World Reserve Currency

The differences between money and currency:

Aspect	Money	Currency
Definition	A medium of exchange that includes all financial assets used to facilitate transactions.	A specific form of money that includes physical coins and banknotes.
Form	Can be physical (coins, banknotes) or digital (bank deposits, electronic money).	Primarily physical forms like coins and banknotes.
Intrinsic Value	Often has intrinsic value (e.g., gold, silver) or represents value (digital balances).	Typically has no intrinsic value; value is derived from government decree.
Functions	Medium of exchange, store of value, unit of account.	Mainly serves as a medium of exchange and unit of account.
Government Role	Can exist independently of government issuance (e.g., barter systems, cryptocurrencies).	Issued and regulated by governments and central banks.
Historical Examples	Gold, silver, barter goods, cryptocurrencies like Bitcoin.	Modern banknotes and coins issued by central banks.
Acceptance	Generally accepted across various platforms and by individuals within and across borders.	Accepted as a legal tender within a particular country or region.
Durability	Can be durable and long-lasting, especially in digital form.	Physical currency can wear out or get damaged over time.
Counterfeiting	More challenging to counterfeit digital forms of money; physical forms are susceptible.	Physical currency is prone to counterfeiting but comes with anti-counterfeiting measures.
Examples	Bank deposits, digital wallets, gold, silver, Bitcoin.	US Dollar bills, Euro coins, Japanese Yen notes.

Summary:

• Money is a broad term that encompasses various forms of value storage and exchange, including both physical and digital assets.

• Currency is a specific type of money that exists in physical forms like coins and banknotes and is officially issued by governments.

Bretton Woods System (post WWII) 1944-1971 :

Since the end of WW2 the US Dollar has been the WRC, this means all central banks hold the USD in their reserves. In other words, all other currencies are backed by the US Dollar. This directly links all countries with a CB to the monetary policy in America.

The Bretton Woods system was a landmark international monetary system established in July 1944 during a conference held in Bretton Woods, New Hampshire, USA. Delegates from 44 nations gathered to develop a framework for post-World War II international economic cooperation. The primary objectives were to establish a stable economic environment, prevent competitive devaluations, and promote economic growth and international trade. Here are the key features and components of the Bretton Woods system:

Key Features

1. Fixed Exchange Rates

   • The system established fixed exchange rates between currencies, pegging them to the US dollar, which was in turn pegged to gold at $35 per ounce. This created a stable environment for international trade and investment.

2. The US Dollar as the Anchor Currency

   • The US dollar became the central reserve currency due to its link to gold. Other countries held reserves in dollars and could exchange them for gold from the US government.

3. Creation of International Institutions

   • International Monetary Fund (IMF): Established to oversee the international monetary system, provide financial assistance to countries facing balance of payments problems, and facilitate stable exchange rates.

   • International Bank for Reconstruction and Development (IBRD), now part of the World Bank Group: Created to provide loans for the reconstruction of war-torn Europe and later for the development of poorer countries.

4. Capital Controls

   • The system allowed for controls on the flow of capital to prevent destabilizing speculation. Countries could impose restrictions on capital movement to maintain economic stability.

5. Adjustable Peg System

   • While exchange rates were fixed, countries could adjust their currency's value with the IMF's approval if they faced fundamental economic imbalances.

How the System Worked

• Stabilizing Exchange Rates: Countries agreed to maintain their currency values within a narrow margin (1%) around a fixed rate to the dollar. Central banks intervened in foreign exchange markets to maintain these rates.

• Dollar Convertibility: The US committed to converting dollars into gold on demand, establishing trust in the dollar as a stable global currency.

• IMF Assistance: Countries facing temporary balance of payments deficits could borrow from the IMF, avoiding the need to devalue their currencies or impose trade restrictions.

Decline and Collapse

The Bretton Woods system began to face significant challenges in the 1960s due to several factors:

1. US Trade Deficits and Inflation: The US ran persistent trade deficits and experienced inflation, leading to doubts about the dollar's stability.

2. Gold Reserves: The US gold reserves were insufficient to cover the amount of dollars held by foreign central banks, creating a crisis of confidence.

3. Speculative Attacks: Speculators began betting against the fixed exchange rates, putting pressure on central banks and the US dollar.

End of the Bretton Woods System

In August 1971, US President Richard Nixon announced the suspension of the dollar's convertibility into gold, effectively ending the Bretton Woods system. This event, known as the "Nixon Shock," led to the transition to a system of floating exchange rates, where currency values are determined by market forces.

Impact and Legacy

• The Bretton Woods system established the foundation for international economic cooperation and the creation of key global financial institutions.

  

  Bonds (IOU) from the Treasury to the Commercial Banks (banks buy these with currency), Federal Reserve buy the Bonds using a cheque (IOU) from the banks
• Its collapse led to the current system of floating exchange rates and the continued role of the IMF and World Bank in global economic governance.

• The system's focus on stable exchange rates and economic growth influenced future international monetary policies and agreements.

Overall, the Bretton Woods system played a crucial role in shaping the post-war global economy, promoting stability and growth, and laying the groundwork for today's international financial architecture.