Bretton Woods tried to keep fixed-ish FX while limiting capital mobility (to preserve domestic policy space).
Modern floating regimes accept FX movement to keep policy independence with open capital markets.
Game: Pick any two cornersThe third becomes “impossible” (😭) and explains why.
Pick any two…
TipEnter or Space also toggles a corner.
Outcome
Classroom translation (simple)
If you promise a fixed FX rate and allow money to move freely across borders, then your central bank must set interest rates to defend the peg —
even if that hurts domestic jobs and growth.
What “anchor” means
An anchor is what convinces markets your currency will keep value: gold convertibility, a credible inflation target, fiscal discipline + strong institutions, etc.
Bretton Woods (1944): the post-WWII system
Fixed but adjustable exchange rates; USD linked to gold; IMF + World Bank.
Feature
How it worked
Why it mattered
USD–Gold link
Foreign official holders could convert USD into gold at an official parity (historically $35/oz).
Created a credibility anchor; USD became the system’s core reserve/settlement currency.
Fixed but adjustable FX
Countries pegged to USD, but could adjust parity under “fundamental disequilibrium.”
Reduced FX volatility to support trade and rebuilding.
Capital controls
More restrictions on cross-border capital flows than today.
Helped preserve domestic policy autonomy under a quasi-fixed FX regime.
Institutions
IMF monitoring + financing; World Bank development lending.
Institutionalized global economic cooperation.
Why Bretton Woods collapsed
The system required confidence that USD liabilities could be backed by gold at the official parity.
As global dollar claims grew faster than U.S. gold reserves, convertibility became questionable.
Once markets (and foreign governments) doubt the anchor, a fixed system becomes costly to defend.
Note: Bretton Woods = “Gold-anchored USD” + “fixed-ish FX” + “limited capital mobility” to keep policy space.
Video (optional) — Bretton Woods
Embed: Bretton Woods explainer (1 minute style).
Open on YouTubeIf the embed is blocked, use “Open on YouTube”.
Mini-prompt (2 minutes)
In one paragraph: Why did Bretton Woods prefer capital controls? Connect to the trilemma.
Video (optional) — IMF + World Bank
Embed: IMF + World Bank explained (short).
Open on YouTubeIf the embed is blocked, use “Open on YouTube”.
Mini-prompt (2 minutes)
In one paragraph: What problem does the IMF solve vs the World Bank? (stability financing vs development lending)
Gold standard: what it is (and what it forces you to accept)
A hard peg: currency value is fixed to a quantity of gold (or credible convertibility).
Definition
A gold standard is a monetary regime where the currency is defined in terms of a quantity of gold and/or is credibly convertible into gold at a fixed parity.
Operationally, it behaves like a hard fixed exchange rate to gold.
Dimension
Pros (what you gain)
Cons (what you give up)
Credibility
Hard constraint can anchor long-run inflation expectations.
Credibility is fragile if convertibility is doubted; defending parity can be costly.
Less ability to cut rates / expand liquidity in recessions and banking stress.
Adjustment
External imbalances eventually force adjustment.
Often via internal deflation (wage/price pain) instead of FX depreciation.
Banking
May reduce inflation risk over long horizons.
In panics, lender-of-last-resort is constrained; crises can be deeper without backstops.
Country angle: “Good for the U.S.? China? Europe? Others?”
U.S.: Gains anchor narrative, but loses domestic stabilization flexibility and the ability to supply global safe assets freely.
Euro area: Adds constraint on already-complex fiscal/monetary coordination; can amplify internal adjustment pressures.
China: Convertibility and capital control issues become central—hard to maintain both a strict peg and domestic credit priorities.
Emerging markets: Hard pegs can reduce inflation, but increase crisis risk if reserves/credibility are insufficient.
No “price prediction” claim: We do scenario logic, not forecasts.
If gold becomes a stricter anchor globally, demand for reserves could rise, but price depends on convertibility rules, fiscal behavior, and alternative safe assets.
Interactive: “Regime tradeoff dashboard”
Pick a regime and see a typical tradeoff profile.
