The International Monetary
System in the 21st Century:
Could Gold Make a Comeback?
Robert A. Mundell
Lecture delivered at St. Vincent College, Letrobe,
Pennsylvania, March 12, 1997.
"...Even today, the importance of gold in the international monetary system is reflected in the fact that it is today the only commodity held as reserve by the monetary authorities, and it constitutes the largest component after dollars in the total reserves of the international monetary system..."
"...The competing asset, the SDR or Special Drawing Right, was a "facility" or "reserve asset" created by the members of the IMF in 1968 as a substitute for gold. It was initially given a gold guarantee by members of the Group of Ten, which would have made it extremely valuable today; however, its gold guarantee was stripped away in the early 1970s when the price of gold soared, and ever since the SDR has floundered as an important component in the international monetary system. Later in the 1970s, when the Second Amendment to the Articles of Agreement, which endorsed managed flexible exchange rates, was enacted, it was decided to emphasize the SDR as an asset and de-emphasize gold; to further this end both the IMF and the US Treasury sold part of their gold holdings. The other countries, however, held onto their gold and experienced as a result reaped huge (if unrealized) capital gains when the price of gold soared in the late 1970s..."
"...The gods changed but the principles stayed the same! Just look at the Masonic hocus-pocus that still remains on our dollar bills! "In God We Trust" introduced on our dollar bills in 1862 when their gold backing was dropped...."
"...When the international monetary system was linked to gold, the latter managed the interdependence of the currency system, established an anchor for fixed exchange rates and stabilized inflation. When the gold standard broke down, these valuable functions were no longer performed and the world moved into a regime of permanent inflation. The present international monetary system neither manages the interdependence of currencies nor stabilizes prices. Instead of relying on the equilibrium produced by automaticity, the superpower has to resort to "bashing" its trading partners which it treats as enemies..."
"...Recovery from the end of the Cold War has been far more disruptive than recovery from the end of the most devastating hot war in history..."
"...It is inappropriate to speak of a "Bretton Woods system." The conference at Bretton Woods, New Hampshire, in 1944 did not create a new international monetary system. Rather, it created two new international institutions, the IMF and the World Bank, were set up to manage international interdependence in the international financial system and provide a supranational veneer for the anchored dollar standard. As Joan Robinson once said, shrewdly: the IMF is "an episode in the history of the dollar."..."
..."A Theory of Superpower Influence
Historically, whenever there has been a superpower in the world, the currency of the superpower plays a central role in the international monetary system. This has been as true for the Babylonian shekel, the Persian daric, the Greek tetradrachma, the Macedonian stater, the Roman denarius, the Islamic dinar, the Italian ducat, the Spanish doubloon and the French livre as it has for the more familiar pounds sterling of the 19th century and the dollar of the 20th century. The superpower typically has a veto over the international monetary system and because it benefits from the international use of its currency, its interest is usually in vetoing any kind of global collaboration that would replace its own currency with an independent international currency..."
"Like the pound, most currencies lost their gold base in the 1930s, thus removing an important convertibility constraint on money supplies. Nevertheless, until 1971, the system did preserve an indirect link to gold through fixed exchange rates with the anchored dollar. It was the severing of the link to gold in 1971 and the movement to flexible exchange rates in 1973 that removed the constraint on monetary expansion."
"...The newly elastic international monetary supply was now made to order to accommodate the supply shock of the oil price spike at the end of 1973. The quadrupling of oil prices created deficits..."
"After 1971, when the Golden Anchor was lifted, inflation control had to depend on the slender reed of Federal Reserve discipline. The result was pandemic inflation that has all the characteristics of becoming a permanent feature that future generations will have to cope with."
A Historical View
[Mrt: the whole paper is so good so it should be pasted in full especially this part which should be highlighted word by word, respecting copyright picking only relevant to Freegold.]
Gold is going to be a part of the structure of the international monetary system for the 21st century, but not in the way it has been in the past. We can look upon the period of the gold standard, the free coinage gold standard, as being a period that was unique in history, when there was a balance among the powers and no single superpower dominated.
Let me just conclude with a final thought: Bismarck once said that the most important event in the 19th century was tha t England and America spoke the same language. In the same spirit, the most important event in the 20th century was the creation of the Federal Reserve System, the vehicle for the spread of the dollar. Without that, you would not have had the subsequent monetary events that took place. Let us hope that the most important event of the 21st century will be that the dollar and the Euro learn to live together."
Source: The International Monetary System in the 21st Century: Could Gold Make a Comeback?
[Mrt: Advance "connect dots" reading]