EVOLUTION OF GLOBAL FINANCE
EVOLUTION OF GLOBAL FINANCE
19
the equation below:
20.67/4.2474
= 4.8665
£1
= $4.8865
Each country promised to give anyone gold in return for its currency
on demand, so maintaining adequate reserves of gold was vital. A major
effect was to limit the rate of growth in the money supply to the rate
at which a country could acquire additional gold.
19141944
With the outbreak of the First World War, everything changed. The gold
standard was abandoned and currencies were allowed to fluctuate over
wide ranges. Speculation against weak currencies and in favor of strong
ones helped to cause exchanges rates to become far more volatile
than was justified by the ``real'' values of currencies; and companies
were unable to offset these changes in the forward exchange market
because it was then relatively thinly traded. In the inter-war years this
had the effect of preventing world trade from growing proportionately
with the growth of world gross national product (GNP). In the Great
Depression of the 1930s, world trade declined to very low levels.
By the mid-thirties, cash was no longer convertible to gold except
by central banks. With the outbreak of the Second World War, many
of the main trading currencies could not be exchanged for other
currencies and by the end of the war only the US dollar remained as an
easily-exchanged currency.
Bretton Woods 1944
The Allies of the Second World War met at Bretton Woods in New
Hampshire in 1944 to discuss how to create exchange rate stability
once the war had ended. Since the United States had become by far
the most powerful country in the world, it was agreed that the new
international monetary system would be based on the US dollar, with
every currency being given a fixed exchange rate to the dollar. The
system itself was tied to the US dollar at $33 to an ounce of gold.
The World Bank and the International Monetary Fund (IMF) were
created; the World Bank assisted reconstruction after the war and
