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jrsiajdranch
Veteran Advisor

You guys who want to learn more about our fiat dollar............

Today I ahve been doin some reading on the dollar and how we got into this mess we are now in.  We haven't really discussed it much over here and I find that odd as it is prolly the biggest factor to watch going forward.  Yesterday the NY fed bought $7.24 billion in treasury debt.   THis was dollars with no backing except the full faith and credit of the US and it's ability to tax you!  It had the unintended but tottaly rational result of driving up comodities. In case you didn't notice corn went up.  So did Gas, milk, beef, cotton, rice you know anything that is real.  While the dairy markets ahven't been good (I thinkI have mentioned thatSmiley Very Happy) They are rising. And I am in no way ready to lock in anything becasue I believe the dollar has just started it's race to the bottom. All we neeed is a gov. shut down with a little mob looting and down she falls.  The American consumer is squeezed in so many ways right now they do not even know where to turn. And the traditional places (gov.) are broke. Food pantries can't keep up. And as my wife told me today when she got back from grocery shopping Gold Medal flower was 2.99 for 5 lbs.!  Folks that is huge!

 

All this stuff has sent me to look into some things about our dollar. I cam across this little known fact about the BRetton Woods Agreement. I ahd never heard of it before my dad started to tell me about it.  I did some research and found it to be very intersting I thought some of you might like to rea up on it.

Bretton Woods Agreement

The year was 1944. For the first time in modern history, an international agreement was reached to govern monetary policy among nations. It was, significantly, a chance to create a stabilizing international currency and ensure monetary stability once and for all. In total, 730 delegates from 44 nations met for three weeks in July that year at a hotel resort in Bretton Woods, New Hampshire.

It was a significant opportunity. But it fell short of what could have been achieved. It was a turning point in monetary history, however.

The result of this international meeting, the Bretton Woods Agreement, had the original purpose of rebuilding after World War II through a series of currency stabilization programs and infrastructure loans to war-ravaged nations. By 1946, the system was in full operation through the newly established International Bank for Reconstruction and Development (IBRD, the World Bank) and the International Monetary Fund (IMF).

 

What makes the Bretton Woods Agreement so interesting to us today is the fact that the whole plan for international monetary policy was based on nations agreeing to adhere to a global gold standard. Each country signing the agreement promised to maintain its currency at values within a narrow margin to the value of gold. The IMF was established to facilitate payment imbalances on a temporary basis.

This system worked for 25 years. But it was flawed in its underlying assumptions. By pegging international currency to gold at $35 an ounce, it failed to take into effect the change in gold's actual value since 1934, when the $35 level had been set. The dollar had lost substantial purchasing power during and after World War II, and as European economies built back up, the ever-growing drain on U.S. gold reserves doomed the Bretton Woods Agreement as a permanent, working system.

This problem was described by a former senior vice president of the Federal Reserve Bank of New York:

"From the very beginning, gold was the vulnerable point of the Bretton Woods system. Yet the open-ended gold commitment assumed by the United States government under the Bretton Woods legislation is readily understandable in view of the extraordinary circumstances of the time. At the end of the war, our gold stock amounted to $20 billion, roughly 60 percent of the total of official gold reserves. As late as 1957, United States gold reserves exceeded by a ratio of three to one the total dollar reserves of all the foreign central banks. The dollar bestrode the exchange markets like a colossus."

In 1971, experiencing accelerating depletion of its gold reserves, the United States removed its currency from the gold standard, and the Bretton Woods Agreement was no longer workable.

In some respects, the ideas behind Bretton Woods were much like an economic United Nations. The combination of the worldwide depression of the 1930s and the Second World War were key in leading so many nations to an economic summit of such magnitude. The opinion of the day was that trade barriers and high costs had caused the worldwide depression, at least in part. Also, during that time it was common practice to use currency devaluation as a means for affecting neighboring countries' imports and reducing payment deficits. Unfortunately, the practice led to chronic deflation, unemployment, and a reduction in international trade. The lessons learned in the 1930s (but subsequently forgotten by many nations) included a realization that the use of currency as a tactical economic tool invariably causes more problems than it solves.

The situation was summed up well by Cordell Hull, U.S. secretary of state from 1933 through 1944, who wrote:

"Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war... If we could get a freer flow of trade ... so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace."

Hull's suggestion that war often has an economic root is reasonable given the position of both Germany and Japan in the 1930s. The trade embargo imposed by the United States against Japan, specifically intended to curtail Japanese expansion, may have been a leading cause for Japan's militaristic stance.

