalued in relation to the West German Mark, the French and Swiss 25 00:02:03.760 --> 00:02:09.200 francs, the Japanese yen, and other hard money currencies. 26 00:02:09.200 --> 00:02:15.040 The result was a chronic and continuing deficit in the American balance of payments, beginning 27 00:02:15.040 --> 00:02:19.480 in the early 1950s and persisting ever since. 28 00:02:19.480 --> 00:02:24.600 The consequence of the chronic deficit was a continuing outflow of gold abroad and a 29 00:02:24.600 --> 00:02:30.760 heavy piling up of dollar claims in the central banks of the hard money countries. 30 00:02:30.760 --> 00:02:36.600 Since 1960, the foreign short-term claims to American gold have therefore become increasingly 31 00:02:36.600 --> 00:02:39.620 greater than the US gold supply. 32 00:02:39.620 --> 00:02:45.560 In short, just as inflation in England and the United States during the 1920s led finally 33 00:02:45.560 --> 00:02:51.080 Consequently to the breakdown of the international monetary order, so has inflation in the post-war 34 00:02:51.080 --> 00:02:57.560 key country, the United States, led to increasing strange and fissures in the triumphant dollar 35 00:02:57.560 --> 00:03:01.220 order of the post-World War II world. 36 00:03:01.220 --> 00:03:06.360 It has become increasingly evident that an ever more inflated and overvalued dollar cannot 37 00:03:06.360 --> 00:03:12.400 continue as the permanently secure base of the world monetary system, and therefore that 38 00:03:12.400 --> 00:03:18.160 that this ever more strained and insecure system cannot long continue in anything like its 39 00:03:18.160 --> 00:03:20.060 present form. 40 00:03:20.060 --> 00:03:25.540 In fact, the post-war system has already been changed considerably in an ultimately futile 41 00:03:25.540 --> 00:03:29.020 attempt to preserve its basic features. 42 00:03:29.020 --> 00:03:35.720 In the spring of 1968, a severe monetary run on the dollar by Europeans redeeming dollar 43 00:03:35.720 --> 00:03:39.620 claims led to two major changes. 44 00:03:39.620 --> 00:03:45.340 One was the partial abandonment of the fixed $35 per ounce gold price. 45 00:03:45.340 --> 00:03:52.440 Instead, a two-price or quote, two-tier gold price system was established. 46 00:03:52.440 --> 00:03:57.300 The dollar and gold were allowed to find their own level in the free gold markets of the 47 00:03:57.300 --> 00:04:03.380 world, with the United States no longer standing ready to support the dollar in the gold market 48 00:04:03.380 --> 00:04:06.060 at $35 an ounce. 49 00:04:06.060 --> 00:04:12.280 On the other hand, $35 still continued as the supposedly eternally fixed price for the 50 00:04:12.280 --> 00:04:18.060 world's central banks, who were pledged not to sell gold in the world market. 51 00:04:18.060 --> 00:04:23.260 Keynesian economists were convinced that with the dollar and gold severed on the world market, 52 00:04:23.260 --> 00:04:28.120 the price of gold would then fall in the freely fluctuating market. 53 00:04:28.120 --> 00:04:32.880 The reverse, however, has occurred, since the world market continued to have more faith 54 00:04:32.880 --> 00:04:39.040 in the soundness and relative hardness of gold than in the increasingly inflated dollar. 55 00:04:39.040 --> 00:04:45.760 The second change was the creation in 1969 of special drawing rights, or SDRs, a new 56 00:04:45.760 --> 00:04:52.440 form of, quote, paper gold, of newly created paper which can supplement gold as an international 57 00:04:52.440 --> 00:04:56.160 currency reserve behind each currency. 58 00:04:56.160 --> 00:05:00.880 While this indeed put more backing behind the dollar, the quantity of SDRs has been 59 00:05:00.880 --> 00:05:23.320 In the spring of 1971, a new monetary crisis finally led to a massive revaluation of the 60 00:05:23.320 --> 00:05:25.320 hard currencies. 61 00:05:25.320 --> 00:05:30.700 If the United States stubbornly refused to lose face by raising the price of gold or 62 00:05:30.700 --> 00:05:36.260 Or by otherwise devaluing the dollar down to its genuine value in the world market, 63 00:05:36.260 --> 00:05:42.100 then the harder currencies such as West Germany, Switzerland and the Netherlands found themselves 64 00:05:42.100 --> 00:05:46.260 reluctantly forced to raise the value of their currencies. 65 00:05:46.260 --> 00:05:52.100 Their alternatives, a massive calling upon the United States to redeem in gold and thereby 66 00:05:52.100 --> 00:05:57.620 the smashing of the facade of dollar redemption in gold, was too much of a political break 67 00:05:57.620 --> 00:06:01.300 with the U.S. for these nations to contemplate. 