The world economy is a complex system that has experienced many different stages in the last century. Today may sound strange, but there were times when banking crises were uncommon, payments went hand in hand with productivity, and you could buy a certain amount of pure gold with some dollars. Despite its obvious success in certain areas, the global monetary system that laid the foundation for this era of stable growth over time failed, and this is the reason.
When an ounce of gold was bought with 35 dollars.
The post-World War II era began with a negotiated monetary system that established the rules for international commercial and financial relations. This was the product of the Bretton Woods Treaty of 1944, created a new financial order in a world devastated by the greatest military conflict until then.
The conference in New Hampshire, which took place before the end of the war, established the fundamental pillars of global trade and exchange: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now part of the World Bank . The General Agreement on Tariffs and Trade (GATT) then replaced by the World Trade Organization (WTO) was signed shortly thereafter.
The governments behind the Bretton Woods system, many of them allied in the war against Nazi Germany, aspired to create a world in which a major armed conflict and a global depression would never occur again. This should be achieved through the construction of an international monetary system and the reduction of barriers to free trade. More than 700 representatives from 44 countries worked on the agreement over the course of a month. No banker was invited, by the way.
Delegates decided that their monetary model should rest in the US dollar as the world currency for reserves. In an effort to replicate the gold standard before the war, despite being in a limited way, the dollar was anchored to the precious metal at a fixed price. The United States government promised to convert dollars to gold at $ 35 per ounce. US currency It became the new gold standard, while retaining its flexibility in relation to real gold.
A fixed exchange rate system was then introduced, in which all other major currencies were linked to the US dollar backed by gold. Participating nations had to keep currency prices within 1% parity through interventions in their foreign exchange markets. Purchases and sales of foreign currency were constantly made to keep rates close to the target.
The good, the bad and the ugly
The Bretton Woods system was effectively a monetary union with the dollar being its main currency. For some time, this generated the stability that the post-war world needed to recover and rebuild. Virtually no major country experienced a banking crisis during the period in which the agreement was respected, between 1945 and 1971.
Speculative financial flows were seriously reduced and investment capital was channeled to technological and industrial developments instead. Helping national economies to grow, create jobs and reduce trade barriers were aimed at giving peace a better opportunity. And in the long run they did, apart from the conflicts over the cold war.
In 1971 the president of the United States eliminates the gold standard
Several important achievements resulted from the Bretton Woods agreement in a variety of fields. An online portal called WTF happened in 1971 (What # @ & happened in 1971?), The year President Nixon's administration unilaterally eliminated the convertibility of the US dollar into gold, summarizes most of these fields, backed by impressive figures. For example, until Washington's decision to finalize the gold-dollar standard, productivity grew sharply and wages, unlike today, were not far behind.
In other words, the rising value of goods and services translated into higher pay for workers. The 119% increase in productivity from 1947 to 1979, the last year that these indicators went hand in hand, was closely followed by a 100% positive change in the average hourly pay. Since then, until 2009, productivity has grown an impressive 80%, while remuneration only marked an 8% increase, according to the data mentioned.
Similar trends can be observed with other pairs of indicators. The divergence between real GDP per capita and the average real wage in the US It has been growing steadily since the 1970s, according to calculations by the Office of Economic Analysis and the Bureau of Labor Statistics. The consumer price index skyrocketed after the gold dollar was lifted. The same applies to the average sale prices of new homes sold in the country. In contrast, the frequency of divorces and the incarceration rate in the United States increased markedly.
The post-war gold semi-standard mitigated income inequality in the United States, which had been growing since the years of the establishment of the Federal Reserve System in 1913 and jumped again when the US government decided to convert the dollar into only fiat currency. Since 1971, the top 1% of employees saw their income increase considerably, while 90% of the fund has remained almost unchanged for decades. The curves crossed at some point at the beginning of the century and in the years that followed the global financial crisis of 2008 the rich have become richer, while the poor have become even poorer.
Other negative trends following the abolition of the last gold standard include the increase in national debt in the US, from well below one billion dollars in the 70s to more than $ 20 billion in 2018. By June 2019, the Federal public debt reached $ 16.17 billion. Last year it was approximately 76% of GDP and the Congressional Budget Office expects it to reach more than 150% by 2040. At the same time, the balance of trade in US goods has fallen dramatically, reaching a new negative record of Almost - $ 80 billion at the end of December.
Will the next reserve currency be crypto?
Bretton Woods, despite its positive aspect, has some important flaws that eventually led to its disappearance. Unlike the gold that supported it, the dollar, which was the currency of the system's reserve, could be manipulated by Washington's power according to the interests of the United States itself, and so it was. The dollars were supposed to provide liquidity to the world economy but initially the United States. I wasn't printing enough of them. As a result, its partners experienced a shortage of convertible currency. And in the last years the opposite happened, the United States inflated the dollar too much. It quickly became clear that the agreement was adapted to the interests of the United States, which at the time of signing had two-thirds of the world gold reserve.
In essence, the monetary union gave the United States a lot of power and was going to work only as long as the other countries were willing to accept the status quo. With Washington exporting inflation to the rest of the world, however, its partners began converting large amounts of dollars into gold while the US Political pressure was increasing for them to accept and maintain their hard currency at fixed rates for other national currencies. Over time, countries like France decided that it was enough and began selling their dollars for gold. Then the United States broke the link between its currency and the precious metal, which, together with the floating exchange rate, put an end to Bretton Woods and the gold standard.
A similar situation is currently happening in the European monetary union. Critics say that many of its problems come from its very design, which greatly favors the interests of Germany, the economic engine of the continent and one of the world's largest exporters. The Berlin government is a supporter of low inflation that ensures that German high-tech industrial exports continue to produce large revenues. However, the countries of the southern flank of the Eurozone such as Italy, Spain, Portugal and Greece need high inflation to remain competitive exporters.
It has become clear that a reserve currency outside the control of several governments would be an improvement over the subordination of the fiat currency to the national interests of one superpower or another. A cryptocurrency that serves as a means of exchange, stock storage, unit of accounts, and that cannot be devalued or revalued through biased political decisions, could be an instrument that would facilitate global commercial and financial transactions without favoring anywhere. In addition, participants could own the actual asset itself and not some derivative.
Satoshi Nakamoto must have thought about these issues when he designed Bitcoin. The person, or persons, behind their name set a symbolic date as their birth in the profile of the P2P foundation of Satoshi, on April 5, 1975. Whether intentional or fortuitous, this is a date that evokes the historical development of the relationships between people, government and money.
On April 5, 1933, through Executive Order 6102, the US government prohibited its citizens from "hoarding gold coins, gold bars, and gold certificates." The Purpose was to artificially increase the demand for your fiat currency at the expense of the demand for gold. During the Bretton Woods era, only foreigners, not US citizens, could convert dollars into gold, which is probably one of the system's failures. The order was repealed in 1975, making the possession of gold legal in the United States again.