Module 4 • International Monetary Systems
Bretton Woods → Gold Standard Tradeoffs → Reserve Currency Framework → Crypto & Stablecoins (Banking Impact)
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Big picture timeline

Click each item to expand. (This is the “first international monetary system” story → today.)
Note: This chapter is mostly about anchors (gold, USD-to-gold, policy credibility), and constraints (capital mobility, fixed FX, independent monetary policy — you can’t fully have all three).

Key identities and “Trilemma”

Trilemma (Impossible Trinity): Choose two, you lose one:
Fixed exchange rate + Free capital mobility + Independent monetary policy
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.
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)

Embed: Bretton Woods explainer.
Open on YouTube If 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.

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.
Policy flexibility Rule-based discipline (less discretionary money creation). 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 a strong anchor narrative, but loses domestic stabilization flexibility and the ability to supply global safe assets freely.
  • Euro area: Would face additional constraints on already-complex fiscal/monetary coordination; could 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: In this module we do scenario logic, not forecasts. If gold becomes a stricter anchor globally, demand for reserves could rise, but price depends on credibility, convertibility rules, fiscal behavior, and alternative safe assets.

Interactive: “Regime tradeoff dashboard”

Pick a regime and see the typical tradeoff profile.
Regime Lens
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?”. Hint: Connect to one policy debate: recession response, banking stress, capital outflows, or reserve-currency credibility.

Reserve currency: conditions & contenders

USD vs Euro vs RMB vs Gold vs Bitcoin vs Stablecoins (as infrastructure).
Framework used in class: Independent central bank / credible policy, Strong security/geopolitical backing, Large & liquid debt market (“safe assets”).
Add two practical criteria: Convertibility + capital openness and Network effects (invoicing, payment rails).
What “safe asset supply” means
A reserve currency needs a huge pool of high-quality collateral and instruments 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; security alliances; established payment rails. Fiscal path concerns; political risk narratives; sanctions/geopolitics can motivate diversification.
EUR Large economy; strong legal systems; ECB framework; regional network effects. Fragmented fiscal backing vs one U.S. Treasury; crisis governance perceptions; safe-asset fragmentation.
RMB Trade footprint; policy push; growing market depth. Convertibility/capital controls; institutional independence perceptions; geopolitical trust tradeoffs.
Gold No issuer default risk; politically neutral asset; hedges extreme tail risks for some holders. No yield; storage costs; not a payment unit for modern trade scale; price volatility exists.
Bitcoin Censorship-resistance narrative; portable; supply rule. Volatility; regulatory uncertainty; no LOLR; limited role as unit of account.
Stablecoins Payment/infrastructure layer (fast settlement), often USD-linked in practice. Run risk; reserve quality/segregation; regulation; can shift deposits away from banks.

Interactive: “Reserve scorecard” (weights + scores)

Try change weights, then compare contenders.
How it works: Score each contender 0–10 on each criterion (default values are reasonable classroom starting points). Change weights to see how the ranking changes.
Weights Weights must sum ~100; we normalize automatically.
Quick set
Discussion prompts (good exam-style)
  1. Under what weight regime could EUR catch USD? What must be true politically/fiscally?
  2. Why does RMB struggle under convertibility weights?
  3. Why might gold rank higher when “political neutrality” is implicitly valued?
  4. Are stablecoins a competitor to USD—or a distribution channel that reinforces USD use?

Why the trend toward holding more gold as reserves?

Logic we can defend without claiming “a forecast.”
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).
Five common drivers
  1. Geopolitics/sanctions risk: reserves diversification away from assets that can be frozen or restricted.
  2. Credibility hedge: protection against fiat confidence shocks or high inflation periods.
  3. Portfolio diversification: different correlation properties than bonds/equities under stress.
  4. Domestic signaling: “hard asset” narrative can support domestic confidence in some regimes.
  5. Transition uncertainty: when the global order is in flux, more hedging demand can appear.
If the world moved toward a stricter gold anchor, what happens?
  • Gold demand could increase for official reserves if convertibility rules are credible and widely adopted.
  • But the system becomes more constrained: less crisis flexibility; adjustment occurs via internal prices/wages.
  • Reserve currency hierarchy: USD’s role might shrink in “anchor narrative,” but still dominates payment/invoicing unless trade contracts and payment rails switch.
  • Euro: could rise under credibility weights if fiscal architecture becomes more unified; could also face harsher internal adjustment in a hard anchor world.

Class-ready “no-forecast” gold price statement

Use this; no need to write irresponsible predictions.
Acceptable wording: “A shift toward gold as a reserve hedge can raise structural demand, but the price still depends on real rates, inflation regimes, fiscal credibility, and the availability of alternative safe assets. Therefore we discuss direction and mechanisms, not a point forecast.”
Make them connect to real rates (easy exam win)
Gold has no yield. When real rates rise, the opportunity cost of holding gold can rise; when real rates fall or risk rises, gold can look more attractive. That is mechanism-based reasoning, not a forecast.