Another observer agreed, saying that poor economic relations among nations "inevitably result in economic warfare that will be but a prelude and instigator of military warfare on an even vaster scale."

Bretton Woods had the original intention of smoothing out economic conflict, in recognition of the problems that economic disparity causes. The nations at the meeting knew that these economic problems were at least partly to blame for the war itself, and that economic reform would help to prevent future wars. At that time, the United States was without any doubt the most powerful nation in the world, both militarily and economically. Because the fighting did not take place on U.S. soil, the country built up its industrial might during the war, selling weapons to its allies while developing its own economic strength. Manufacturing by 1945 was twice the annual rate of 1935-1939.

Due to its economic dominance, the United States held the leadership role at Bretton Woods. It is also important to note that the United States owned 80 percent of the world's gold reserves at the time. So the United States had every motive to agree to the use of the gold standard to organize world currencies and to create and encourage free trade. The gold standard evolved over a period of hundreds of years, planned by a central bank, government, or committee of business leaders.

Throughout most of the nineteenth century, the gold standard dominated currency exchange. Gold created a fixed exchange rate between nations. Money supply was limited to gold reserves, so nations lacking gold were required to borrow money to finance their production and investment.

When the gold standard was in force, it was true that the net sum of trade surplus and deficit came out to zero overall, because accounts were eventually settled in gold - and credit was limited as well. In comparison, in today's fiat money system, it is not gold but credit that determines how much money a country can spend. So instead of economic might being dictated by gold reserves, it is dictated by a country's borrowing power. The trade deficit and the trade surplus are only "in balance" in theory, because the disparity between the two sides is funded with debt.

The pegged rates - the value of currency to the value of gold - maintained sensible economic policy based on a nation's productivity and gold reserves. Following Bretton Woods, the pegged rate was formalized by agreement among the leading economic powers of the world.

The concept was a good one. However, in practice the international currency naturally became the U.S. dollar and other nations pegged their currencies to the dollar rather than to the value of gold. The actual outcome of the Bretton Woods Agreement was to replace the gold standard with the dollar standard. Once the United States linked the dollar to gold at a value of $35 per ounce, the whole system fell into place, at least for a while. Since the dollar was convertible to gold and other nations pegged their currencies to the dollar, it created a pseudo-gold standard.

The British economist John Maynard Keynes represented Great Britain at Bretton Woods. Keynes preferred establishing a system that would have encouraged economic growth rather than a gold-pegged system. He favored creation of an international central bank and possibly even a world currency. He proposed that the goal of the conference was "to find a common measure, a common standard, a common rule acceptable to each and not irksome to any."

Keynes' ideas were not accepted. The United States, in its leading economic position, preferred the plan offered by its representative, Harry Dexter White. The U.S. position was intended to create and maintain price stability rather than outright economic growth. As a consequence, Third World progress would be achieved through lending and infrastructure investment through the IMF, which was charged with managing trade deficits to avoid currency devaluation.

In joining the IMF, each country was assigned a trade quota to fund the international effort, budgeted originally at $8.8 billion. Disparity among countries was to be managed through a series of borrowings. A country could borrow from the IMF, which would be acting in fact like a central bank.

The Bretton Woods Agreement did not include any provisions for creation of reserves. The presumption was that gold production would be sufficient to continue funding growth and that any short term problems could be resolved through the borrowing regimens.

Anticipating a high volume of demand for such lending in reconstruction efforts after World War II, the Bretton Woods attendees formed the IBRD, providing an additional $10 billion to be paid by member nations. As well-intended an idea as it was, the agreements and institutions that grew from Bretton Woods were not adequate for the economic problems of postwar Europe. The United States was experiencing huge trade surplus years while carrying European war debt. U.S. reserves were huge and growing each year.

By 1947, it became clear that the IMF and IBRD were not going to fix the problems of European postwar economic woes. To help address the issue, the United States set up a system to help finance recovery among European countries. The European Recovery Program (better known as the Marshall Plan) was organized to give grants to countries to rebuild. The problems of European nations, according to Secretary of State George Marshall, "are so much greater than her present ability to pay that she must have substantial help or face economic, social, and political deterioration of a very grave character."

Between 1948 and 1954, the United States gave 16 Western European nations $17 billion in grants. Believing that former enemies Japan and Germany would provide markets for future U.S. exports, policies were enacted to encourage economic growth. During this period, the Cold War became increasingly worse as the arms race continued. The USSR had signed the Bretton Woods Agreement, but it refused to join or participate in the IMF.

