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Chapter 3, Part III. Look in the rearview mirror. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Bretton Wood System crisis

    After WWII the US held about $26 Billion of gold reserves out of total reserves about $40 Billion - it’s over 60% of the overall world’s reserves! As world trade increased rapidly, the size of gold base increased just a few percent.

    The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the official price of $35 per ounce. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market.

    When Bretton Woods had started to work, there were 3.1 times less dollars deposited in foreign banks than the value of US gold reserves. In the 1970s there were 6.1 times greater dollars in turnover than US gold reserves.

    Here is appearing the so-called Triffin’s paradox: according to the Bretton Woods system, the amount of the world reserve currency should be equal to the gold reserves of the issuing country (USA). If there are more USD issued than US gold reserves allow, then there will be a problem with potential exchanges of reserve currency into gold, and the Bretton Woods system is designed for free, unlimited exchange between US Dollars and gold. From the other side, fast growth of international trade demands more currency be available to serve all trading transactions and the international trading growth was much faster than the growth of gold reserves. In the endm this became a reason for cancelling the gold standard and the fixed US dollar rate to gold of $35 per 1 Troy Oz. And here is how it has happened…
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