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From Bretton Woods to World Inflation

The purpose of this book is to re-examine the consequences of the decisions made by the representatives of the forty-five nations at Bretton Woods, New Hampshire, over sixty years ago. These decisions, and the institutions set up to carry them out, have led us to the present world monetary chaos. For the first time in history, every nation is on an inconvertible paper money basis. As a result, every nation is inflating, some at an appalling rate. This has brought economic disruption, chronic unemployment, and anxiety, destitution, and despair to untold millions of families.

It is not that inflation had not occurred before the Bretton Woods Conference in July, 1944. Inflation's widespread existence at the time, in fact, was the very reason the conference was called. But at that meeting, chiefly under the leadership of John Maynard Keynes of England, all the wrong decisions were made. Inflation was institutionalized. And in spite of the mounting monetary chaos since then, the world's political officeholders have never seriously re-examined the inflationist assumptions that guided the authors of the Bretton Woods agreements. The main institution set up at Bretton Woods, the International Monetary Fund, has not only been retained, its inflationary powers and practices have been enormously expanded.

The Bretton Woods agreements never seriously considered the return of each signatory nation to a gold standard. Lord Keynes, their principal author, even boasted that they set up "the exact opposite of a gold standard." In any case, what Bretton Woods really set up was what used to be called a "gold-exchange" standard. Every other country in the scheme undertook simply to keep its own currency unit convertible into dollars. The United States alone undertook (on the demand of foreign central banks) to keep its own currency unit directly convertible into gold.

Neither the politicians of foreign countries, nor unfortunately of our own, realized the awesome responsibility that this scheme put on the American banking and currency authorities to refrain from excessive credit expansion. The result was that when President Nixon closed the American gold window on August 15, 1971, U.S. gold reserves amounted to only about 2 per cent of outstanding currency and demand and time bank deposits ($10,132 million of gold vs. $454,500 million of M2). In other words, there was only $2.23 in gold to redeem every $100 of paper promises. But this takes no account of outstanding "Eurodollars," or even of the outstanding currency and bank deposits of all the foreign signatories to Bretton Woods. The ultimate gold reserves on which the conversion burden could legally fall under the system must have been only some small fraction of 1 per cent of the total paper obligations against them. Even if the American Congress, and our own banking and currency authorities, had acted far more responsibly, the original Bretton Woods system was inherently impossible to maintain.

Click here to open "From Bretton Woods to World Inflation" by Henry Hazlitt (PDF 48MB)

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