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Losing the Gold Standard – History Revisited

Karibu (Welcome) G&G Readers,

It was July 1944 in New Hampshire when the US hosted 44 allied nations, which signed off on the Bretton Woods system of monetary management. These nations agreed to adopt a monetary policy that maintained exchange rates by tethering its currency to the US dollar.

The US dollar was tied to gold at $35 an ounce, and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold, setting the standard of the US dollar as the world’s reserve currency. Now that’s not to say that this occurred without resistance. Several nations resisted (notably Britton and France), but in a deficit ridden global environment, where the US government held the purse strings, nations that needed to borrow money were coercively greeted with extortion type tactics forcing policy acceptance in return for US dollars.

As countries ratified the Bretton Woods agreement steps were taken to create the IMF and what is now the World Bank. These entities bridge temporary imbalances of global payments. In short, they are the world’s financial firefighters providing nations emergency loans, technical training and monitoring global economic events. In addition, IMF approval was necessary for any change in exchange rates in excess of 1%.

Inevitably market fluctuations developed and arbitrage occurred. US dollars would be redeemed for gold which was of greater value than its pegged price. Several steps were taken to constrain the price of gold.

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To control the price of gold the London Gold Pool was established on November 1, 1961 between eight nations. The theory behind the pool was that spikes in the free market price of gold could be controlled by having a pool of gold to buy or sell on the open market. This however was short lived and in mid-March 1968 a run on gold ensued and the London Gold Pool was dissolved.

Another attempt to control gold pricing occurred in 1967 when the IMF replace the tranche structure set up in 1946 with Special Drawing Rights (SDR). SDR’s were set as equal to one U.S. dollar, but were only suitable for transactions between banks and the IMF. The intent of the SDR system was to prevent nations from buying pegged gold and selling it at the higher free market price. This gave nations a reason to hold dollars by crediting interest, at the same time setting a clear limit to the amount of dollars that could be held.

On March 18, 1968 Congress repealed the 25% gold backing of the dollar and pledged to suspend gold sales to governments that trade gold in the private markets. Accordingly without the constraints of government suppression gold rose much higher than the official dollar price. All attempts to maintain the gold to US dollar relationship collapsed in November 1968 and a new policy attempted to convert the Bretton Woods system into an enforcement mechanism for floating the gold peg.

It was the summer of 1971 when Bretton Woods was diagnosed terminally ill. Germany, France and Switzerland had tendered massive amounts of US dollar reserves for gold. On August 15, 1971, President Nixon, “closed the gold window”, ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system hence the name, Nixon Shock.

In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.

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Until the next time,

Ankh Uja Snb (Life, Health, Strength),

Asar Gary Gray
Tax & Financial Consultant, RFC
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LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.