CASO DE ESTUDIO PEGA STIC®, MANTENIENDO EL LIDERAZGO DE UNA ESTRELLA

Gold has long existed as a medium of international exchange. But in its role as a reserve asset it has significant shortcomings. First, it is wasteful to use a commodity with a significant positive cost of production to perform a function that could equally well be performed by a financial instrument with a zero cost of production. Secondly, the use of gold gives benefits to the country where the gold is produced and which may not necessarily benefit the world economy. And there have been objec- tions to the political nature of the world’s largest gold producer, South Africa. Thirdly, the increase in the supply of gold may not reflect the world’s increasing need for extra international liquidity. Indeed increases in gold supplies may be unrelated to the world’s needs. They may be influenced, though, by the need for foreign exchange on the part, for example of South Africa.

The price of gold was fixed in 1933 at $35 an ounce and this fixed value held up to the early 1970s. Since the currencies were fixed in relation to the dollar, central banks could exchange their currencies for dollars and with their dollars they could obtain gold. The US Federal Reserve Bank was willing to buy and sell gold at this rate. This willingness of the United States to back the world monetary system is understandable given that the United States, at the end of the Second World War,

had a gold stock valued at $20bn or 60 per cent of the total of official gold reserves. As long as the dollar and its gold backing was considered invulnerable, foreign cent- ral banks had an incentive to hold currencies, which earned interest, rather than gold, which earned nothing.

In 1954 a gold market was opened in London in which private buyers and sellers could operate. A central bank gold pool of $80m was set up in 1962. The gold pool was an arrangement among eight countries, including the United States, to sell or buy gold in the free market to keep the price close to the official price of $35 an ounce. France left the gold pool in 1967.

By the late 1960s there existed a situation whereby the dollar had become con- vertible into gold not only by foreign central banks but also by private speculators all over the world. Until 1968, under the gold pool arrangement, major central banks clubbed together to hold the gold price at $35 an ounce. As there was no prospect of the gold price going down, but a good prospect of it going up, this gave speculators a one-way option. In 1968 central banks were forced to set the gold price free for commercial transactions. However, for settlements between themselves, they agreed to stick to the old price and not to sell gold on the free market. The central banks expected that under this two-tier gold system, the free-market gold price would stay within easy reach of the official price. It did not do so for long.

Increasingly, fixed exchange rates were becoming more and more difficult to defend and various governments around the world were very reluctant to devalue and revalue despite what many would have described as fundamental disequilibria. In other words, national governments were abusing the system.

In 1971 the system was clearly under pressure on two fronts – the fixed gold price and fixed exchange rates made little sense. Matters were brought to a head when President Nixon, as a preparation to the 1972 election, sought to expand demand in the United States. Speculation against the dollar mounted and many central banks in continental Europe and Japan were forced to buy dollars to keep their currencies within the narrow bands required by Bretton Woods – rather than rising, which eco- nomic and speculative pressures were favouring. The free-market gold price rose sharply. This led several countries to demand conversion of their surplus dollars into gold at the official price of $35 per ounce. The United States, with $10bn in gold reserves versus liabilities of $50bn in other countries’ reserves, decided to suspend convertibility in August 1971 and the US dollar was set free to float.

There being considerable anxiety about the international monetary system, a con- ference of finance ministers was summoned in December 1971 at the Smithsonian Institute in the United States. The so-called Smithsonian Agreement resulted. This increased the fixed exchange rate band spread to 4.5 per cent, allowing central banks more room for manoeuvre before intervention became necessary. At the same time upward revaluations of various currencies against the US dollar were agreed, with the dollar formally devaluing against gold. The price of the metal was increased from $35 per ounce to $38 per ounce – an effective dollar devaluation of 9 per cent.

The dollar-based international monetary system continued to function for just over another year, when the failure of the US balance of payments to respond to the dollar’s initial devaluation led to a second realignment. The dollar was devalued again in February 1973; this raised the official gold price to $41.22 per ounce. But

24 Chapter 2. The international monetary system

this realignment was almost immediately brought under excessive strain when a new exchange crisis emerged in March 1973 and European central banks refused to buy dollars. In mid-March the Bretton Woods era finally crumbled when fourteen major industrial nations abandoned the adjustable peg and allowed their currencies to float against the dollar. But we are not universally in a floating exchange rate world now, as we shall see shortly.