From 1961 to 1968 Western Banks corroborated in what was known as the London gold pool. Essentially The United States and a handful of European nations pooled their gold resources into the London gold exchange in an attempt to stabilize the price of gold around the fixed redemption rate of $35 per troy oz.
This monetary experiment, just like every other attempt at market intervention and stabilization (ultimately meaning an attempt to subvert free market action), failed horribly and ultimately led up to the closing of the gold window by Richard Nixon in 1971.
Perhaps its best to establish a timeline of events here. In 1933 EO 6102 not only made it illegal for US citizens to hold physical gold, but also effectively prohibited them from redeeming treasury notes for gold. With the outbreak of war in Europe, the London Gold Pool closed its operations in 1939, effectively stinting international gold redemption under Bretton Woods (est. 1944) until the London Gold Pool reopened in 1954.
Notice here, that during this time period, (roughly 1933-1954) US gold reserves were at their all time high. Starting in 1961, central banks began cooperating in an attempt to stabilize gold prices via the London Gold Pool by providing excess gold if demand increased and providing buy pressure if demand started to drop.
In the first half of the 1960s the Sterling pound was under significant stress from various European geopolitical crises as seen here. As a result, increasing amounts of intervention were needed from central banks to maintain desired gold exchange rates.
It was well known by sovereign financial ministries that the US was benefiting disproportionately via the Dollar peg by exporting inflation and running deficits to benefit from the seniorage of dollar creation. In 1965 the De Gaulle administration of France (at direction of the finance minister Jaques Rueff) announced intentions to begin exchanging dollars for gold in an attempt to close this deficit gap and force a return to an international gold standard.
These events had significant and expected impacts on the demand and price of the gold markets, and if you refer to the first chart I shared again you can see, starting around 1960, a dramatic decrease in US Gold reserves all the way up until the collapse of the London Gold Pool in 1968. In effect, this financial loss can be viewed as central bank’s (both the US and The Bank of England) attempt to stabilize the London Gold Pool.
In 1969, the IMF passed legislation allowing the issuance of the SDR, technically the first fiat obligation not backed by a form of gold redemption under the Bretton Woods system, the first step towards the establishment of floating global fiat reserve currencies.
As we know, Nixon ended the convertibility of the dollar for gold in 1971 (the backbone of the Bretton Woods System) and the adjustable peg disappeared entirely in 1973.
For a far more comprehensive look at these events, in far greater detail than I can cover in a simple blog post, I would refer to this research piece. However, hopefully I have given you enough of an overview of these historical events to get a picture of how incentives of the system disrupted its stability. This topic is complex, and despite the fact that the USD was the backbone of the Bretton Woods system, that isn’t to say they were the only nation to benefit from inflation and market intervention.
Ultimately the system of Bretton Woods was doomed to fail because of its misaligned incentives.
Book of the Month:The Road to Serfdom by F A Hayek
-“Freedom to order our own conduct in the sphere where material circumstances force a choice upon us, and responsibility for the arrangement of our own life according to our own conscience, is the air in which alone moral sense grows and in which moral values are daily recreated in the free decision of the individual. Responsibility, not to a superior, but to one’s own conscience, the awareness of a duty not exacted by compulsion, the necessity to decide which of the things one values are to be sacrificed to others, and to bear the consequences of one’s own decision, are the very essence of any morals which deserve the name.”
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