London Gold Pool

Last updated

The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.

Contents

The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses. The United States provided 50% of the required gold supply for sale. The price controls were successful for six years until the system became unworkable. The pegged price of gold was too low, and after runs on gold, the British pound, and the US dollar occurred, France decided to withdraw from the pool. The London Gold Pool collapsed in March 1968.

The London Gold Pool controls were followed with an effort to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window collapsed in 1971 with the Nixon Shock, and resulted in the onset of the gold bull market which saw the price of gold appreciate rapidly to US$850 in 1980.

Gold price regulation

In July 1944, before the conclusion of World War II, delegates from the 44 allied nations gathered in Bretton Woods, New Hampshire, United States, to reestablish and regulate the international financial systems. [1] The meeting resulted in the founding of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), and was followed by other post-war reconstruction efforts, such as establishing the General Agreement on Tariffs and Trade (GATT). The IMF was charged with the maintenance of a system of international currency exchange rates which became known as the Bretton Woods system.

Foreign exchange market rates were fixed, but adjustments were allowed when necessary. Currencies were required to be convertible. For this purpose, all currencies had to be backed by either physical gold reserves, or a currency convertible into gold. The United States dollar was recognized as the world's reserve currency, as the anchor currency of the system. [2] The price of one troy ounce of gold was pegged to US$35. This agreement did not affect the independent global or regional markets in which gold was traded as a precious metal commodity. There was still an open gold market. For the Bretton Woods system to remain effective, the fix of the dollar to gold would have to be adjustable, or the free market price of gold would have to be maintained near the $35 official foreign exchange price. The larger the gap, known as the gold window, between free market gold price and the foreign exchange rate, the more tempting it was for nations to deal with internal economic crises by buying gold at the Bretton Woods price and selling it in the gold markets.

The Bretton Woods system was challenged by several crises. As the economic post-war upswing proceeded, international trade and foreign exchange reserves rose, while the gold supply increased only marginally. In the recessions of the 1950s, the US had to convert vast amounts of gold, and the Bretton Woods system suffered increasing breakdowns due to US payment imbalances. [3]

After oil import quotas and restrictions on trade outflows were insufficient, by 1960, targeted efforts began to maintain the Bretton Woods system and to enforce the US$35 per ounce gold valuation. Late in 1960, amidst US presidential election debates, panic buying of gold led to a surge in price to over US$40 per oz, resulting in agreements between the US Federal Reserve and the Bank of England to stabilize the price by allocating for sale substantial gold supplies held by the Bank of England. [4] The United States sought means of ending the drain on its gold reserves.

In November 1961, eight nations agreed on a system of regulating the price of gold and defending the $35/oz price [5] through measures of targeted selling and buying of gold on the world markets. For this purpose each nation provided a contribution of the precious metal into the London Gold Pool, led by the United States pledging to match all other contributions on a one-to-one basis, and thus contributing 50% of the pool.

Member contributions

The members of the London Gold Pool and their initial gold contributions in tonnes (and USD equivalents) to the gold pool were: [6]

CountryParticipationAmount
(by weight)		Value
United States50%120 t$135 MM
West Germany11%27 t$30 MM
United Kingdom9%22 t$25 MM
France9%22 t$25 MM
Italy9%22 t$25 MM
Belgium4%9 t$10 MM
Netherlands4%9 t$10 MM
Switzerland4%9 t$10 MM

Collapse

By 1965 the pool was increasingly unable to balance the outflow of gold reserves with buybacks. [4] Excessive inflation of the US money supply, in part to fund the Vietnam War, [5] [7] led to the US no longer being able to redeem foreign-held dollars into gold, as the world's gold reserves had not grown in relation, and the payment deficit had grown to US$3 billion. [8] Thus, the London Gold Pool came under increased pressures of failure, causing France to announce in June 1967 a withdrawal from the agreements [9] and moving large amounts of gold from New York to Paris. [4]

The 1967 devaluation of the British currency, followed by another run on gold and an attack on the pound sterling, was one of the final triggers for the collapse of the pooling arrangements. By spring 1968, "the international financial system was moving toward a crisis more dangerous than any since 1931." [10]

Despite policy support and market efforts by the United States, [11] the 1967 attack on the British pound and a run on gold forced the British government to devalue the pound on 18 November 1967, by 14.3%. [12] [13] Further protective measures in the US tried to avert a continued run on gold and attacks on the US dollar. On 14 March 1968, a Thursday evening, the United States requested [10] of the British government that the London gold markets be closed the following day [14] to combat the heavy demand for gold. The ad-hoc declaration of the same Friday (March 15) as a bank holiday in England by the Queen upon petition of the House of Commons, [14] and a conference scheduled for the weekend in Washington, were deemed to address the needs of the international monetary situation in order to reach a decision with regards to future gold policy. [10] The events of the weekend led the Congress of the United States to repeal the requirement for a gold reserve to back the US currency as of Monday, March 18, 1968. The London gold market stayed closed for two weeks, while markets in other countries continued trading with increasing gold prices. These events brought the London Gold Pool to an end.

