Currency Wars_ The Making of the Next Global Crisis - James Rickards [45]
The two-tier system caused speculative pressures to be directed to the open market while the $35 price remained available only to central banks. However, the U.S. allies reached a new, informal agreement not to take advantage of the gold window by acquiring gold at the cheaper official price. The combination of the end of the Gold Pool, the creation of two-tier system and some short-term austerity measures put in place by the United States and United Kingdom helped to stabilize the international monetary system in late 1968 and 1969, yet the dénouement of Bretton Woods was clearly in sight.
On November 29, 1968, not long after the collapse of the London Gold Pool, Time reported that among the problems of the monetary system was that “the volume of world trade is rising far more quickly than the global supply of gold.” Statements like this illustrate one of the great misunderstandings about the role of gold. It is misguided to say that there is not enough gold to support world trade, because quantity is never the issue; rather, the issue is one of price. If there was inadequate gold at $35 per ounce, the same amount of gold would easily support world trade at $100 per ounce or higher. The problem Time was really alluding to was that the price of gold was artificially low at $35 per ounce, a point on which the magazine was correct. If the price of gold was too low, the problem was not a shortage of gold but an excess of paper money in relation to gold. This excess money was reflected in rising inflation in the United States, the United Kingdom and France.
In 1969, the IMF took up the “gold shortage” cause and created a new form of international reserve asset called the special drawing right, or SDR. The SDR was manufactured out of thin air by the IMF without tangible backing and allocated among members in accordance with their IMF quotas. It was promptly dubbed “paper gold” because it represented an asset that could be used to offset balance of payments deficits in the same manner as gold or reserve currencies.
The creation of the SDR was a little-understood novelty at the time. There were several small issuances in 1970–1972 and another issuance in response to the oil price shock and global inflation in 1981. Thereafter, the issuance of SDRs came to a halt for almost thirty years. It was only in 2009, in the depths of a depression that had begun in 2007, that another, much larger amount of SDRs were printed and handed out to members. Still, the original issuance of SDRs in 1970 was a reflection of how badly unbalanced the supply of paper money had become in relation to gold and of the desperation with which the United States and others clung to the gold parity of $35 per ounce long after that price had become infeasible.
The entire period of 1967 to 1971 is best characterized as one of confusion and uncertainty in international monetary affairs. The devaluation of sterling in 1967 had been somewhat of a shock even though the instability in sterling had been diagnosed by central bankers years before. But the following years were marked by a succession of devaluations, revaluations, inflation, SDRs, the collapse of the Gold Pool, currency swaps, IMF loans, a two-tiered gold price and other ad hoc solutions. At the same time, the leading economies of the world were undergoing internal strains in the form of student riots, labor protests, antiwar protests, sexual revolution, the Prague Spring, the Cultural Revolution and the continuing rise of the counterculture. All of this was layered onto rapid technological change summed up in the ubiquity of computers, the fear of thermonuclear war and plain awe at landing a man on