Thus, the proposed economic reforms turned into part of the struggle between capitalism and Communism on the world stage.

It became increasingly difficult to maintain the peg of the U.S. dollar to $35-per-ounce gold. An open market in gold continued in London, and crises affected the going value of gold. The conflict between the fixed price of gold between central banks at $35 per ounce and open market value depended on the moment. During the Cuban missile crisis, for example, the open market value of gold was $40 per ounce. The mood among U.S. leaders began moving away from belief in the gold standard.

President Lyndon B. Johnson argued in 1967 that:

"The world supply of gold is insufficient to make the present system workable - particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."

By 1968, Johnson had enacted a series of measures designed to curtail the outflow of U.S. gold. Even so, on March 17, 1968, a run on gold closed the London Gold Pool permanently. By this time, it had become clear that maintaining the gold standard under the Bretton Woods configuration was no longer practical. Either the monetary system had to change or the gold standard itself would need to be revised.

During this period, the IMF set up Special Drawing Rights (SDRs) for use as trade between countries. The intention was to create a type of paper gold system, while taking pressure off the United States to continue serving as central banker to the world. However, this did not solve the problem; the depletion of U.S. gold reserves continued until 1971. By that time, the U.S. dollar was overvalued in relation to gold reserves. The United States held only 22 percent gold coverage of foreign reserves by that year. SDRs acted as a basket of key national currencies to facilitate the inevitable trade imbalances.

However, the Bretton Woods Agreement lacked any effective mechanism for checking reserve growth. Only gold and the U.S. asset were considered seriously as reserves, but gold production was lagging. Accordingly, dollar reserves had to expand to make up the difference in lagging gold availability, causing a growing U.S. current account deficit. The solution, it was hoped, would be the SDR.

While these instruments continue to exist, this long-term effectiveness can only be the subject of speculation. Today SDRs make up about 1 percent of IMF members' nongold reserves, and when in 1971 the United States went off the gold standard, Bretton Woods ceased to function as an effective centralized monetary body. In theory, SDRs - used today on a very limited scale of transactions between the IMF and its members - could function as the beginnings of an international currency. But given the widespread use of the U.S. dollar as the peg for so many currencies worldwide, it is unlikely that such a shift to a new direction will occur before circumstances make it the only choice.

The Bretton Woods system collapsed, partially due to economic expansion in excess of the gold standard's funding abilities on the part of the United States and other member nations. However, the problems of currency systems not pegged to gold lead to economic problems far worse.

Addison Wiggin
The Daily Reckoning

 


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16 Replies
jrsiajdranch
Veteran Advisor

Re: You guys who want to learn more about our fiat dollar............

One more sentence that sums up our current direction.

the unbalanced fiscal spending of the Johnson administration had transformed the dollar shortage of the 1940s and 1950s into a dollar glut by the 1960s.

 

inflation has always been described as to many dollars chasing to few goods.

WIth todays runaway spending requiring the fullout use of the printing press we must see that our commodity prices are being run up by the inflation of our dollars. as that continues High prices of today will be low in the next trading period. And options to cover our risk will be more expensive as well.

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nwobcw
Advisor

Re: You guys who want to learn more about our fiat dollar............

   Some time ago there was a show on Discovery channel or 1 of those similar ones about the founding of the federal reserve.  Seemed to me it was a pure power play by the super wealthy.  The newspaper here reported today 1 in 59 homes are in foreclosure.  1 out  of 3 homes underwater on their mortgage.   Sure seems like a crisis to me.

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jrsiajdranch
Veteran Advisor

Re: You guys who want to learn more about our fiat dollar............

This is real interesting. 

 

At the end of World War II, the monetary condition of all nations was deplorable. The U.S. faced a massive debt overhang from the war and yet this country was still a creditor nation to the world. The U.S. also had huge stockpiles of gold. Most everyone else was flat-out bankrupt, as only a gargantuan government program can accomplish. The main currencies had been wrecked and the main economies along with them.


As was the fashion, world elites assembled to plan some gigantic coordinated solution. They met from July 1 to July 22, 1944, at the Mount Washington Hotel in Bretton Woods, NH, and drafted the Articles of Agreement. It was nearly a year and a half later, in December 1945, that the agreement was ratified. On March 1947, one of the monstrosities created during the event, the International Monetary Fund, began operations.