As a reaction to the temporary closure of the London gold market in March 1968 and the resulting instability of the gold markets and the international financial system in general, Swiss banks acted immediately to minimize the effects on the Swiss banking system and its currency by establishing a gold trading organization, the Zürich Gold Pool, which helped in establishing Zürich as a major trading location for gold. [15]

Gold window

Gold bull market prices and their decline after the collapse of the London Gold Pool in 1968 (in nominal US$ and inflation adjusted US$/oz) Gold price.png
Gold bull market prices and their decline after the collapse of the London Gold Pool in 1968 (in nominal US$ and inflation adjusted US$/oz)

The collapse of the gold pool forced an official policy of maintaining a two-tiered market system of stipulating an official exchange standard of US$35, while also allowing open market transactions for the metal. [note 1] Although the gold pool members refused to trade gold with private persons, and the United States pledged to suspend gold sales to governments that traded in the private markets, [16] this created an open opportunity for some market participants to exploit the gold window by converting currency reserves into gold and selling the metal in the gold markets at higher rates.

Amidst accelerating inflation in the United States, this unsustainable situation collapsed in May 1971, when West Germany was the first to withdraw support for the dollar and officially abandon the Bretton Woods accords, fueling a quick decline in the value of the dollar. [17] Under pressure from currency speculation, Switzerland declared secession in August with $50 million in gold purchases, and France followed suit at the rate of $191 million. This brought the US gold reserves to their lowest level since 1938.

The United States, under President Richard Nixon, reacted strongly to end an inflationary spiral, and unilaterally, without consultation with international leaders, abolished the direct convertibility of the United States dollar into gold in a series of measures known as the Nixon Shock.

The events of 1971 ignited the onset of a gold bull market culminating in a price peak of US$850 in January 1980. [18]

See also

Notes

  1. ↑ The two-tiered market system from 1968 to 1971 is described by Jacques Rueff (1972), The Monetary Sin of the West, New York: The Macmillan Company, LCCN   79-182450

Further reading

Related Research Articles

<span class="mw-page-title-main">Gold standard</span> Monetary system based on the value of gold

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. Many states nonetheless hold substantial gold reserves.

<span class="mw-page-title-main">Reserve currency</span> Currencies held by monetary authorities as part of their foreign exchange reserves

A reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.

<span class="mw-page-title-main">Bretton Woods Conference</span> International conference in New Hampshire, US in 1944

The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 allied nations at the Mount Washington Hotel, in Bretton Woods, New Hampshire, United States, to regulate what would be the international monetary and financial order after the conclusion of World War II.

<span class="mw-page-title-main">Global financial system</span> Global framework for capital flows

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic action that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets. In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after World War II improved exchange rate stability, fostering record growth in global finance.

<span class="mw-page-title-main">Bretton Woods system</span> Financial-economic agreement reached in 1944

The Bretton Woods system of monetary management established the rules for commercial relations among the United States, Canada, Western European countries, and Australia and other countries, a total of 44 countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold. It also envisioned greater cooperation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits.

In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket. The opposite of devaluation, a change in the exchange rate making the domestic currency more expensive, is called a revaluation. A monetary authority maintains a fixed value of its currency by being ready to buy or sell foreign currency with the domestic currency at a stated rate; a devaluation is an indication that the monetary authority will buy and sell foreign currency at a lower rate.

<span class="mw-page-title-main">Foreign exchange market</span> Global decentralized trading of international currencies

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

Petrocurrency is a word used with three distinct meanings, often confused:

  1. Dollars paid to oil-producing nations —a term invented in the 1970s meaning trading surpluses of oil-producing nations.
  2. Currencies of oil-producing nations which tend to rise in value against other currencies when the price of oil rises.
  3. Pricing of oil in US dollars: currencies used as a unit of account to price oil in the international market.

Foreign exchange reserves are cash and other reserve assets such as gold and silver held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged.

<span class="mw-page-title-main">International finance</span> Financial services between nations

International finance is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.

The history of the United States dollar began with moves by the Founding Fathers of the United States of America to establish a national currency based on the Spanish silver dollar, which had been in use in the North American colonies of the Kingdom of Great Britain for over 100 years prior to the United States Declaration of Independence. The new Congress's Coinage Act of 1792 established the United States dollar as the country's standard unit of money, creating the United States Mint tasked with producing and circulating coinage. Initially defined under a bimetallic standard in terms of a fixed quantity of silver or gold, it formally adopted the gold standard in 1900, and finally eliminated all links to gold in 1971.

