"Under the Bretton Woods system, the global economy required US dollars for international trade and reserves. To supply these dollars, the US had to run persistent balance of payments deficits."
Was this part of the agreement, or did the U.S. just do this reflexively because the dollar was rising against other currencies because it was the international unit of account, making imports cheap, and exports expensive?
Then, as discussed before, issuance of--at least the Federal Reserve-issued portion of--currency required active open market operations by the Federal Reserve (as treasury and bank payment net issuance were self draining by Treasury auction and the overnight market, respectively), or else the banks wouldn't have the reserves to pay for the currency, since all other counterparty payments resulting in net reserve creation were spoken for by the overnight market or it's subcategory, Treasury auctions.
__________________________
Another thing I noticed is that gold bullion being a third of currency was but one of a range of odd ratios during the period.
1. 1939, for instance: bullion was double currency, something one would think bound to drive scarcity of bullion and thereby by the law of supply and demand put the same sort of pressure on the currency one saw leading on down to 1970.
2. Or 1930: bullion roughly equaled currency. As one thinks of bullion as simply a kind of starter yeast, that too is odd. But then one realizes that at that time, some share of currency existed in ten and twenty dollar coin, making the ratio of gold to redeemable gold certificates even somewhat higher than one-to-one, even odder, as is the problem with the 1939 numbers; I mean, at a glance.
Then, you suggest that a thirty percent (fifteen to fifty) ratio is "wrong," but what, then *is* a good ratio, would you say? Or more to the point, what used to be this ratio back in the day, 1901, 1910, 1920? And why did this "crisis" not occur back in 1792 and throughout the nineteenth century? I know bullion-backed paper money is the problem, as one wouldn't see the problem of having to redeem coin with, say, coin back in trimetallic era. But in the early nineteenth century, the issue one hears is always a lack of industrial scale minting machinery, and never a shortage of bullion of either silver nor gold--as coin would still need bullion to mint it with.
At first glance, these numbers - bullion roughly equal to currency in 1930, and then double it in 1939 - do seem strange. But when you see their context, they’re not signs of some deep flaw, but rather a snapshot of a country caught in the transition from a rigid gold standard to a more flexible fiat system.
The rapid shift in this ratio between 1930 and 1939 illustrates an economy in transition. The US was leaving the deflationary spiral of the gold standard behind, but not yet fully adapted to the new fiat world.
Date Monetary Gold Stock (Bullion) Currency in Circulation (approx.) Ratio (approx.)
1930 ~$4.6 billion ~$4.6 billion 1:1
1939 ~$14.6 billion ~$6.5 billion ~2.3:1
This transition helps explain why the ratio in 1939 seems so large: the US government had revalued its gold holdings and was actively accumulating the metal as a safe haven, all while the domestic economy remained depressed and the public hoarded cash.
The high 1939 ratio didn't cause a crisis because the system had changed. This was gold as a war chest, no longer a monetary anchor.
Under the Federal Reserve Act, the central bank was required to hold gold reserves equal to 40% of the value of Federal Reserve notes in circulation. This requirement created an automatic deflationary brake that was the "gold straitjacket."
In 1939, with roughly $14.6 billion in gold supporting only $6.5 billion in currency, the US was sitting on an enormous gold surplus. This allowed the Fed to expand the money supply in the coming years to fight WWII without any fear of hitting the 40% reserve constraint. This was not a problem; it was immense firepower.
The system didn't collapse in the 1930s because the US was swimming in gold, but it almost did in the 1890s when the Treasury's gold reserves dipped perilously low. The "crisis" wasn't an automatic price, but a political panic about the government's ability to honour its gold promises.
Ultimately, no "good" ratio exists. The "right" number was whatever allowed the government to pay its bills and avoid a bank run. Anything else was just accounting.
Not newly mandated, it's from 1901, but I think before, 1834. The 1792 ratio was very slightly lower (nine tenths of gold, one tenth of copper, by weight, so the volume of copper was a lot more..., for the twenty dollar one ounce coin), although we're really talking coins, not a weight in bullion, to my mind, up until at least 1901, although the Constitution on this point seems a bit unreadable to my eye. Note, it would be troy ounces, not regular ounces.
Tom, thank you - very poorly phrased, I have amended now.
It was the Coinage Act 1834.
You're right that until 1900, and really until 1933, Americans primarily thought in terms of gold coins, not bullion weight. The Coinage Act of 1792 specified the exact weight, fineness, and denomination of coins. A "twenty dollar gold piece" wasn't an abstract quantity of bullion; it was a specific coin you could hold. The shift to thinking of gold purely as weight in ounces came later, after private gold ownership was criminalized and coins were withdrawn from circulation.
As far as Troy ounces, I admit that I take it for granted - in much the same way that I didn't specify US Dollar. I know a couple of gold dealers and they only ever speak of ounces.
The actual legal instruments used grains. The US adopted the troy pound (5,760 grains) for mint purposes, and a troy ounce contains 480 grains. So when the Gold Standard Act of 1900 said the dollar was 25.8 grains of 90% pure gold, that meant it contained 23.22 grains of pure gold. Dividing 480 by 23.22 gives you roughly 20.67, the official gold price. Therefore, even though the law never explicitly said "troy ounce," the ounce unit that matches the statutory grain count is the troy ounce.
Just to show that I'm not the only one who makes (lots of) typos, I found a slight discrepancy in the 1900 grain weight. While the standard figure is 25.8 grains, one of the congressional records mentioned 25.08 grains. However, this appears to be an outlier (likely a typo in that specific document). The overwhelming consensus from other sources confirms the figure of 25.8 grains.
