June 9, 2014 at 8:29 pm #18348THOMAS.BEHNKEMember
I’m trying to understand why the US agreed to the IMF. Why did it look favorably upon so many countries pyramiding on top of our currency, when it only deteriorates its value? Is it out of “sympathy?”June 10, 2014 at 5:35 pm #18349jmherbenerParticipant
The IMF was the enforcement mechanism of the Bretton-Woods international monetary arrangement. B-W, established at the end of WWII, created an international dollar standard in which all countries held dollars as a reserve against the issue of their own currencies. Each foreign currency was pegged to the dollar. The system was designed so that all countries could inflate their currencies in unison without facing devaluations and trade imbalances. If the Fed inflated the dollar by 10 percent, then other countries could obtain increases in their dollar reserves sufficient to permit 10 percent increases in their own currencies. Prices would then rise proportionately in each country and exchange rates would stay the same. There is a moral hazard in the system, however, as each country has incentive to over inflate its domestic currency if other countries act to support the pegged exchange rate. The IMF, then, was designed to impose austerity conditions on over-inflating countries to prevent the system from falling apart.
The U.S. gained from this system as the monetary inflation of the Fed could stimulate credit expansion in the U.S. without domestic price inflation, as much of the new money was held overseas.
Here is Henry Hazlitt on Bretton-Woods:
And Murray Rothbard:June 13, 2014 at 7:57 am #18350THOMAS.BEHNKEMember
I definitely see how this worked in the post-Nixon years, but how did it work out while we were still on the gold standard? Even though the FDR administration made it illegal for US citizens to hold gold, we still had to redeem bank notes in gold for trade purposes, didn’t we? Also, under the IMF, weren’t citizens of other countries permitted to redeem the US dollars they exchanged for in gold as well? If both of these statements are correct, then how did we still manage to pay out all of this gold to foreign nations? I’m sure a lot of gold shifted from the US to other countries…so I guess my question is did foreign nations benefit from the IMF more than we did in the pre-Nixon years?June 13, 2014 at 2:02 pm #18351jmherbenerParticipant
In addition to the source I listed above, take a look at the epilogue to Section 5 (pp. 486-490) in Murray Rothbard’s book, A History of Money and Banking in the United States.
In short, foreign dollar redemption for gold under Bretton-Woods was, in practice, done mainly by foreign central banks. As the U.S. inflated dollars in the 1960s, the dollar devalued against gold and foreign central banks began to redeem dollars for gold. Gold was flowing out of the U.S. Treasury in the late 1960 and early 1970s. This is one reason, Nixon closed the gold window in August 1971.
U.S. commercial bank notes were not redeemable for gold or silver under the Federal Reserve System, which started operations in 1914. Commercial banks exchanged their gold reserves for Federal Reserve Notes and the Fed came to own the “country’s” gold stock. If Americans wanted to buy foreign goods, they just traded Federal Reserve Notes for foreign currencies. They did not need to convert to gold first.
Finally, under Bretton-Woods, foreign governments stored their gold in the U.S. So when a trade imbalance required gold to move from the U.S. to a foreign country, it would simply be moved from one part of the vault in Fort Knox to another.
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