Gold, Bretton Woods and “The Wizard of Oz”

It is 40 years since the end of the Bretton Woods agreement and, indeed, the end of the gold standard. Bretton Woods had been a financial discipline put in place to prevent central bankers expanding the monetary supply in an irresponsible way and to introduce fiscal discipline. For those who believe in the power of happy coincidences, the answer to current financial issues might just lie in the number "40". I'll explain.

The Bretton Woods system collapsed exactly 40 years ago under the weight of US trade deficits and the cost of funding the Vietnam War, which meant that gold and international currencies were freely floated. It was to be the birth of fiat currencies (Latin for "let it be done"—in other words, the currency’s value is decreed by government) and it ushered in (initially) an era of unprecedented prosperity.

Ironically, fiat currencies have a long history, originating in China in the 11th Century during the Song Dynasty (they cannot say that they were not warned) but it died during a period of hyperinflation, something that fiat currencies have had a tendency to do.

A 40th anniversary is referred to as a "Ruby Anniversary" and in an act of irony we may find the answer to our current economic woes in another ruby—Dorothy’s 'ruby shoes' in the Wizard of Oz—a film thought by some to be a monetary allegory for the gold standard. More of that in a moment; you will need to wait for the punch line.

In 1944 at the outset of Bretton Woods the US government held 60% of global gold reserves. The US dollar was pegged to all currencies at a fixed exchange rate and gold was fixed at a price of $35 per ounce and redeemable by holders of dollars at that price. The Federal Reserve was thus constrained from expanding their monetary base without buying more gold. It placed financial constraints on central bankers. This artificial construct came under pressure and a number of countries—especially France but also later Germany and Switzerland—redeemed their dollars for gold with the US Federal Reserve.

During the period of Bretton Woods (1944-1971), gold coverage for dollars printed by the Federal Reserve had fallen from 55% to 22%. The US was in difficulty and on August 15, 1971, President Richard Nixon unilaterally decided without consultation with Congress to impose a wage freeze, a 10% duty on imports, and closed the gold window, ending convertibility. This was the so-called Nixon Shock, and it succeeded in liberating global economies so that markets flourished—for a while.

The Wizard of Oz, meanwhile, had been published in 1900 by William Baum (a keen political writer and Populist) and released as a film in 1939. In the original book, Dorothy's shoes were silver but this was changed to ruby by the filmmakers because Hollywood was going technicolor . The Populist Movement of 1894 had wanted silver (at a fixed ratio of 16:1), along with gold, to be used as the backing for US dollars, thereby creating more dollars, thus devaluing dollars and therefore reducing the debt burdens that workers (and especially farmers) were laboring under. It was a form of quantitative easing, if you like.

There is no solid evidence to support the view that the book was intended as a political satire or even a monetary allegory, but it does nevertheless serve a didactic purpose.

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