Week 6 MT - WEEK VI THE GOLD-DOLLAR STANDARD OVERVIEW The...

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WEEK VI  2/25/2009  THE GOLD-DOLLAR STANDARD OVERVIEW     The Gold-dollar standard was an  important component of the Bretton- Woods negotiations in NH, 1944.  Negotiations and agreements forged  principally between Britain and the United States. The system was multilateralized over time to include other countries,  mainly the rich industrialized nations (i.e. Western Europe) . There were some *disagreements* over  - The International Monetary Fund (IMF) regarding its  size  and  function. - Exchange rate flexibility (related to the Gold Standard) - Freedom of monetary policy A system would develop whereby the US dollar ($) would replace gold as  the centerpiece of the international monetary system. Changes were necessary; the system would work with the US still  following the first two gold standard rules i.e. (classical, pre-1914 rules) i) Fix the $ at a  par value  to gold 1oz = $35 ii) Convertibility : Redeem dollars for gold on demand at any federally  chartered bank window. Other countries in the system would not be on this standard per se; gold  did not matter to them.
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The dollar was the anchor for other currencies: they declared a  par value  for their currencies against the dollar and established dollar convertibility. This eliminated the need to maintain gold reserves (the third classical  rule). By replacing gold with dollars, the US $ becomes the  key global reserve  asset International monetary stability is thus very closely related to US  monetary and economic policy, and the US has increased  responsibility to preserve global financial stability. It became incumbent on the US: To maintain an adequate  money supply.  i.e. To provide enough dollars  in circulation outside the US. The circulation had to keep up with the  growth in international trade and payment frequencies. ( World gold supply could not keep up with growth in demand for it – A gold  backed money system is thus inherently deflationary) To provide adequate  liquidity To maintain  confidence  i.e. “the dollar’s as good as gold” in order to  avoid global runs on US gold reserves. The US government had to  prove capable of maintaining the par value of the $ to gold. In the late 1940s:  A slow period of adjustment to the system occurs,  because other nations have not built up dollar reserves. In the 1950s: The
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This note was uploaded on 04/16/2009 for the course POL 173A taught by Professor Chase during the Spring '09 term at Brandeis.

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Week 6 MT - WEEK VI THE GOLD-DOLLAR STANDARD OVERVIEW The...

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