Lost Anchors and the Great Financial Expansion

The story of the 2008 global crisis

By Lex Hoogduin and Jesper Nederhoed

Who really wants to understand the crisis of 2008 needs to go back quite a few decades in time. This crisis did not come out of thin air, but has very long roots.

The demise of the Bretton Woods system

At the end of the Second World War, the foundation for the international monetary and financial order after the war is laid, in the United States of America (US). All currencies are given a fixed but adjustable exchange rate against the dollar, which in turn is pegged to gold. Exchange rates are only adjustable in case of fundamental imbalances. The International Monetary Fund (IMF) is founded to watch over the system. The dollar becomes the reserve currency of the world. The stability of the international monetary and financial system depends to a large extent on the conduct of sound monetary and fiscal policy by the US. Gold is the ultimate anchor. If the US issue too many dollars in circulation, the central banks of other countries can redeem these in gold or threaten to do so.

In the course of the 1960s things go wrong. The US get caught in the Vietnam War and at the same time want to build the welfare State, known as the Great Society. Public finances run out of control and the amount of dollars in circulation increases (inflation). This undermines the peg of the dollar to gold. France in particular, but also the Netherlands want to exchange their dollars into gold. In the early 1970s the Bretton Woods system falls apart. The international monetary...

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