68 00:06:01.300 --> 00:06:07.100 For the United States, to preserve the façade of gold redemption at $35 had been using 69 00:06:07.100 --> 00:06:12.980 intense political pressure on its creditors to retain their dollar balances and not redeem 70 00:06:12.980 --> 00:06:14.860 them in gold. 71 00:06:14.860 --> 00:06:20.940 By the late 1960s, General Charles de Gaulle, under the influence of classical gold standard 72 00:06:20.940 --> 00:06:26.620 advocate Jacques Ruff, was apparently preparing to make just such a challenge. 73 00:06:26.620 --> 00:06:32.000 to break the dollar standard as a move toward restoring the classical gold standard in France 74 00:06:32.000 --> 00:06:34.600 and much of the rest of Europe. 75 00:06:34.600 --> 00:06:41.100 But the French domestic troubles in the spring of 1968 ended that dream at least temporarily 76 00:06:41.100 --> 00:06:46.040 as France was forced to inflate the franc for a time in order to pay the overall wage 77 00:06:46.040 --> 00:06:51.180 increase it had agreed upon under the threats of the general strike. 78 00:06:51.180 --> 00:06:56.380 Despite these hasty repairs, it is becoming increasingly evident that they are makeshift 79 00:06:56.380 --> 00:07:02.420 Stop Gaps, and that a series of more aggravated crises will shake the international monetary 80 00:07:02.420 --> 00:07:05.900 order until a fundamental change is made. 81 00:07:05.900 --> 00:07:11.320 A hard money policy in the United States that put an end to inflation and increase the soundness 82 00:07:11.320 --> 00:07:17.220 of the dollar might sustain the current system, but this is so politically remote as to hardly 83 00:07:17.220 --> 00:07:19.980 be a likely prognosis. 84 00:07:19.980 --> 00:07:25.660 There are several possible monetary systems that might replace the present deteriorating 85 00:07:25.660 --> 00:07:32.100 The new system desired by the Keynesian economists and the American government would be a massive 86 00:07:32.100 --> 00:07:38.340 extension of, quote, paper gold, to demonetize gold completely and replace it with a new 87 00:07:38.340 --> 00:07:44.480 monetary unit, such as the Keynesian, quote, bank ore, and a paper currency issued by a 88 00:07:44.480 --> 00:07:47.240 new World Reserve Bank. 89 00:07:47.240 --> 00:07:53.120 If this were achieved, then the new American-dominated World Reserve Bank would be able to inflate 90 00:07:53.120 --> 00:07:59.600 any currencies indefinitely and allow inflating currencies to pay for any and all deficits 91 00:07:59.600 --> 00:08:01.800 ad infinitum. 92 00:08:01.800 --> 00:08:07.640 While such a scheme, embodied in the Triffin Plan, the Bernstein Plan and others, is now 93 00:08:07.640 --> 00:08:13.320 the American Dream, it has met determined opposition by the hard-money countries and 94 00:08:13.320 --> 00:08:17.800 it remains doubtful that the United States will be able to force these countries to go 95 00:08:17.800 --> 00:08:20.000 along with the plan. 96 00:08:20.000 --> 00:08:25.680 The other logical alternative is the rough plan of returning to the classical gold standard 97 00:08:25.680 --> 00:08:29.600 after a massive increase in the world price of gold. 98 00:08:29.600 --> 00:08:35.280 But this too is unlikely, especially over powerful American opposition. 99 00:08:35.280 --> 00:08:40.840 Barring acceptance of a new world currency, the Americans would be content to keep inflating 100 00:08:40.840 --> 00:08:46.080 and simply force the hard-money countries to keep appreciating their exchange rates. 101 00:08:46.080 --> 00:08:51.940 But again, it is doubtful that German, French, Swiss and other exporters will be content 102 00:08:51.940 --> 00:08:57.120 to keep crippling themselves in order to subsidize dollar inflation. 103 00:08:57.120 --> 00:09:03.760 Perhaps the most likely prognosis is the formation of a new, hard-money European currency block, 104 00:09:03.760 --> 00:09:08.400 which might eventually be strong enough to challenge the dollar, politically as well 105 00:09:08.400 --> 00:09:10.440 as economically. 106 00:09:10.440 --> 00:09:16.320 In that case, the dollar standard will probably fall apart and we may see a return to the 107 00:09:16.320 --> 00:09:23.360 currency blocks of the 1930s, with the European block this time on a harder and quasi-gold 108 00:09:23.360 --> 00:09:24.360 basis. 109 00:09:24.360 --> 00:09:30.720 It is at least possible that the future will see gold and the hard European currencies 110 00:09:30.720 --> 00:09:35.520 at last dethrone the triumphant but increasingly uneasy dollar.