The Breton Woods post Second World War monetary system, designed and maintained, at great cost by the Americans, fell apart in August 1971. This is when the convertibility of the dollar into gold at a fixed price of $35 was officially ended.
The beginning of the end started much earlier in 1967 /68 when a crisis in monetary confidence bought on by the devaluation of the British Pound, created a run on gold and the depletion of almost half of the 650 million ounce gold reserve of held by the Americans at Fort Knox Kentucky.
There had been a serious wobble before, when the Cuban Missile Crisis caused a buying panic on the Gold Bullion Market in London. The sudden and unexpected demand for gold, as a safe haven against possible nuclear Armageddon, led to the formation of the London Gold Pool. This unofficial agreement between Central Bankers, known only to a few, was to lend reserves of gold bullion held in the national accounts, of The US, Britain, a few European Countries, so as to maintain order in an unregulated market. This seemed to work for a while but was totally inadequate when the dogs of speculation were let loose on the International Markets in 1967.
The Stirling crisis had been coming for some time because the Socialist Labor Government of Britain was unable, or unwilling, to enact the austerity measures required to pay for the massive nationalization of industry and infrastructure that had taken place following the declaration of peace in 1945. Sharply increased wages had rendered much of Industry uncompetitive and the national balance of payments had suffered accordingly. An initial devaluation of 40% against the US Dollar had not been enough to reflect the dire condition of the nation’s balance sheet.
Breton Woods was greatly influenced by Keynesian Economics that favored fiscal rather than monetary discipline, and a belief that elected governments could and would keep their budgets in balance In this utopian world bankers were seen as a second line of defence only to be called upon when needed. Experience, almost from the beginning, had shown the fallacy of this dogma and the monetary system had only survived to this point because of the hegemony of the US Dollar freely convertible into Gold.
In 1967 Britain was required to maintain a trading range for the Pound Stirling, of two cents either side of official rate of $ US 2.80 using reserves of gold and dollars held by The Bank of England to buy and sell Stirling as required. The problem arose because the reserves of the B.O.E. were inadequate for the task at hand. So the bankers, arranged to borrow huge sums of dollars (3 billion) to throw into the caldron should the need arise. The lead banker for this rescue was the Federal Reserve Bank of New York that pledged a billion dollars and the backing of all the gold in Fort Knox to the cause.
The rescue worked for a while, but the fates were not on the side of the angles and very soon speculation about a further devaluation of the pound began once more. This time in spite of the continuing efforts of bankers to maintain the status quo the British Government capitulated and the pound was devalued to a new official rate of $US 2.40. The effect, totally unexpected, was a loss of confidence in the dollar and a run on gold, this time on scale never anticipated.. In a matter of a few days the market for gold spun out of control with buyers shorting the dollar and forcing the American Treasury to make good on its promise to deliver gold in exchange for dollars.
So dire was the situation that The Federal Reserve Bank of New York, along with the US Treasury, was forced to suspend gold for dollar transactions, and allow an unofficial or floating rate to prevail. The immediate effect was a spread between the official rate and the actual rate or a devaluation of the dollar of approximately $5 or 14%.
Suddenly the American dollar was vulnerable, and nobody, it seemed, knew what to do, other than suspend the market for gold. The French Government under President Charles De Gaulle , having recently created the New Franc to purchase the tons of gold held by French Citizens, was intransigent and refused to cooperate. Also the members of the newly formed O.P.E.C.(the Oil Cartel) who suddenly realized that they were being paid for their oil in depreciating dollars thus reducing the value of the commodity. Their answer was to hedge future deliveries by selling dollars and buying gold.
After a weekend meeting of the monetary powers, this time including Switzerland,and the gold backed Swiss Franc, along with Japan and the Yen, a new form of specie was invented to supplement gold, as the principal monetary reserve. The specie, or new currency, took the form of Special Drawing Rights (SDRs) issued by The International Monetary Fund created in 1944 at Breton Woods as the sole arbitrator on International Currencies. At the same meeting it was decided to do away with fixed exchange rates, that had been at the heart of Breton Woods, and allow currencies to find their own value.
The initial stated value of an SDR was 0.888671 grams of pure gold. This provided a continuing link to hard currency and gold, and had the desired effect of stabilizing the gold market, that now traded independently from the US Dollar. But it would not be long until the final link with gold was broken and the daily value of SDRs’ was calculated based solely upon the trading range of a basket of four currencies, The Dollar, the Pound, the Yen and finally the Euro, thus excluding gold.
The number of issued SDRs’ is now a very far cry from the original stop-gap issue, and is thought by the New York Federal Reserve Bank and the other central bankers to be sufficient to curb excessive currency speculation. But no one really knows, and herein lies the problem.
What will happen if all four major currencies, are depreciated or devalued at the same time, as it appears they maybe at this time. If unlimited amounts of dollars, yen, pounds and euros are created to stop deflation and start inflation what happens to the Basket