The ecology of money, by Richard Douthwaite
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Box 5: The end of the two Gold Standards

The gold standard worked reasonably well up to 1914 but was cast aside by all the major combatants except the US during the First World War. It proved impossible to restore during the 1920s and 30s, although great efforts were made to do so. Churchill, for example, insisted in 1925 that Britain should restore convertibility between the pound sterling and gold at the pre-war level of 123.3 grains of gold at eleven-twelfths fine to £1. This required the British price level to be cut by between 10-15% if export competitiveness was to be maintained. The attempt to deflate by this amount caused the General Strike in 1926 and massive unemployment. Keynes wrote later of: "the disastrous inefficiency which the international gold standard has worked since its restoration five years ago, and the economic losses, second only to those of a great war, which it has brought upon the world." Even the US was forced off the gold standard in 1933.

After the Second World War, the non-communist industrialised nations adopted the gold exchange standard rather than the gold standard. Under this, they fixed their exchange rates in relation to the US dollar, which itself was fixed in terms of gold. However, the US, as the world's banker, did what many goldsmiths had done previously and failed to observe a sufficiently cautious ratio between the number of dollars it allowed its commercial banks to put into circulation and its reserves of gold. Confidence in the ability of the US to maintain the fixed exchange rate between the dollar and gold was finally destroyed by the surge of money that went into circulation in the US to cover the costs of fighting the Vietnam war. All around the world, holders of dollars rushed to convert them to gold.

On August 15th, 1971, President Nixon cracked. He took the US off the gold standard and removed the last fixed link between the world's money and anything real. As a result ever since the value of every currency has been based on nothing but confidence and has fluctuated in response to the whims of the market to an unprecedented extent. The monetary world was left with no foundation, no fixed point, "a floating non-system" as the then German Chancellor called it.

Since then, central banks have been forced to adjust interest rates and the amount of money in circulation in their domestic economies on the basis of how those economies are perceived internationally rather than the volume of trade going on. The markets' confidence has to be maintained. This obviously severely damages their currencies' ability to serve as a satisfactory medium of exchange.

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SearchContentsForewordGlossaryIntroductionChapter 1Chapter 2Chapter 3Chapter 4Chapter 5Appendices