"Under the Bretton Woods system, the global economy required US dollars for international trade and reserves. To supply these dollars, the US had to run persistent balance of payments deficits."
Was this part of the agreement, or did the U.S. just do this reflexively because the dollar was rising against other currencies because it was the international unit of account, making imports cheap, and exports expensive?
Then, as discussed before, issuance of--at least the Federal Reserve-issued portion of--currency required active open market operations by the Federal Reserve (as treasury and bank payment net issuance were self draining by Treasury auction and the overnight market, respectively), or else the banks wouldn't have the reserves to pay for the currency, since all other counterparty payments resulting in net reserve creation were spoken for by the overnight market or it's subcategory, Treasury auctions.
__________________________
Another thing I noticed is that gold bullion being a third of currency was but one of a range of odd ratios during the period.
1. 1939, for instance: bullion was double currency, something one would think bound to drive scarcity of bullion and thereby by the law of supply and demand put the same sort of pressure on the currency one saw leading on down to 1970.
2. Or 1930: bullion roughly equaled currency. As one thinks of bullion as simply a kind of starter yeast, that too is odd. But then one realizes that at that time, some share of currency existed in ten and twenty dollar coin, making the ratio of gold to redeemable gold certificates even somewhat higher than one-to-one, even odder, as is the problem with the 1939 numbers; I mean, at a glance.
Then, you suggest that a thirty percent (fifteen to fifty) ratio is "wrong," but what, then *is* a good ratio, would you say? Or more to the point, what used to be this ratio back in the day, 1901, 1910, 1920? And why did this "crisis" not occur back in 1792 and throughout the nineteenth century? I know bullion-backed paper money is the problem, as one wouldn't see the problem of having to redeem coin with, say, coin back in trimetallic era. But in the early nineteenth century, the issue one hears is always a lack of industrial scale minting machinery, and never a shortage of bullion of either silver nor gold--as coin would still need bullion to mint it with.
At first glance, these numbers - bullion roughly equal to currency in 1930, and then double it in 1939 - do seem strange. But when you see their context, they’re not signs of some deep flaw, but rather a snapshot of a country caught in the transition from a rigid gold standard to a more flexible fiat system.
The rapid shift in this ratio between 1930 and 1939 illustrates an economy in transition. The US was leaving the deflationary spiral of the gold standard behind, but not yet fully adapted to the new fiat world.
Date Monetary Gold Stock (Bullion) Currency in Circulation (approx.) Ratio (approx.)
1930 ~$4.6 billion ~$4.6 billion 1:1
1939 ~$14.6 billion ~$6.5 billion ~2.3:1
This transition helps explain why the ratio in 1939 seems so large: the US government had revalued its gold holdings and was actively accumulating the metal as a safe haven, all while the domestic economy remained depressed and the public hoarded cash.
The high 1939 ratio didn't cause a crisis because the system had changed. This was gold as a war chest, no longer a monetary anchor.
Under the Federal Reserve Act, the central bank was required to hold gold reserves equal to 40% of the value of Federal Reserve notes in circulation. This requirement created an automatic deflationary brake that was the "gold straitjacket."
In 1939, with roughly $14.6 billion in gold supporting only $6.5 billion in currency, the US was sitting on an enormous gold surplus. This allowed the Fed to expand the money supply in the coming years to fight WWII without any fear of hitting the 40% reserve constraint. This was not a problem; it was immense firepower.
The system didn't collapse in the 1930s because the US was swimming in gold, but it almost did in the 1890s when the Treasury's gold reserves dipped perilously low. The "crisis" wasn't an automatic price, but a political panic about the government's ability to honour its gold promises.
Ultimately, no "good" ratio exists. The "right" number was whatever allowed the government to pay its bills and avoid a bank run. Anything else was just accounting.
"at the newly mandated price of $20.67 per ounce"
Not newly mandated, it's from 1901, but I think before, 1834. The 1792 ratio was very slightly lower (nine tenths of gold, one tenth of copper, by weight, so the volume of copper was a lot more..., for the twenty dollar one ounce coin), although we're really talking coins, not a weight in bullion, to my mind, up until at least 1901, although the Constitution on this point seems a bit unreadable to my eye. Note, it would be troy ounces, not regular ounces.
Tom, thank you - very poorly phrased, I have amended now.
It was the Coinage Act 1834.
You're right that until 1900, and really until 1933, Americans primarily thought in terms of gold coins, not bullion weight. The Coinage Act of 1792 specified the exact weight, fineness, and denomination of coins. A "twenty dollar gold piece" wasn't an abstract quantity of bullion; it was a specific coin you could hold. The shift to thinking of gold purely as weight in ounces came later, after private gold ownership was criminalized and coins were withdrawn from circulation.
As far as Troy ounces, I admit that I take it for granted - in much the same way that I didn't specify US Dollar. I know a couple of gold dealers and they only ever speak of ounces.
The actual legal instruments used grains. The US adopted the troy pound (5,760 grains) for mint purposes, and a troy ounce contains 480 grains. So when the Gold Standard Act of 1900 said the dollar was 25.8 grains of 90% pure gold, that meant it contained 23.22 grains of pure gold. Dividing 480 by 23.22 gives you roughly 20.67, the official gold price. Therefore, even though the law never explicitly said "troy ounce," the ounce unit that matches the statutory grain count is the troy ounce.
Just to show that I'm not the only one who makes (lots of) typos, I found a slight discrepancy in the 1900 grain weight. While the standard figure is 25.8 grains, one of the congressional records mentioned 25.08 grains. However, this appears to be an outlier (likely a typo in that specific document). The overwhelming consensus from other sources confirms the figure of 25.8 grains.