RegimeLens
FX stability / anchor credibility
50
Monetary policy independence
50
Crisis flexibility (LOLR / liquidity)
50
Capital mobility (openness)
50
For discussion:
“Which constraint bites first for your chosen region?”. Connect to one policy debate:
recession response, banking stress, capital outflows, or reserve-currency credibility.
Interactive: Gold standard → banking stress (toy model)
Under a strict gold anchor, crisis liquidity is constrained by gold reserves / convertibility credibility.
This widget shows why runs can force suspension, credit contraction, or failure.
Mechanism: If deposit withdrawals (convertibility demand) exceed available gold/liquidity and emergency support is limited,
banks must either (i) raise rates aggressively, (ii) liquidate assets, (iii) suspend convertibility, or (iv) fail.
Gold reserve ratio (% of deposits held as gold)
20%
Run intensity (deposit withdrawal demand %)
12%
Emergency support capacity (extra liquidity % of deposits)
A reserve currency needs a huge pool of high-quality collateral that global investors can hold at scale (deep government bond market, repo plumbing, legal protections).
Asset / Unit
Why it can be held as “reserve”
Main limitations
USD
Deep Treasury market; global invoicing; Fed credibility; alliances; established payment rails.
Fiscal path concerns; political risk narratives; sanctions/geopolitics motivate diversification.
EUR
Large economy; strong legal systems; ECB framework; regional network effects.
How it works: Score each contender 0–10 on each criterion (defaults are reasonable classroom starting points).
Change weights to see how the ranking changes.
WeightsWeights can be any values; we normalize automatically.
Quick set
Discussion prompts (good exam-style)
Under what weight regime could EUR catch USD? What must be true politically/fiscally?
Why does RMB struggle under convertibility weights?
Why might gold rank higher when “political neutrality” is implicitly valued?
Are stablecoins a competitor to USD—or a distribution channel that reinforces USD use?
Why central banks hold more gold as reserves (trend logic)
Logic we can defend without making “price forecasts.”
Core idea: Gold is a non-liability asset (no issuer default risk) and can be viewed as a hedge against extreme tail events
(sanctions risk, war risk, inflation regime shifts, or confidence shocks).
Mechanisms (the “why”)
Sanctions / counterparty risk hedge: gold isn’t another country’s liability.
Confidence anchor narrative: holding gold can signal “backing” and credibility in stress.
Portfolio diversification: reduces reliance on one currency (USD) when geopolitical risk rises.
Tail risk insurance: for rare but high-impact regimes (war/financial repression/inflation breaks).
Exam-ready sentence
“Gold reserve accumulation can be rational as a hedge against issuer risk and geopolitical tail events, even if it pays no yield, because it reduces reliance on any single sovereign’s liabilities.”
What we are NOT claiming: “Gold must go up.” We are explaining the incentive logic for reserve managers.
Quick exercise: “What is the reserve manager optimizing?”
Choose a priority, then answer in 3 bullets.
Priority
Note
This is a clean way to grade “mechanism thinking” without needing anyone to forecast prices.
Crypto & stablecoins: why they matter for the monetary system
Think of stablecoins as payment rails + money market claims (depending on design/regulation).
Key idea: Many stablecoins are effectively “USD distribution channels.”
They can increase USD usage in cross-border payments but also create bank funding substitution if deposits move into stablecoins.
Two channels (exam-ready)
Payments channel: faster settlement, lower frictions → more cross-border usage of the unit they’re pegged to.
Banking channel: if users move money from bank deposits to stablecoins, banks lose cheap funding → credit supply can tighten.
Run-risk intuition
If reserves aren’t high-quality and transparently segregated, stablecoins can face run dynamics similar to money-market funds or shadow banking structures.
If Bretton Woods is an anchor story, and the trilemma is a constraint story,
explain how stablecoins might change either payment rails or bank funding.
Homework
Assignment: Pick one regime (gold standard, Bretton Woods-style, modern float). Then:
State which two corners of the trilemma your regime tries to keep.
Explain what it must “give up” (and how).
Add one banking implication (LOLR, runs, or credit contraction).
Submission format
One page max. Bullet points allowed. Use anchor, constraint, adjustment, banking channel.