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how the bretton woods system changed the world

The roughly three decades that coincided with the monetary arrangements of the Bretton Woods system is often thought of as a time of relative stability, order, and discipline. Yet considering that it took nearly 15 years following the 1944 conference at Bretton Woods before the system was fully operational and that there were signs of instability throughout the era, perhaps not enough has been made of the relative difficulty in trying to maintain the system. Rather than seeing Bretton Woods as a period characterized by stability, it's more accurate to consider it as being a transitional stage that ushered in a new international monetary order that we're still living with today.

In July 1944, delegates from 44 Allied nations gathered at a mountain resort in Bretton Woods, NH, to discuss a new international monetary order. The hope was to create a system to facilitate international trade while protecting the autonomous policy goals of individual nations. It was meant to be a superior alternative to the interwar monetary order that arguably led to both the Great Depression and World War II.

Discussions were largely dominated by the interests of the two great economic superpowers of the time, the United States and Britain. But these two countries were far from united in their interests, with Britain emerging from the war as a major debtor nation and the U.S. poised to take on the role of the worlds great creditor. Wanting to open the world market to its exports, the U.S. position, represented by Harry Dexter White, prioritized the facilitation of freer trade through the stability of fixed exchange rates. Britain, represented by John Maynard Keynes and wanting the freedom to pursue autonomous policy goals, pushed for greater exchange rate flexibility in order to ameliorate balance of payments issues.

A compromise of fixed-but-adjustable rates was finally settled upon. Member nations would peg their currencies to the U.S. dollar, and to ensure the rest of the world that its currency was dependable, the U.S. would peg the dollar to gold, at a price of $35 an ounce. Member nations would buy or sell dollarsin order to keep within a 1% band of the fixed-rate and could adjust this rate only in the case of a fundamental disequilibrium in the balance of payments.

In order to ensure compliance with the new rules, two international institutions were created: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD; later known as the World Bank). The new rules were officially outlined in the IMF Articles of Agreement. Further provisions of the Articles stipulated that current account restrictions would be lifted while capital controlswere allowed, in order to avoid destabilizing capital flows.

What the Articles failed to provide, however, were effective sanctionson chronic balance-of-payments surplus countries, a concise definition of fundamental disequilibrium, and a new international currency (a Keynes proposal) to augment the supply of gold as an extra source of liquidity. Further, there was no definitive timeline for implementing the new rules, so it would be close to 15 years before the Bretton Woods system was actually in full operation. By this time, the system was already showing signs of instability.

While the U.S. pushed for immediate implementation of Articles provisions, poor economic conditions in much of the post-war world made remedying balance-of-payments issues in a fixed exchange rateregime difficult without some current account exchange controls and external sources of funding. With no international currency created to provide supplemental liquidity, and given the limited loan capacities of the IMF and IBRD, it soon became evident that the U.S. would have to provide this external source of funding to the rest of the world while allowing for gradual implementation of current account convertibility.

From 1946 to 1949, the U.S. was running an average annual balance-of-payments surplus of $2 billion. In contrast, by 1947, European nations were suffering from chronic balance-of-payments deficits, resulting in the rapid depletion of their dollar and gold reserves. Rather than considering this situation advantageous, the U.S. government realized it seriously threatened Europes ability to be a continuing and vital market for American exports.

Within this context, the U.S. administered $13 billion of financing to Europe through the Marshall Planin 1948, and some two dozen countries, following Britains lead, were permitted to devaluetheir currencies against the dollar in 1949. These moves helped alleviate the shortage of dollars and restored competitive balance by reducing the U.S. trade surplus.

The Marshall Plan and more competitively-aligned exchange rates relieved much of the pressure on European nations trying to revive their war-torn economies, allowing them to experience rapid growth and restore their competitiveness vis--vis the U.S. Exchange controls were gradually lifted, with full current account convertibility finally achieved at the end of 1958. However, during this time the U.S. expansionary monetary policythat increased the supply of dollars, along with increased competitiveness from other member nations, soon reversed the balance of payments situation. The U.S. was running balance-of-payments deficits in the 1950s and had a current account deficit in 1959.

The depletion of U.S. gold reserves accompanying these deficits, while remaining modest due to other nations' desire to hold some of their reserves in dollar-denominated assets rather than gold, increasingly threatened the stability of the system. With the U.S. surplus in its current account disappearing in 1959 and the Federal Reservesforeign liabilities first exceeding its monetary gold reserves in 1960, this bred fears of a potential run on the nations gold supply.

With dollar claims on gold exceeding the actual supply of gold, there were concerns that the official gold parity rate of $35 an ounce now overvalued the dollar. The U.S. feared that the situation could create an arbitrage opportunity whereby member nations would cash in their dollar assets for gold at the official parity rate and then sell gold on the London market at a higher rate, consequently depleting U.S. gold reserves and threatening one of the hallmarks of the Bretton Woods system.