The Triffin dilemma is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin. He noted that a country whose currency is the global reserve currency, held by other nations as foreign exchange (FX) reserves to support international trade, must somehow supply the world with its currency in order to fulfill world demand for these FX reserves. This supply function is nominally accomplished by international trade, with the country holding reserve currency status being required to run an inevitable trade deficit. After going off of the gold standard in 1971 and setting up the petrodollar system later in the 1970s, the United States accepted the burden of such an ongoing trade deficit in 1985 with its permanent transformation from a creditor to a debtor nation. The U.S. goods trade deficit is currently on the order of one trillion dollars per year. Such a continuing drain to the United States in its balance of trade leads to ongoing tension between its national trade policies and its global monetary policy to maintain the U.S. dollar as the current global reserve currency. Alternatives to international trade that address this tension include direct transfer of dollars via foreign aid and swap lines.

<span class="mw-page-title-main">Nixon shock</span> 1971 decoupling of the US dollar from gold

The Nixon shock was the effect of a series of economic measures, including wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold, taken by United States President Richard Nixon on 15th August 1971 in response to increasing inflation.

<span class="mw-page-title-main">Monetary hegemony</span>

Monetary hegemony is an economic and political concept in which a single state has decisive influence over the functions of the international monetary system. A monetary hegemon would need:

The Smithsonian Agreement, announced in December 1971, created a new dollar standard, whereby the currencies of a number of industrialized states were pegged to the US dollar. These currencies were allowed to fluctuate by 2.25% against the dollar. The Smithsonian Agreement was created when the Group of Ten (G-10) states raised the price of gold to 38 dollars, an 8.5% increase over the previous price at which the US government had promised to redeem dollars for gold. In effect, the changing gold price devalued the dollar by 7.9%.

<span class="mw-page-title-main">United States dollar</span> Currency of the United States

The United States dollar is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it into 100 cents, and authorized the minting of coins denominated in dollars and cents. U.S. banknotes are issued in the form of Federal Reserve Notes, popularly called greenbacks due to their predominantly green color.

A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between states that have different currencies. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944.

The Zürich Gold Pool was founded in 1968 by the largest banks in Switzerland. The establishment was triggered by the temporary closing of the London bullion market which marked the collapse of the London Gold Pool, a system of maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London market.

References

  1. ↑ "The Bretton Woods Conference, 1944". U.S. Department of State. Archived from the original on 2010-10-06. Retrieved 2010-09-20.
  2. ↑ Armand Van Dormael. "The Bretton Woods Conference: Birth of a Monetary System (Section: Gold and the US Dollar)". Leland Stanford Jr. University. Archived from the original on 2001-07-27. Retrieved 2009-11-21. IMF information site
  3. ↑ Francis J. Gavin, Gold, Dollars, and Power - The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press (2003), ISBN   0-8078-5460-3
  4. 1 2 3 Philip Judge (2001). "Lessons from the London Gold Pool". Archived from the original on 2009-11-19. Retrieved 2009-11-30.{{cite web}}: CS1 maint: bot: original URL status unknown (link)
  5. 1 2 Adrian Douglas (2008-11-19). "The second London Gold Pool is dying" . Retrieved 2009-11-21.
  6. ↑ Jake Towne (2009-06-14). "R.I.P - The London Gold Pool, 1961 - 1968".
  7. ↑ "Gold: At the Point of Panic". Time. 1968-03-22. Archived from the original on November 4, 2012.
  8. ↑ Time Magazine (1965-02-12). "Money: De Gaulle v. the Dollar". Time and CNN. Archived from the original on June 30, 2008. Retrieved 2010-09-20.
  9. ↑ "BIS Chronology 1960-1969". Bank for International Settlements. Retrieved 2009-11-22.
  10. 1 2 3 "Memorandum of discussion, Federal Open Market Committee" (PDF). Federal Reserve. 1968-03-14.
  11. ↑ Richard Roberts, University of Sussex (2006-08-21). "Sterling and the End of Bretton Woods" (PDF). Helsinki, Finland: XIV International Economic History Congress, University of Helsinki.
  12. ↑ "Wilson defends 'pound in your pocket'". BBC News. 1967-11-19.
  13. ↑ "Pound in your pocket". BBC News. 1967-11-18.
  14. 1 2 "House of Commons Sitting, London Gold Market Closing, HC Deb vol 760 cc1855-62". Parliamentary Debates (Hansard) . 14 March 1968.
  15. ↑ "Zürich Gold Pool". Encyclopædia Britannica.
  16. ↑ Speech by Darryl R. Francis, President Federal Reserve Bank of St. Louis (1968-07-12). "The Balance of Payments, The Dollar, and Gold". Statements and Speeches of Darryl R. Francis. p. 7.
  17. ↑ Frum, David (2000). How We Got Here: The '70s. New York, New York: Basic Books. pp. 295–298. ISBN   0-465-04195-7.
  18. ↑ "London Gold Fixings - 1980 Monthly Gold Averages". London Gold Market Association.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.