RUNNING HEAD: MONETARY SYSTEMS 1
Discussion Board 3: Financial Markets, Monetary Systems, Regional Economic Integration
David S. Saunders
School of Business, Liberty University
Busi 604 International Business
Dr. Angela Peterson
September 17, 2025
Key Term and Why you are interested in it
For this assignment, I have chosen the term monetary system. Specifically, I will discuss
the following types of monetary systems commodity money/commodity-based money, and fiat
money (Agarcoal, 2025). I will also discuss the aftermath of the Bretton Woods Agreement on
the world currency market.
Explanation of the term
A monetary system is defined as “a set of policies, frameworks, and institutions by which
the government creates money in an economy” (Agarcoal, 2025). Institutions that create money
would be the central bank, treasury, and the mint (Agarcoal, 2025). The main monetary systems
are commodity/commodity based monetary systems, and fiat monetary systems.
Commodity and commodity-based money is defined as “a physical good that consumers
universally use to trade for other goods” (Boyce, 2023). In the past gold was used as money, but
it also had a value outside of its use as a medium of exchange (Boyce, 2023). Therefore, gold has
an intrinsic value (Boyce, 2023). Other examples of commodity money in the past would be
alcohol, cocoa beans, copper, gold, silver, tea, and tobacco. The are four main characteristics of
commodity money, and they are: it is durable, it is divisible, it is easily exchanged, and it is rare
(Boyce, 2023).
Commodity money is a form of currency whose value comes from the material it is made
of, rather than from government declaration or a promise (AccountingInsights Team, 2025).
Gold for example, has been used as money, but it also holds value in jewelry or industrial
applications (AccountingInsights Team, 2025). The value of commodity money is determined by
the market dynamics of supply and demand for physical good, not by a government
(AccountingInsights Team, 2025). Its intrinsic value provides stability as well as reliability
(AccountingInsights Team, 2025). Historically, commodity money was used in barter systems as
a medium of exchange that simplified transactions (AccountingInsights Team, 2025).
Fiat money is defined as “all kinds of money that are made legal tender by a government
decree or fiat” (Britannica, 2025). This term is meant for all legal-tender paper money or
coinage that has a face value that exceeds their commodity valuation and are not redeemable in
gold or silver (Britannica, 2025). In the past, paper money and banknotes have acted as
promises to pay the bearer a specified amount of gold or silver (Britannica, 2025). During the
American Revolution the continental currency, the assignats issued during the French
Revolution, and the greenbacks during the American Civil War period are all examples of fiat
money (Britannica, 2025).
From the early 19th century to the mid-20th century, gold standard or bimetallic systems
were used by the major economies of the world. After World War II, the Bretton Woods system
was used, where the U.S. dollar serves as the international reserve currency that was backed by
gold at a fixed price of $35 an ounce (Britannica, 2025). However, by the late 20th century, it
became impossible for the US to maintain gold at a fixed rate, and in August 1971, President
Nixon announced that he would “suspend temporarily the convertibility of the dollar into gold
or other reserve assets” (Britannica, 2025). This action ended the Bretton Woods system. By
1973, all major currencies were “floated” against each other on the world markets. Their values
were determined by market demand. According to the quantity theory of inflation, “excessive
issuance of fiat money can lead to its depreciation in value” (Britannica, 2025).
Major article summary
The article I am reviewing was written in 2017, by Dr. Michael Bordo, Professor of
Economics at Rutgers University in Rutgers, NJ. This article discusses the implementation of the
Bretton Woods system in 1944, and how it played an important role in the development of the
global economy after the end of World War II (Bordo, 2017). This article will look at how this
system brought stability and economic performance to the US and global economies during the
1950s and 1960s (Bordo, 2017). However, due to liquidity issues and inflationary pressure, the
system ended in the early 1970s, and the dollar standard took effect, and it is still place today
(Bordo, 2017).
Discussion
The Bretton Woods system was created by the 1944 Articles of Agreement at a global
conference that was conducted by the US Treasury in Bretton Woods, NH (Bordo, 2017). This
system was established to implement a new international monetary order after World War II,
and this was also established to prevent protectionism, devaluations of currency, and unstable
exchange rates (Bordo, 2017). This system also sought to provide monetary and financial
stability so that there would be economic growth as well as an increase in international trade
(Bordo, 2017).
This system was a compromise between the fixed exchange rates of the gold standard,
and it was seen to rebuild the network of global trade and finance, and to provide greater
flexibility to countries so that they could maintain domestic economic and financial stability
(Bordo, 2017). “The Articles represented a compromise between the American plan of Harry
Dexter White and the British plan of John Maynard Keynes” (Bordo, 2017). The compromise
created an adjustable peg system that was based on the US dollar being convertible into gold at
$35 per ounce along with capital controls (Bordo, 2017). The compromise gave members
stability and independence for their monetary authorities to maintain full employment (Bordo,
2017). The International Monetary Fund was established, and it was based on the principle of a
credit union, whereby members could withdraw more than their original gold quotas, and it
also provided relief for temporary current account shortfalls (Bordo, 2017).
It took close to 15 years to get the Bretton Woods system fully operational (Bordo,
2017). As it evolved into a gold dollar standard, three big problems of the interwar gold
exchange standard re-emerged: adjustment, confidence, and liquidity problems (Bordo, 2017).
The adjustment problem in Bretton Woods reflected a downward rigidity in wages and prices
which prevented the normal price adjustment of the gold standard price specie flow mechanism
to operate properly (Bordo, 2017). Consequently, payment deficits would be associated with
rising unemployment and recessions (Bordo, 2017). “This was the problem that was faced by
the UK, which alternated between expansionary monetary and fiscal policy, and then in the face
of a currency crisis, austerity – a policy referred to as stop-go” (Bordo, 2017).