What was the goal of the plan? It was the same goal as at the founding of the Federal Reserve and the same goal that has guided every monetary plan in modern history. The stated idea was to promote economic growth, encourage macroeconomic stability, and, most absurdly, tame inflation. Of course, it did none of these things.

There are other analogies to the Fed. In the same way that the Fed was to serve as a lender of last resort, a provider of liquidity in times of instability, so too the Bretton Woods Agreement obligated all member nations to make their currencies available to be loaned to other countries to prevent temporary balance-of-payment problems.

There was to be no talk at all about what created these balance-of-payment problems. The assumption was that they were like bad weather or earthquakes or floods, just something that happens to countries from time to time. The unspoken truth was that monetary problems and the related problems with balance of payment are created by bad policies: governments that inflate, spend too much, run high debts, control their economies, impose trade protections, create gigantic welfare states, fight world wars, and otherwise undermine property rights.

As with all government plans, Bretton Woods was dealing with symptoms rather than causes, and treating those symptoms in a way that enables and even encourages the disease. It pegged currencies at unrealistic levels, provided a bailout mechanism for governments and banking establishments to continue to do what they should not be doing, and thereby prolonged the problems and made them worse in the long run.

Governments have been throwing our good money after bad for a very long time. The plan, just as with the latest round of bailouts in the U.S. or Europe, was to dump money on near-bankrupt countries and thereby encourage them to continue with the very policies and practices that created the problem to begin with.


The core problem of the world monetary system after World War II was essentially that the gold standard had broken down, or rather, government had destroyed what remained of the old-fashioned gold standard through relentless inflation, debt, and devaluation. Economists in the Keynesian tradition had encouraged this, viewing money creation as some sort of panacea for all that ailed the world economy.

Keynes, the maestro of the Bretton Woods Conference, himself had recommended this and celebrated the results. To him, a flexible and standard-less currency was the key to macroeconomic manipulation of his beloved aggregates. In a perverse way, he was right about this. A government on the gold standard is seriously constrained. It can't take a sledgehammer to aggregate supply and aggregate demand. It can't spend beyond its means. It must pay for the programs it creates through taxation, which means having to curb the appetite for welfare and warfare. There can be no such thing as a Keynesian state on the gold standard, any more than a cocaine addict or compulsive gambler can be on a strict budget.

Keynes's message at Bretton Woods, in Mises's summary, was that the world elites could turn stones into bread. And so under the influence of Keynes, the target at the Bretton Woods meeting was liberalism itself, which was widely assumed to have failed during the Great Depression. The elites also came out of World War II with a more profound appreciation for the role of central planning. They had reveled in it.

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jrsiajdranch
Veteran Advisor

Re: You guys who want to learn more about our fiat dollar............

The point of this being in the Marketing side is that we must realize that our Markets today are casued by inflation and that all supply/demand influences will be inversley affected by our monetary policy.  So many today are taking a look at their charts and seeing what they think is a coorelation to '51 or '80-81. Nope this is '70-'71. We are on the back side of the nixon shock.

So Many today look at our current white house occupant as Carter. That is very niave. He is Nixon. A full out socialist with a bent towards control.  Your best move going forward is to buy calls and resell as teh market moves up. Keep them close don't go out to far. Cause one day they will outlaws them. Not overtly mind you but they will make them very expensive to own. ( just read the frank-dodd act)  The best bet is to own the physical don't forward contract as the ownership has been transfered and you will be forced To deliver even if you have no crop. Many will be wiped out with what was a very good sale but is well below the market when it come time to forward sell. 

I would also be very scard of an insurance policy backed by the federal gov.

ALl I am saying is don't count the chickens till they are hatched. Risk is very hard thing to identify some times.

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Red Steele
Veteran Advisor

Re: You guys who want to learn more about our fiat dollar............

A good post, but the sky will probably not fall out of the sky , either. The Tea Party movement seems to have some traction, and it may very well be that a Paul Volker is warming up at the sidelines, ready to soon come in to relieve that boy wonder Timmy Geithner, and stablilize the money supply, if the fed and congress can somehow work together.  THe Potus is , for all practical purposes, the lamest of ducks for two years barring impeachment, which is really not in the cards. He was voted in, in a democratic election and should have the right to be voted out, too.

 

I would be more concerned with high taxes and high interest that may make your ability to make money and payoff debt nearly impossible. I think the prudent thing to do is to have enough sales on the books to know where your money is going to come from to pay off existing debt and to have any debt on fixed interest terms.