But while member nations had individual incentives to take advantage of such an arbitrage opportunity, they also had a collective interest in preserving the system. What they feared, however, was the U.S. devaluing the dollar, thus making their dollar assets less valuable. To allay these concerns, presidential candidate John F. Kennedy was compelled to issue a statement late in 1960 that if elected he would not attempt to devaluethe dollar.

In the absence of devaluation, the U.S. needed a concerted effort by other nations to revalue their own currencies. Despite appeals for a coordinated revaluationto restore balance to the system, member nations were reluctant to revalue, not wanting to lose their own competitive edge. Instead, other measures were implemented, including an expansion of the IMFs lending capacity in 1961 and the formation of the Gold Pool by a number of European nations.

The Gold Pool brought together the gold reserves of several European nations in order to keep the market price of gold from significantly rising above the official ratio. Between 1962 and 1965, new supplies from South Africa and the Soviet Union were enough to offset the rising demand for gold, any optimism soon deteriorated once demand began outpacing supply from 1966 through 1968. Following Frances decision to leave the Pool in 1967, the Pool collapsed the following year when the market price of gold in London shot up, pulling away from the official price. (To read more, see: A Brief History of the Gold Standard in the United States.)

Another attempt to rescue the system came with the introduction of an international currencythe likes of what Keynes had proposed in the 1940s. It would be issued by the IMF and would take the dollars place as the international reserve currency. But as serious discussions of this new currencygiven the name of Special Drawing Rights (SDR)only began in 1964, and with the first issuance not occurring until 1970, the remedy proved to be too little, too late.

By the time of the first issuance of the SDRs, total U.S. foreign liabilities were four times the amount of U.S. monetary gold reserves, and despite a brief surplusin the merchandise trade balance in 1968-1969, the return to deficit thereafter was enough pressure to initiate a run on the U.S. gold reserves. With France leaking its intentions to cash in its dollar` assets for gold and Britain requesting to exchange $750 million for gold in the summer of 1971, President Richard Nixon closed the gold window.

In a final attempt to keep the system alive, negotiations took place in the latter half of 1971 that led to the Smithsonian Agreement, by which the Group of Ten nations agreed to revalue their currencies in order to achieve a 7.9% devaluation of the dollar. But despite these revaluations, another run on the dollar occurred in 1973, creating inflationaryflows of capital from the U.S. to the Group of Ten. Pegs were suspended, allowing currencies to float and bringing the Bretton Woods system of fixed-but-adjustable rates to a definitive end.

Far from being a period of international cooperation and global order, the years of the Bretton Woods agreement revealed the inherent difficulties of trying to create and maintain an international order that pursued both free and unfettered trade while also allowing nations to pursue autonomous policy goals. The discipline of a gold standard and fixed exchange rates proved to be too much for rapidly-growing economies at varying levels of competitiveness. With the demonetizationof gold and the move to floating currencies, the Bretton Woods era should be regarded as a transitional stage from a more disciplinary international monetary order to one with significantly more flexibility.

how to buy gold | consumeraffairs

Gold and other precious metal IRAs are an investment and carry risk. Consumers should be alert to claims that customers can make a lot of money in these or any investment with little risk. As with any investment, you can lose money and past performance is not a guarantee of future performance results. Consumers should also obtain a clear understanding of the fees associated with any investment before agreeing to invest.

You can buy gold in a few different ways. Some investors are looking for gold-related stock or funds, while others just want something tangible that they can sell quickly in the event of another economic crisis. Either way, buying gold is thought by some to be a proven method for hedging your bets and ensuring financial security.

As with all investments, the general rule of buy low, sell high applies to gold, whether in coin, bullion or stock form. To know the right time to buy, research the type of gold you want to buy and keep your eye on the market.

Since gold tends to perform well when the economy is in a recession, most people buy gold as a type of financial insurance policy to hedge their bets against the value of the dollar in the market. As a hard asset, gold holds its value even during times of inflation. For instance, the early 1970s would have been a great year to buy gold its value increased from $35 per ounce in 1971 to $180 per ounce in 1974.

There are two main reasons people buy physical gold: as insurance and as an investment. People who are concerned about the recent economic crisis tend to view their ownership of precious metals as an insurance policy: As long as you have physical gold or silver to sell or trade, you will never be broke, even if the economy collapses. It is relatively easy to buy a gold bar, and once you purchase it, you dont need to do anything but store it.

Bullion coins and ingots are a relatively safe way to buy gold, though some investors prefer to invest in gold funds, such as mutual funds or exchange-traded funds (ETFs). One benefit of investing in stocks over physical gold is that it's easier to sell. When you have physical gold, you need to find a physical buyer, which can be difficult and time-consuming, especially when the market starts to go south. In contrast, selling stocks is as easy as a few keystrokes.

