How the end of Bretton Woods started our woes

It is 40 years today since the end of the Bretton Woods agreement and indeed the end of the gold standard. Bretton Woods had been a financial discipline put in place to prevent central bankers expanding the monetary supply in an irresponsible way and to introduce fiscal discipline.

The Bretton Woods system collapsed under the weight of US trade deficits and the cost of funding the Vietnam War which meant that gold and international currencies were freely floated. For those that believe in the power of happy coincidences, the answer to current financial issues might just lie in the number 40. I'll explain.

A 40th anniversary is referred to as a ruby anniversary and we may find the answer to our economic woes in another ruby, that is ruby shoes in the Wizard of Oz, thought to be a monetary allegory for the gold standard.

The Wizard of Oz was published in 1900 by L Frank Baum (a keen political writer and populist) and released as a film in 1939. In the original book Dorothy's shoes were silver but changed to ruby because Hollywood was going technicolour.

The Populist Movement of 1894 had wanted silver along with gold to be used as the backing for US dollars, thereby creating more dollars, thus devaluing dollars and therefore reducing the debt burdens that workers (and especially farmers) were labouring under. A form of quantitative easing if you like.

The interpretation of the film is clear. Dorothy (Everyman American) is lost in a (financial) storm. She is joined in her endeavours to find a solution by the Scarecrow (farmers), Tin Man (industrial workers) and Lion (pro-silver politicians). The Yellow Brick Road (gold standard) takes her some of the way there.

However, it leads to the Emerald City (fiat currency) with its false tricks and delusions. The answer to financial salvation lies in her ruby (silver) shoes. Of course the Wizard (President) was a fraud, his gifts were shallow and much of what he said was fantasy.

The message is clear at its simplest level; we have the power within us by clicking our heels to make the changes we need. At a deeper level it proposes a move beyond the constraints of a gold standard to make the economic changes necessary for growth, in this case silver. Bretton Woods was devised precisely to prevent the sort of economic conditions we suffer today - excessive leverage and politicians who lack the courage to give us what we need, rather than what we want.

This safety net was abandoned 40 years ago. The solution to today's problems is not to head back down the yellow brick road and reintroduce a gold standard, although it might play a role in the solution.

In 1942 JM Keynes conceptualised and the UK proposed that the IMF introduce the Bancor, a supranational currency used for trade and exchanged by barter. It could play a parallel role as the global reserve currency and it would be backed in part by gold and other hard commodities. In 2008 the governor of the People's Bank of China has suggested special drawing rights at the IMF as an alternative solution.