A second aspect of the adjustment problem was the asymmetric adjustment between
the US and the rest of the world. In the pegged exchange rate system, the US served as central
reserve country, and it did not have to adjust to its balance of payments deficit (Bordo, 2017).
This policy was resented by the Europeans.
The US monetary authorities began to worry about the balance of payments deficit
because of its effect on confidence (Bordo, 2017). “As US Dollar liabilities held abroad mounted
with successive deficits, the likelihood increased that these dollars would be converted into gold
and that the US monetary gold stock would eventually reach a point low enough to trigger a
run” (Bordo, 2017). By 1959, the US monetary gold stock was equal to the total external dollar
liabilities, and the rest of the world’s monetary gold stock exceeded that of the US (Bordo,
2017). By 1964, official dollar liabilities held by foreign monetary authorities exceeded that of
the US monetary gold stock (Bordo, 2017).
Additionally, there was concern about the dollar’s role in providing liquidity to the rest of
the world. If there was an elimination of the US balance of payments deficits (as the French and
Germans were urging), this could create a global liquidity shortage, and there was much
concern through the 1960s as to how to provide this liquidity (Bordo, 2017). “The Bretton
Woods parities, which were declared in the 1940s, had undervalued the price of gold, and gold
production would be insufficient to provide the resources to finance the growth of global trade”
(Bordo, 2017). This shortfall would be met by capital outflows from the US, and this would be
manifested in its balance of payments deficit (Bordo, 2017). Economists believed that as
outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank
run when the rest of the world’s monetary authorities would convert their dollar holdings into
gold (Bordo, 2017). According to many economists at that time, when the tipping point
occurred, the US monetary authorities would have to tighten monetary policy, and this would
lead to global deflationary pressure (Bordo, 2017).
The problems of the Bretton Woods system were dealt with by the IMF, the G10 plus
Switzerland, and by US monetary authorities (Bordo, 2017). The remedies that followed worked
in the short run but not in the long run (Bordo, 2017). The main threat to the system was
exacerbated after 1965, by expansionary US monetary and fiscal policy which led to rising
inflation (Bordo, 2017). The following measures were put into place:
•In 1961 there was the creation of the Gold Pool. This pool was formed by eight central
banks that pooled their gold reserves to keep the London price of gold close to the $35
per ounce parity price (Bordo, 2017).
•There was also the issuance of Roosa bonds (foreign currency denominated bonds)
(Bordo, 2017).
•There was an establishment of General Arrangements to Borrow in 1961, that was an
IMF facility that was large enough to offer credit to the US (Bordo, 2017).
•Operation Twist in 1962 allowed the US Treasury to purchase long-term debt to lower
long-term interest rates, as a measure to encourage investment (Bordo, 2017). At the
same time, the Federal Reserve sold short-term Treasury bills to raise short-term rates
and to attract capital inflows (Bordo, 2017).
•The Interest Equalization Tax in 1963 imposed a tax on capital outflows (Bordo, 2017).
•The Federal Reserve also protected gold stocks via the swap network, that was designed
to provide an alternative to foreign central bank conversions of the US dollar holdings
into gold (Bordo, 2017).
The measures protected US gold reserves until the mid-1960s.
Between 1968-1971, a breakdown of Bretton Woods occurred. This was due to the rise of
inflation in the US that began in 1965 (Bordo, 2017). In 1965, the Federal Reserve shifted to an
inflationary policy that continued until the early 1980s, and in the 1970s it became known as
“The Great Inflation” (Bordo, 2017). This shift was caused by rising deficits in the US that were
due to the Vietnam War as well as President Johnson’s Great Society (Bordo, 2017). The
increase in US monetary growth caused an increase in the US balance of payments deficits, and
this led to a growing balance of payments surpluses in Germany and other countries (Bordo,
2017).
In 1967, the British Government devalued their currency, and this caused pressure on the
US Dollar in the London gold market (Bordo, 2017). As a result of this action by the British
Government, the Gold Pool was ended in March 1968, and a two-tier arrangement was put into
place (Bordo, 2017). From 1968-1971, the US Government put pressure on other monetary
authorities to prevent them from converting their US Dollard into gold (Bordo, 2017). “Then on
August 15, 1971, President Nixon decided to suspend gold convertibility, and this was triggered
by the French and British intentions to convert US Dollars into gold” (Bordo, 2017). This
measure basically ended the Bretton Woods System, and it was completely ended in March
1973 (Bordo, 2017).
The collapse of this system was replaced by a managed floating exchange rate that is still
in place. There has been resentment by other countries to this especially the French as well as
the Chinese, but the due to the dominance of the US economy the likelihood of the US Dollar
being replaced by another currency does not seem to be imminent. The dollar standard will be
in place for the foreseeable future.
REFERENCES
AccountingInsights Team. (2025, Aug. 18). What Is Commodity Money? Definition and Examples.
Retrieved from: https://www.accountinginsights.org/what-is-commoditymoney-definition-and-
examples/.
Agarcoal, P. (2025, Apr. 7). Monetary-system. Retrieved from:
https://www.intelligenteconomist.com/monetary-system.
Britannica, T. Editors of Encyclopedia. (2025, Sept. 17). Fiat Money. Retrieved from:
https://www.britannica.com/money/fiat-money.
Bordo, M. (2017, Apr. 23). The operation and demise of the Bretton Woods system: 1958 to
1971. Retrieved from: https://www.cepr.org/voxeu/columns/operation-and-
demisebretton-woods-systems-1958-1971.
Boyle, P. (2023, Jul. 4). Commodity Money: What it is, why it has value & examples.
Retrieved from: https://www.boycewire.com/commodity-money-definition.