 

Not a good time to be exposed to market risk of any sort.

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Jim Meade / Iowa City
Senior Advisor

Re: You guys who want to learn more about our fiat dollar............

JR,

 

This is in response to your post, but it is aimed at the group, not you as an individual.

 

I could not conceivably disagree more with your following quoted statement and I think it does a serious disservice to most farmers.:

 

"The point of this being in the Marketing side is that we must realize that our Markets today are casued by inflation and that all supply/demand influences will be inversley affected by our monetary policy. "

 

My disagreement probably has to do with where we are in our respective world views.  You are obviously a big picture guy who is happy talking about policy and long term trends.  To me, grain marketing is something that I do with the grain in the bin (old crop), the grain in the bag (new crop) and the grain in the plan (first out-year).

 

In my opinion, marketing for producing farmers like me who are driven by present and foreseeable cash flow and equity needs is a fairly process oriented procedure.  It can be be based on seasonals, fundamentals, technicals, cash or time targets, cash flow or you name it, but it is a fairly constrained and finite process.  Within that, there is a world to learn about how to best manipulate the data and deploy it to be a successful marketer.

 

I don't think marketing has anything to do with the "big picture" of policy and politics.  I concede that communication technology has compressed the space between inflation and selling corn next week.  But, when I left Germany in 1993, I sold my German house.  When I sold the house there was a time period between the sale and when I received the money.  I hedged the DMark so a rapid currency shift wouldn't affect the money I got.  Do any of us contract grain and hedge the dollar?  ADM and Cargill may but you and I don't.

 

The problem I have with talking about the big picture things in Marketing Talk is that (1) it doesn't make any difference because we don't apply what we think we learn from the discussion, and (2) it detracts from talking about really hard stuff like when to sell corn by letting us thing that talking about fun stuff like when inflation will be and how hard it will hit actually matters in the marketing plans or procedures of the typical producing farmer like we on this forum are.

 

Now, I know I've lost this debate years ago.  I believed that politics belonged in AgForum, policy and anything beyond 2 years out belonged in Farm Business and the really hard stuff - the nuts and bolts of how to market belonged in Marketing.  What we have now is no one talks about the really hard stuff (maybe because we've bad-mouthed those who dared and ridiculed those who failed) and we all want to talk about fun, frothy topics like inflation.  When it comes to inflation, I write my representatives but don't have the flexibility to store a couple of years of crop waiting for a commodity spike.  I sell each years crop before the next crop is harvested, as do most farmers.

 

So, on a nice Sunday morning, I am going to go off and visit my grandson.  Don't let the dollar get out of control before I get back.

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4wd
Senior Contributor

Re: You guys who want to learn more about our fiat dollar............

Now Jim, I think you failed to read JR's last part of his diatribe~

 

"Your best move going forward is to buy calls and resell as teh market moves up. Keep them close don't go out to far. Cause one day they will outlaws them. Not overtly mind you but they will make them very expensive to own. ( just read the frank-dodd act)  The best bet is to own the physical don't forward contract as the ownership has been transfered and you will be forced To deliver even if you have no crop. Many will be wiped out with what was a very good sale but is well below the market when it come time to forward sell. "

Sounds like he is dispensing his short term marketing advise very clearly for all to read. No, I don't agree with him, but usually read his stuff. BTW, my last gallon jug of 2% milk purchased this week cost me $3.13.  I Sure hope JR got a piece of that.

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jrsiajdranch
Veteran Advisor

Re: You guys who want to learn more about our fiat dollar............

Jim My "diatribe" was directed to today. IF you had looked at fundamentals cash flow this years crop in the bin next years crop in the bag and decided to price corn in or on Dec. 15 you had all the right near term outlook stuff right. IF you did not look at the political ruling classses actions then you missed the fact that the dollar is gonna move real fast. ANd you left about $1.50 on the table.   Looking at what has happened in the past is gonna give you a raod map. BUt you must look at the events surrounding the chart move not the chart. Other wise you miss the painting by looking at the colors.

Have a good day with your grandson.

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jrsiajdranch
Veteran Advisor

Re: You guys who want to learn more about our fiat dollar............

4WD got about half of it!  I am poking around here today as My kids and wife were at an all night lock in for 4-H.  I am just trying to stay quite till everybody wakes upAnd about half the time I do not agree with me so about half the time you and I agree! HE HE

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