If it was so good, what happened? The gold standard eventually collapsed due to the effects of the First World War. During the war, nations on both sides had to finance their huge military spending by imposing more paper money. Because the currency in circulation exceeded each country`s gold reserves, many countries were forced to abandon the gold standard. In the 1920s, most countries, including the United Kingdom, the United States, Russia and France, returned to the gold standard at the same price level, despite political instability, high unemployment and inflation that spread throughout Europe. We can be less detailed on many other issues that are part of the Jamaican agreement, as I have defined overall. In short, the gold agreement does not even begin to resolve the real issues, namely the final elimination of gold from the monetary system and the protection of the system pending disruptions related to the rest of the monetary role of gold. For now, the agreement is so vague that it will take a few years to see more clearly how it will affect the role of gold over the next decade. Gold remains a part of the monetary system. Nevertheless, it has become a speculative product with a weak market and a volatile price, and therefore a source of monetary disruption. Monetary authorities hold about one billion ounces of gold, which means that a price increase of only one dollar increases international liquidity by $1 billion. Without a further reduction in the monetary role of gold, it will not be possible to control the volume of international liquidity.
We are far from agreeing on how such a system works. On the one hand, we must guard steadmark the temptation to turn the system back into a system of de facto value, an attempt that, even if temporarily successful, will inevitably fail over time for reasons already widely explained. On the other hand, we cannot throw away an economic instrument as important as the exchange rate and leave the exchange rate developments almost exclusively to market forces, as Secretary Simon seems to have in mind. In particular, it does not seem acceptable for exchange rates to rise and fall in response to temporary divergences in monetary policy, as the Secretary is clearly prepared to do.21 This would not arbitrarily grant profit margins and impose sanctions on export and import industries. Both monetary policy and foreign exchange market intervention policy in the major industrialized countries must be designed and coordinated to avoid such unnecessary outcomes. Other questions and problems will undoubtedly arise. But at least the machine was created, which allows constructive experiences of forward-looking policy makers in a cooperative spirit.