Continuation of International Currency and Gold Standards

 World War I started in 1914, many countries abandoned the gold standard and replaced it with paper money to be sustain their military expenses, which degraded the value of their currencies. In 1917, Three years since the war started, Britain, which had steadfastly held to the gold standard to maintain its position as the world’s leading currency, found itself having to borrow money for the first time. 

The United States entered the war in 1917, it also became the lender of choice for many countries that were willing to buy dollar-denominated U.S. bonds. One year after the war in 1919, Britain was finally forced to abandon the gold standard, the biggest bearer of this transformation were the international merchants as it decimated their bank accounts because they traded in pounds. By then, the United States dollar became the world’s leading reserve by replacing the pound. 

As it is said history repeats itself same sets of events occurred as it did in World War I, the United States tried to stay neutral but it was forced to enter World War II long after the fighting had started. Before it entered the war, the United States served as the Allies’ main producer of weapons, supplies, and other goods. By the end of the war, the United States owned the vast majority of the world’s gold since they were collecting gold as the mode of payment. This precluded a return to the gold standard by all of the countries that had depleted their gold reserves. 

In 1944, delegates from 44 Allied countries met in Bretton Wood, New Hampshire, to come up with a system to manage foreign exchange that would not put any country at a disadvantage. In Bretton Woods conference decisions were taken for establishing World Bank and international monetary fund to preserve global economic stability and full employment in the industrial world. These institutions would also deal with surplus and deficit of member nations and finance post-war reconstruction. 

In the Bretton Woods Agreement, it was established that the central banks would maintain fixed exchange rates between their currencies and the dollar. In return, the United States would redeem U.S. dollars for gold on demand. Countries had some degree over the currencies in situations where the value of their currency became too weak or too strong relative to the dollar, they could buy or sell their currency to regulate the money supply. 

Since World War II made the United States the world’s largest gold reserve, the United States dollar was officially crowned the world’s reserve currency as a result of “Bretton woods conference”. This resulted in reserves of United States dollars instead of gold reserves by other countries. This generated the need for a place to store their dollars, countries started buying United States Treasury securities, which was considered to be the safest place to store money. 

This demand for Treasury securities coupled with the shortage of money needed to finance the Vietnam War and the Great Society domestic programs caused the United States to flood the market with paper money. This became the major concern as to what will happen to the stability of the dollar, this fear drove countries to start converting their dollar reserves into gold. 

This demand for gold was so huge that President Richard Nixon was forced to intervene and de-link the dollar from gold, which led to the floating exchange rates that exist today. Although there have been periods of stagflation—high inflation and high unemployment—the U.S. dollar has remained the world’s reserve currency. 

In our next blog post, we will look at how modern global currency came into being. 

Thanks for taking time to read this blog post. 

Mrinal Choudhary 

References

 • Mulder, Nicholas: War Finance, in: 1914-1918-online. International Encyclopedia of the First World War, ed. by Ute Daniel, Peter Gatrell, Oliver Janz, Heather Jones, Jennifer Keene, Alan Kramer, and Bill Nasson, issued by Freie Universität Berlin, Berlin 2018-02-08. DOI: 10.15463/ie1418.11220. 

• How the US actually financed the second world war: FEBRUARY 13 2019 By: Brendan Greeley, https://ftalphaville.ft.com/2019/02/13/1550057130000/How-the-US-actually-financed-the-secondworld-war/#comments

• The Bretton Woods Conference, 1944, https://2001-2009.state.gov/r/pa/ho/time/wwii/98681.htm • Richard Nixon Encyclopædia Britannica https://www.britannica.com/biography/Richard-Nixon