The London Gold Pool was the pooling of

gold reserves A gold reserve is the gold held by a national central bank, intended mainly as a guarantee to redeem promises to pay depositors, note holders (e.g. paper money), or trading peers, during the eras of the gold standard, and also as a store of v ...

by a group of eight

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

s in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the

Bretton Woods System The Bretton Woods system of monetary management established the rules for commercial relations among 44 countries, including the United States, Canada, Western European countries, and Australia, after the 1944 Bretton Woods Agreement until the ...

of fixed-rate convertible currencies and defending a gold price of US$35 per

troy ounce Troy weight is a system of units of mass that originated in the Kingdom of England in the 15th century and is primarily used in the precious metals industry. The troy weight units are the grain, the pennyweight (24 grains), the troy ounce (20 p ...

by interventions in the London gold market. 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 Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...

, 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 World War II or the Second World War (1 September 1939 – 2 September 1945) was a World war, global conflict between two coalitions: the Allies of World War II, Allies and the Axis powers. World War II by country, Nearly all of the wo ...

, delegates from the 44 allied nations gathered in Bretton Woods, New Hampshire, United States, to reestablish and regulate the international financial systems. The meeting resulted in the founding of the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...

(IMF) and the

International Bank for Reconstruction and Development The International Bank for Reconstruction and Development (IBRD) is an international financial institution, established in 1944 and headquartered in Washington, D.C., United States; it is the lending arm of World Bank Group. The IBRD offers lo ...

(IBRD), and was followed by other post-war reconstruction efforts, such as establishing the

General Agreement on Tariffs and Trade The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its p ...

(GATT). The IMF was charged with the maintenance of a system of international currency

exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...

s which became known as the

Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial relations among 44 countries, including the United States, Canada, Western European countries, and Australia, after the 1944 Bretton Woods Agreement until the ...

Foreign exchange market The foreign exchange market (forex, FX, or currency 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. By trading volume, ...

rates were fixed, but adjustments were allowed when necessary. Currencies were required to be

convertible A convertible or cabriolet () is a Car, passenger car that can be driven with or without a roof in place. The methods of retracting and storing the roof vary across eras and manufacturers. A convertible car's design allows an open-air drivin ...

. For this purpose, all currencies had to be backed by either physical

, 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. The price of one

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

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. 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. 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 The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

and the

Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...

to stabilize the price by allocating for sale substantial gold supplies held by the

. 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 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:

Collapse

By 1965 the pool was increasingly unable to balance the outflow of gold reserves with buybacks. Excessive inflation of the US money supply, in part to fund the Vietnam War, 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. Thus, the London Gold Pool came under increased pressures of failure, causing France to announce in June 1967 a withdrawal from the agreements and moving large amounts of gold from New York to Paris. The 1967 devaluation of the British currency, followed by another run on gold and an attack on the

pound sterling Sterling (symbol: £; currency code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of sterling, and the word '' pound'' is also used to refer to the British currency general ...

, 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."'' Despite policy support and market efforts by the United States, 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%. 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 of the British government that the London gold markets be closed the following day 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, 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''. The events of the weekend led the

Congress of the United States The United States Congress is the legislative branch of the federal government of the United States. It is a bicameral legislature, including a lower body, the U.S. House of Representatives, and an upper body, the U.S. Senate. They both ...

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.

Gold window

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.The two-tiered market system from 1968 to 1971 is described by 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, 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 West Germany was the common English name for the Federal Republic of Germany (FRG) from its formation on 23 May 1949 until German reunification, its reunification with East Germany on 3 October 1990. It is sometimes known as the Bonn Republi ...

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. 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 A market trend is a perceived tendency of the financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time ...

culminating in a price peak of US$850 in January 1980.

Notes

References

External links

Federal Reserve System - Monetary PolicyWhat is The Gold Standard?
University of Iowa Center for International Finance and Development
International Financial Stability (PDF)
by Michael Dooley, PhD, David Folkerts-Landau and Peter Garber, Deutsche Bank (October 2005)
HL Deb 21 November 1967 vol 286 cc904-1036
''Devaluation of the Sterling'', House of Commons Lords Sitting {{DEFAULTSORT:London Gold Pool Gold standard Foreign exchange market Monetary policy Monetary economics 1961 in economic history 1968 in economic history