Investing in mining stocks is riskier than buying physical gold bullions or coins, but the payoffs can be more significant and include dividends you wont get when you buy a piece of gold. According to Durrett, Mining stocks are potentially the investment of a lifetime opportunity because of the cash flow.

Still, this option may not be for everyone. During our interview, Durrett described successful investors of mining stocks as contrarian and speculative. He further noted that a successful investor would pay attention to their particular mining stock'sdaily and external factors, such as oil prices, geological events and natural disasters that can affect the price of gold.

Because of the risk involved, some investors recommend starting small: Investors really want to start out using money they can afford to lose until they get an understanding of how mining stocks work and what causes their prices to rise and fall, according to Durrett.

Even though he invests in mining stocks, Durrett recommends that people begin investing in bullion before jumping into stocks: I always tell people to buy some physical gold or silver coins buy them and stick them in a safety deposit box and see how it feels."

Hunter Riley III, longtime investor and author of Stack Silver Get Gold: How to Buy Gold and Silver Bullion Without Getting Ripped Off, said that one of the main things gold bullion has going for it is that its a tangible asset you maintain control of, no matter what happens to the global economy.

The current price of gold is called the spot price, and it is constantly fluctuating. The spot price reflects the most recent average bid price, according to global professional traders. Several things can influence the spot price on any given day, including war, the central bank, supply/demandand the size of the average transaction. When you buy gold, you will buy at a percentage (generally 5% to 8%) above the spot price, and you will sell for exactly the spot price.

In his book "How to Buy and Sell Gold and Silver Privately," internet marketer and business coach Doyle Shuler explains many of the complexities surrounding taxation and buying gold. Some states apply sales tax for gold bullion, and others do not.

Some gold buyers are critical of the U.S. government and therefore do not want their gold purchase to be noted by the IRS. According to Shuler, simply paying cash isnt enough to keep you off the grid.

By law, precious metals dealers are required to report purchase amounts over $10,000 cash to the IRS. However, they only reportthe amount of money spent per transaction, not what was bought or who bought it. Shuler recommends paying with a bank wire or check if you are purchasing more than $10,000 worth of gold in cash since banks do not report to the IRS.

It's a good idea to follow the price of gold for some time before deciding it's the right time to invest. You dont want to buy at the peaks, so you'll want to understand what factors affect the price of gold. For instance, gold coin dealers maintain that numismatic coins are worth more than just the metal contained inside of them, which is how they can justify charging a premium when you buy. There's really no getting around this, so be cautious of any dealer that claims it isnt charging a premium.

Shop around dealer websites to make sure you're paying a fair price for gold. Check exchange sites to find out what the spot price is, andexpect to pay a 5% to 8% premium above the spot price for a gold coin.

Durrett advises gold bullion buyers to buy from online companies and to sell locally, explaining that local retailers cant compete with online stores and typically charge customers more. But because you will always be selling your gold at the spot price, it doesnt matter where you sell.

Take some time to research reputable gold dealers to find a fair price on gold coins. In general, avoid buying gold online through bidding sites, as you can end up in a bidding war and pay more for a gold coin than it is worth. Here are a few things to consider when youre looking for a gold dealer:

Where will you store your precious metal? Bank safety deposit boxes are an option, but many precious metals investors dont trust banks. You might prefer purchasing a home safe for your gold, which will add additional overall cost to your investment.

Even though it is relatively easy to find and buy precious metal, there are some risks to consider. Avoid Craigslist, online dealers offering massive discounts, pawnshops, TV ads, cold callers and any dealer without a brick-and-mortar location, since there is no way of verifying that the dealer actually exists. Dealers that offer free storage or delayed delivery might not be legitimate, and you may never see the gold that you paid for.

Gold has been a commodity for thousands of years. Its value has been relatively stable historically, and it tends to perform better when stocks are down. For these reasons, gold is a popular investment strategy for many people who want to diversify their portfolios. However, most financial advisors dont recommend putting more than 10% of your assets in gold.

If youre looking to invest in gold for retirement, you might consider a gold IRA. Gold IRAs are investment retirement accounts that are backed by gold. They work similarly to a traditional or Roth IRA but hold bullion or coins instead of paper assets. To learn more, research how to find the best gold IRA company.

As a member of the ConsumerAffairs Research Team, Kate Williams, Ph.D. believes everyone deserves easy access to accurate and comprehensive information on products and businesses before they make a purchase. She spends countless hours researching companies and industries before writing buyers guides to make sure consumers have all the information they need to make smart, informed buying decisions.

ConsumerAffairs is not a government agency. Companies displayed may pay us to be Authorized or when you click a link, call a number or fill a form on our site. Our content is intended to be used for general information purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances and consult with your own investment, financial, tax and legal advisers.