Abstract

On the Long-term Instability of a Gold-Rerserve Currency System

Here the attempt has been made to derive information on whether and to what extent there is a sound basis for the traditional view that for the collapse due to mistrust of an international monetary order organized in accordance with the Bretton Woods concept it is sufficient for the short-term foreign liabilities of a reserve currency country to beginn to exceed its freely available stock of international liquidity (gold). It proves that this traditional hypothesis must be revised. The onset of a crisis due to mistrust which can no longer be kept under control is not linked up with any specific debt-gold stock ratio of the issuing country of a reserve currency. The number of central banks and the “size” of national economies behind them, on which the main burden of financing the balance-of-payments deficits of the reserve currency country falls, exert a strong influence on the probability of extensive conversion-proneness and hence a generel loss of confidence. The experience gathered since 1950 and theoretical considerations indicate that the collapse of a gold-reserve currency system due to mistrust can no longer be obviated only when two factors coincide. This situation is given when the balance of trade of the reserve currency country begins to run downhill into a prolonged and marked deficit, and at the same time the reserve currency country is far from being in a position to convert its short-term foreign liabilities at the prevailing parity rate into other reserve assets (gold).