Epilogue
The Bretton Woods Agreement established the framework for the international monetary system
down to the early 1970s.
A new and more restricted international dollar-gold exchange standard had replaced the collapsed
dollar-pound gold exchange standard of the 1920s.
During the early post-war years, the system worked quite successfully within its own terms,
and the American banking community completely abandoned its opposition.
With European currencies inflated and overvalued, and European economies exhausted, the undervalued
dollar was the strongest and quote, hardest of world currencies.
A world quote, dollar shortage prevailed, and the dollar could base itself upon the
vast stock of gold in the United States, much of which had fled from war and devastation
abroad.
But in the early 1950s, the world economic balance began slowly but emphatically to change.
For while the United States, influenced by Keynesian economics, proceeded blithely to
inflate the dollar, seemingly relieved of the limits imposed by the classical gold standard,
several European countries began to move in the opposite direction.
Under the revived influence of conservative, free markets and hard-money-oriented economists
In such countries as West Germany, France, Italy and Switzerland, these newly recovered
countries began to achieve prosperity with far less inflated currencies.
Hence these currencies became ever stronger and quotes harder, while the dollar became
softer and increasingly inflated.
The continuing inflation of the dollar began to have two important consequences.
First, the dollar was increasingly overvalued in relation to gold, and second, the dollar
was also increasingly overvalued in relation to the West German Mark, the French and Swiss
francs, the Japanese yen, and other hard money currencies.
The result was a chronic and continuing deficit in the American balance of payments, beginning
in the early 1950s and persisting ever since.
The consequence of the chronic deficit was a continuing outflow of gold abroad and a
heavy piling up of dollar claims in the central banks of the hard money countries.
Since 1960, the foreign short-term claims to American gold have therefore become increasingly
greater than the US gold supply.
In short, just as inflation in England and the United States during the 1920s led finally
Consequently to the breakdown of the international monetary order, so has inflation in the post-war
key country, the United States, led to increasing strange and fissures in the triumphant dollar
order of the post-World War II world.
It has become increasingly evident that an ever more inflated and overvalued dollar cannot
continue as the permanently secure base of the world monetary system, and therefore that
that this ever more strained and insecure system cannot long continue in anything like its
present form.
In fact, the post-war system has already been changed considerably in an ultimately futile
attempt to preserve its basic features.
In the spring of 1968, a severe monetary run on the dollar by Europeans redeeming dollar
claims led to two major changes.
One was the partial abandonment of the fixed $35 per ounce gold price.
Instead, a two-price or quote, two-tier gold price system was established.
The dollar and gold were allowed to find their own level in the free gold markets of the
world, with the United States no longer standing ready to support the dollar in the gold market
at $35 an ounce.
On the other hand, $35 still continued as the supposedly eternally fixed price for the
world's central banks, who were pledged not to sell gold in the world market.
Keynesian economists were convinced that with the dollar and gold severed on the world market,
the price of gold would then fall in the freely fluctuating market.
The reverse, however, has occurred, since the world market continued to have more faith
in the soundness and relative hardness of gold than in the increasingly inflated dollar.
The second change was the creation in 1969 of special drawing rights, or SDRs, a new
form of, quote, paper gold, of newly created paper which can supplement gold as an international
currency reserve behind each currency.
While this indeed put more backing behind the dollar, the quantity of SDRs has been
In the spring of 1971, a new monetary crisis finally led to a massive revaluation of the
hard currencies.
If the United States stubbornly refused to lose face by raising the price of gold or
Or by otherwise devaluing the dollar down to its genuine value in the world market,
then the harder currencies such as West Germany, Switzerland and the Netherlands found themselves
reluctantly forced to raise the value of their currencies.
Their alternatives, a massive calling upon the United States to redeem in gold and thereby
the smashing of the facade of dollar redemption in gold, was too much of a political break
with the U.S. for these nations to contemplate.
For the United States, to preserve the façade of gold redemption at $35 had been using
intense political pressure on its creditors to retain their dollar balances and not redeem
them in gold.
By the late 1960s, General Charles de Gaulle, under the influence of classical gold standard
advocate Jacques Ruff, was apparently preparing to make just such a challenge.
to break the dollar standard as a move toward restoring the classical gold standard in France
and much of the rest of Europe.
But the French domestic troubles in the spring of 1968 ended that dream at least temporarily
as France was forced to inflate the franc for a time in order to pay the overall wage
increase it had agreed upon under the threats of the general strike.
Despite these hasty repairs, it is becoming increasingly evident that they are makeshift
Stop Gaps, and that a series of more aggravated crises will shake the international monetary
order until a fundamental change is made.
A hard money policy in the United States that put an end to inflation and increase the soundness
of the dollar might sustain the current system, but this is so politically remote as to hardly
be a likely prognosis.
There are several possible monetary systems that might replace the present deteriorating
The new system desired by the Keynesian economists and the American government would be a massive
extension of, quote, paper gold, to demonetize gold completely and replace it with a new
monetary unit, such as the Keynesian, quote, bank ore, and a paper currency issued by a
new World Reserve Bank.
If this were achieved, then the new American-dominated World Reserve Bank would be able to inflate
any currencies indefinitely and allow inflating currencies to pay for any and all deficits
ad infinitum.
While such a scheme, embodied in the Triffin Plan, the Bernstein Plan and others, is now
the American Dream, it has met determined opposition by the hard-money countries and
it remains doubtful that the United States will be able to force these countries to go
along with the plan.
The other logical alternative is the rough plan of returning to the classical gold standard
after a massive increase in the world price of gold.
But this too is unlikely, especially over powerful American opposition.
Barring acceptance of a new world currency, the Americans would be content to keep inflating
and simply force the hard-money countries to keep appreciating their exchange rates.
But again, it is doubtful that German, French, Swiss and other exporters will be content
to keep crippling themselves in order to subsidize dollar inflation.
Perhaps the most likely prognosis is the formation of a new, hard-money European currency block,
which might eventually be strong enough to challenge the dollar, politically as well
as economically.
In that case, the dollar standard will probably fall apart and we may see a return to the
currency blocks of the 1930s, with the European block this time on a harder and quasi-gold
basis.
It is at least possible that the future will see gold and the hard European currencies
at last dethrone the triumphant but increasingly uneasy dollar.