Crypto vs Stablecoins: money, payments, and the banking system

Separate the concepts: speculative asset vs payment rail vs bank deposit substitute.
Category What it mainly is Why it matters to the monetary system Main risk channel
Bitcoin Volatile digital asset; limited unit-of-account role. Challenges “store of value” narratives; political/tech debate; not core settlement for trade. Volatility + regulation + limited lender-of-last-resort.
Stablecoins Tokenized claims intended to track a fiat value (often USD). Can move payments outside banks; may increase USD reach globally via token rails. Run risk; reserve quality; bank disintermediation; regulatory arbitrage.
Tokenized deposits / CBDC Bank/central-bank liabilities in digital form. Modernizes rails without “private money” run risk (design dependent). Privacy, governance, and bank funding model impacts.
One sentence that must get right
Stablecoins are often not a “new global reserve currency” — they are frequently a USD distribution channel unless their backing and settlement unit change.

Interactive: Stablecoin deposit shift → bank funding stress (simple simulator)

This is a toy model for classroom intuition; it does not forecast any bank’s outcomes.
Mechanism: If deposits migrate to stablecoins, banks may replace funding with wholesale borrowing (more expensive, more runnable), potentially tightening credit unless policy/market adjustments offset it.
Deposit share migrating to stablecoins (%)
10%
Bank deposit rate (APR %)
2.0%
Wholesale funding rate (APR %)
5.0%
Bank lending margin target (bps)
300
Interpretation guide
If stablecoins are backed by T-bills, that can increase demand for Treasuries (good for U.S. funding), but still drain deposits from banks unless banks issue competing tokenized deposits or policy changes occur.

Homework: Module 4 (Due with the first midterm exam)

Answer in a separate document. Do not use one-liners—use mechanisms (anchor, constraints, adjustment, reserve conditions, banking channel).
  1. Bretton Woods: What was the Bretton Woods system? Explain (i) the USD–gold anchor, (ii) “fixed but adjustable” pegs, (iii) the role of capital controls, and (iv) why the system collapsed. Use trilemma language.
  2. Gold as reserves + the 2025 surge (mechanisms): Gold rose sharply in 2025 and stayed strong. Explain why central banks might prefer adding gold versus USD assets as reserves. Your answer must include at least three mechanisms from: sanctions/geopolitical risk, “non-liability asset” logic, diversification/correlation under stress, real-rate opportunity cost, confidence/credibility hedging, transition uncertainty.
  3. Crypto & stablecoins (the monetary system + banking channel): Distinguish Bitcoin/crypto as an asset from stablecoins as a payment instrument. Then explain how stablecoins can affect (i) bank deposits and bank funding costs, (ii) credit supply, and (iii) the U.S. financial system’s role globally. Are USD-linked stablecoins more likely a competitor to the dollar—or a distribution channel that reinforces USD usage? Justify.

Discussion prompt (Eurozone strategy scenario)

You are the head of the Eurozone. Your objective is to protect the euro’s credibility and strengthen Europe’s security posture (NATO readiness, Arctic/Greenland security environment, and broader deterrence) while managing domestic political constraints.
Rules of the exercise: Pick a package (not a single policy). You must justify your choices using mechanisms from this module: anchor, constraints (trilemma), adjustment, safe assets, bank funding, and geopolitics.
Step 1: Choose your strategy levers Check any you want—but be prepared to defend tradeoffs.
Lever (choose) What it does (mechanism) Main tradeoff / risk
Signals “non-liability” hedge; reduces exposure to sanctions/freeze narratives; credibility hedge. No yield; valuation volatility; does not create a euro safe-asset market by itself.
De-risk geopolitical concentration; reduces reliance on dollar plumbing at the margin. Could raise transaction frictions; may be symbolic unless euro markets deepen further.
Improves reserve-currency conditions: scale + liquidity + collateral quality (repo/settlement). Political feasibility; moral hazard concerns; governance complexity.
Strengthens security backing—one key reserve-currency criterion; lowers tail-risk perceptions. Budget tradeoffs; inflation/deficit concerns; requires credible medium-term fiscal plan.
Attempts to keep deficits contained while funding security priorities. Political backlash; inequality/social risk; may weaken domestic cohesion (credibility channel).
Preserves social stability while raising revenue; can support long-run institutional credibility. Growth effects; tax competition; implementation delays.
Reduces vulnerability to external shocks; improves “war economy” resilience and credibility. Efficiency costs; subsidy politics; risk of fragmentation across member states.
Builds network effects; reduces reliance on external rails; can boost euro usage in invoicing/settlement. Takes time; requires coordination; may face private-sector adoption constraints.
Modernizes rails without private-money run risk (design-dependent); supports sovereignty. Privacy concerns; bank disintermediation if poorly designed; governance risk.
Trilemma lever: reduces destabilizing flows; can preserve policy space under stress. Market stigma; may reduce attractiveness of euro assets if overused.
Step 2: Explain your package Minimum: 6–10 sentences. Use at least three module mechanisms.
Tip: Aim for a coherent package, not contradictions.
Self-check: Did you identify (i) the main constraint (political, fiscal, market, or trilemma), (ii) the benefit (credibility, safe assets, security), and (iii) the cost (growth, volatility, banking stress, cohesion)?
Output This box will auto-fill so you can copy/paste.