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Bretton Woods, Gold Standard - History of Money

In a subsistence economy, a good can only be acquired in exchange for another good. In a market-oriented economic system, this parallelism is eliminated, because the act of buying and selling are separated in time and space. For this to work, a generally accepted medium of exchange is needed - money.

History of money begins in the 6th century

Since Croesus, King of Lydia in Asia Minor, first put coins into circulation in the 6th century BC, silver coins remained the predominant means of payment until the end of the 18th century. In the course of the onset of industrialization and the resulting increase in world trade, however, one disadvantage of coinage came to light, namely its rather high weight for handling supraregional payment transactions. The solution was the introduction of paper money.

Origins of paper money and gold-silver standards

The origins of paper money go back to the late Middle Ages. Goldsmiths at that time had theft-proof arrangements to cover silver(bimetallic standard). The first central bank in the 19th century was the Bank of England, which was already allowed to issue some banknotes uncovered.

Gold, silver or bimetallic standards led to price stability and economic growth, and foreign trade balances were balanced, as deficits caused gold outflows and thus a reduction in the money supply. A watershed event was then the Coinage Act of 1873, also known as the "Crime of 1873." By prohibiting the minting of the standard silver dollar, silver was effectively demonetized. From then on, the gold standard prevailed worldwide, which, by the way, was launched by none other than Sir Issac Newton at the beginning of the 18th century, ironically as a result of Newton's misjudgement of the price relationship between gold and silver.[3] In favor of gold were the higher specific weight and the higher value per unit of weight compared to silver, which meant lower transport and storage costs.

At the beginning of the 19th century, David Ricardo, a leading exponent of classical national economics, nevertheless argued for the introduction of a silver-based standard.[4] He justified this on the basis of the greater uniformity of silver supply and demand. A silver standard would also have been introduced if gold discoveries in America, Alaska, and Australia had not seemingly eliminated the gold shortage. In the course of the world economic crisis at the beginning of the 1930s, however, it became apparent that this was not the case. in 1934, private ownership of gold was banned in the U.S., and China was the last major country to abandon its silver currency.


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Bretton Woods Agreement

Immediately after World War II, the Bretton Woods Agreement[5] made the gold-backed U.S. dollar the universally accepted world reserve currency in a system of fixed exchange rates. The U.S. had a balanced foreign trade account and held 70% of the world's gold reserves. U.S. capital exports (direct investment, loans) had a positive effect on world economic growth. Over time, however, the volume of dollars in circulation abroad increased significantly, the U.S. balance of payments became in deficit, and current account deficits resulted from the fact that the U.S. increasingly consumed more goods and services than it produced. The deficits were financed by foreign capital, as the U.S. was considered a safe haven due to the unstable global financial system.

End of the Bretton Woods gold standard

U.S. economic and fiscal policy remained expansionary despite increasing trade deficits, when it should have been restrictive in the spirit of Bretton Woods. Gold backing declined, and with it confidence in the U.S. dollar. Inflation risks increased and the fixed exchange rate system came under increasing pressure. As European countries then exchanged the US-$ for gold, the USA experienced rapid gold outflows. The high cost of the Vietnam War eventually meant that the U.S. no longer had enough gold to service its foreign debt. To avoid an impending default, U.S. President Richard Nixon announced in 1971 that he would suspend the guarantee that the U.S. dollar would be redeemed in gold. This effectively ended the gold standard, and the Bretton Woods world monetary system in place until then collapsed. Subsequently, other countries abandoned the gold standard. A paper money standard was introduced instead.

For the first time since the introduction of paper money, no major world currency had a tangible peg. This enabled the U.S.A. to further expand its national debt and henceforth to inflate through an expansive monetary policy (expansion of the money supply). The attractiveness of the U.S. capital market will decline in the future, further destabilizing the world monetary system. 1971 thus represents a tidal turn, not only for the precious metals markets, but for the entire world economy and financial system. It was the beginning of the liberalization of the financial markets, the fatal effects of which we are increasingly feeling today. The replacement of the precious metal standard by an unbacked paper money standard laid the foundation for the formation of speculative bubbles, the loss of confidence in paper currencies and, as a consequence, for pronounced financial market and economic crises such as the New Economy crisis in 2000, the real estate and financial market crisis in 2008/2009, the sovereign debt crisis in 2011/2012 and, in the future, probably even far more dramatic crises. 


This article was written by Dr. Jochen Dehio - author of the book"Gold oder Silber - wem gehört die Zukunft?

More about the author and the book

[1] Vgl. (2009), gold-silber-ratio.html, Abruf vom 01.10.2012).

[2] Vgl., Die Geschichte des Goldes (Internet: risch.html, Abruf vom 01.10.2012).

[3] Vgl. Bernstein, P.L. (2005), Die Macht des Goldes. Auf den Spuren einer Faszination. FinanzBuch Verlag, München: S. 282.

[4] Vgl. Bernstein, P.L. (2005), Die Macht des Goldes: S. 283f.

[5] Vgl. Wikipedia, Bretton-Woods System (Internet:, Abruf vom 01.10.2012).


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