Bretton Woods
What got us out of the Great Depression wasn’t the government’s spending and work programs of the Roosevelt administration, or even World War 11, as most people think. No. What got us out of the Great Depression was the tremendous influx of gold from Europe. When the U.S. raised the price of gold by nearly 70 percent to $35 per ounce, prices of goods and services in the U.S. didn’t immediately jump by the same 70 percent. Remember, thanks to the Roosevelt administration, the dollar was devalued by over 40 percent. So its purchasing power overseas fell by the same amount, slowing our imports drastically. But countries, buying from the U.S. now found their currency purchased 70 percent more U.S . stuff than it used to.
Also, when a country fixes its currency to gold, it has to buy or sell as much gold as is offered or demanded to maintain the currency price. Suddenly, all the gold mining companies around the world were selling their gold to one buyer, the U.S. Government. So this, plus a tremendous trade surplus accounted for most of the gold inflows from 1934 through 1937.
But in 1938, a new dimension was added. When Germany’s Adolf Hitler annexed Austria, the rest of Europe panicked, fearing the looming threat of war. And there was a transfer of wealth from European investments to U.S. investments as Europe braced for the ravages of war. European consumer goods factories were used to produce guns, ammunition, airplanes and tanks. Thus most Europeans had to obtain everyday items from U.S. So, in reality, gold inflows, foreign investments, and war profiteering, not social programs, were what lifted the U.S. out of the Depression.
About a year before the end of the war representatives from forty-four countries met in July of 1944 at Bretton Woods, New Hampshire, to figure out how they were going to make the world of International trade and finance work again. They needed a system of international payments that permitted trade without the wild fluctuations in currency exchange rates or the fear of sudden currency depreciation that crippled international trade during the Great Depression. It was decided that all countries would peg their currencies to the U.S. dollar and the U.S. would make the dollar redeemable in gold, to foreign central banks only, at a rate of $35 per ounce. This meant that, from World War 11 on, all foreign central banks had to hold dollars instead of, or in addition to, what was left of their gold reserves.
From the book: “Guide to Investing in Gold and Silver” by Michael Maloney
