There has been talk of returning to the fixed exchange rate system established at Bretton Woods, back in 1944. Some call it returning to the gold standard. Bretton Woods was about as far from a gold standard as you can get. It failed miserably because of it. Any attempt to return to it will fail again.
The gold standard was abandoned in 1913 when the Federal Reserve System replaced it. The essence of the gold standard is that individuals use gold (and other metals) as money. The amount of money in circulation is limited by the amount of gold produced per year. In 1913, the Fed was put in charge of the supply of money. The result has been the continuous depreciation of the dollar for almost a hundred years.
In 1944, when the nations of the world convened to establish the Bretton Woods system, Americans were legally prohibited from owning gold. You can not have a gold standard while prohibiting the use of gold as money! Bretton Woods was a system where our competitors could convert their surplus dollars into gold, but the American citizen could not.
Worse, it established rules that allowed our competitors to devalue their currencies against the dollar up to 10%, if they ran chronic surpluses. It was called the "adjustable peg" system. Since most nations want to run surpluses by limiting imports and subsidizing exports, they ended up with huge trade surpluses. This led to inflation in their countries which made their goods more expensive and therefore, less desirable. They then devalued their currencies to make their goods cheap again. The result was hundreds of devaluations over the years of the Bretton Woods system.
First you would have chronic surpluses build up. Then you had "hot money" flights of capital out of some nations and into others, as speculators attacked nation's currencies. Then you would have vehement denials by the government that they would ever devalue their currency. And finally, you would have the inevitable midnight devaluation, usually on a Friday night, and the whole process would begin over again. No, Bretton Woods was not a gold standard. To revisit it would result in the same farce of the past, and gold would end up getting the blame again.
The gold standard requires free markets, free trade, and governments that abide by the rules they establish. When this is the case, money holds its value. Many claim that we had panics and recessions under the gold standard, and that the system failed to deal with them. This is true. But the gold standard was never intended to deal with economic fluctuations. All the gold standard claims to do, and did for centuries, is preserve the value of money.
Those that blame it in advance for causing economic and monetary problems, know nothing about the nature of the gold standard. They blame a sound currency for the government interventions into the economy that actually led to bank runs, recessions, and crises, during those years. At the root of all of these crises, you will find the heavy hand of government. The gold standard remained neutral during these times. It was neither a cause or an effect of economic matters. It simply resulted in sound money.
The critics claim that by creating the Federal Reserve System we avoid such problems as booms and busts. Yet, it only took the Fed 16 years to create the "roaring 20's", and the Great Depression, which put the smaller recessions under the gold standard to shame. It increased money and decreased money at rates no gold standard could possibly achieve. And yet, it is the gold standard that is said to cause booms and busts.
Under the gold standard you could buy approximately the same amount of goods at the end of the century as you could at the beginning of the century. Under the Federal Reserve System the dollar buys three cents of what a dollar bought a century earlier. Critics claim we have too little gold to be used as money, and that it will restrict growth. Yet, through the 18th and 19th centuries we experienced an Industrial Revolution that brought the world the greatest amount of growth ever known to man. The gold standard and prosperity does not require more money to exist; it requires stable money to exist.
Those that understand the virtues of a gold standard and the vices of the Federal Reserve System are demanding we return to the gold standard. I am not one of them -- at least not today. The gold standard requires fiscal discipline to exist. It requires free trade where nations do not demand the right to forever export more than they import. It demands the end of protectionism -- an end to subsidies and tariffs, quotas and capital controls. It requires free markets and free men and the protection of property rights.
When we have all of these conditions met, a gold standard, when implemented will thrive and survive as it did for centuries before. But not until then. The idea that we as a world, could graft a monetary system of integrity onto a system of irresponsible trade practices and disastrous fiscal and monetary policies is insane. In such a world a system of freely floating exchange rates is the only system that will work. Fixed exchange rates can only lead to trade imbalances, speculative flows of hot money and constant devaluations as it did before. It is an invitation to chaos.
The best we can hope for is a move toward saner monetary policies, a return to fiscal responsibility, an opening up of markets, and the reduction of protectionism. Bretton Woods died a well deserved death. Let us not make the mistake of reviving it again.
by Paul Nathan