Page 15 - Nuvama | IC Report 2023

INDIA: THE 5D ADVANTAGE

“You came to tell us that the great cities are in favour of the gold standard; we reply that
the great cities rest upon our broad and fertile plains. Burn down your cities and leave our
farms, and your cities will spring up again as if by magic. But destroy out farms and the grass
will grow in the city...You shall not press down upon the brow of labour this crown of thorns.
You shall not crucify mankind upon a cross of gold.”
— Williams Jennings Brown, July 1896

However, as democracy spread, labour unions expanded after the world war, and the gold standard
became untenable.

Bretton Woods 1 – Soft multilateralism
History progressed, and from the ashes of the gold standard and the WW2 emerged the Bretton Woods
System. In the face of expanding democracy and strengthening nation-states, globalisation had to be Under Bretton
reined in. That was the compromise achieved given the challenges inherent in the political trilemma. Woods 1, the US
dollar was pegged
The system retreated from hyper-globalisation to soft multilateralism. Under the latter, there was to gold while other
space for international co-ordination, but policymakers at the national level had enough independence currencies had
to follow their own economic policies with regards to openness to capital flows, financial regulations, flexibility to adjust
taxation and so on to ensure domestic financial stability, full employment and social safety nets. against the dollar to
allow for domestic
The monetary system that underpinned this arrangement was one in which the US dollar was pegged policy objectives
to gold while other currencies maintained some flexibility to adjust against the dollar in order to allow
room for domestic policy objectives. The US, being the largest creditor nation after WW2, played an
instrumental role in managing the system.
For example, when European nations were confronting high inflation and gold shortages after WW2, the
US recycled its dollar surpluses back to Europe (Marshall Plan) in order to provide them funding and
stabilise their exchange rates/inflation. The system worked very well—it brought financial stability to
Europe, allowed time for European manufacturing to get back on its feet, ensured Western Europe did
not fall into the fold of communism and facilitated ‘equitable’ growth around the world.
However, as Hegel would have it, History marched forward through ‘cunning of reason’, i.e. in a sly
manner, without agents being conscious of it. Cracks began to appear in the system in the 1960s as Cracks began
global capital flows began to expand and geopolitics took an adverse turn. The US got embroiled in a to appear in the
long Vietnam War while it was expanding domestic spending to build roads and highways (the famous system in the
‘guns and butter’). As a result, US macro-balances started slipping into a deficit even as Europeans 1960s as global
began generating surpluses. capital flows began
to expand and
Now, the direction of recycling of dollars had to be reversed, with Europeans now recycling dollars back geopolitics took
to the US to support the dollar. It worked for a while, but as private capital flows were progressively an adverse turn
liberalised and US kept running BoP deficits, the confidence in the dollar-gold peg broke down. This
triggered a gold drain from the US, thereby tightening US financial conditions.

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