From Scientific American:
The People’s Bank of China jolted the financial world in March with a proposal for a new global monetary arrangement. The proposal initially attracted attention mostly for its signal of China’s rising global economic power, but its content also has much to commend it. A century ago almost all the world’s currencies were linked to gold and most of the rest to silver. Currencies were readily interchangeable, gold anchored exchange rates and the physical supply of gold stabilized the money supply over the long term. The gold standard collapsed in the wake of World War I. Wartime financing with unbacked paper currency led to widespread inflation. European nations tried to resume the gold standard in the 1920s, but the gold supply was insufficient and inelastic. A ferocious monetary squeeze and competition across countries for limited gold reserves followed and contributed to the Great Depression. After World War II, nations adopted the dollar-exchange standard. The U.S. dollar was backed by gold at $35 per ounce, while the rest of the world’s currencies were backed by dollars. The global money stock could expand through dollar reserves.
President Richard Nixon delinked the dollar from gold in 1971 (to offset the U.S.’s expansionary monetary policies in the Vietnam era), and major currencies began to float against one another in value. But most global trade and financial transactions remained dollar-denominated, as did most foreign exchange reserves held by the world’s central banks. The exchange rates of many currencies also remained tightly tied to the dollar.
More here.
