Why gold mattered
In the 1960s the international monetary system rested on a fixed relationship between the dollar and gold. Under the Bretton Woods arrangements agreed in 1944, the United States stood ready to exchange dollars for gold held by foreign central banks at $35 an ounce, and other currencies were fixed to the dollar. This made the dollar the central asset of the system and gave the US a special responsibility. As long as people believed in the $35 price, dollars were treated as “as good as gold”.
The difficulty was that the United States gradually ran balance of payments deficits through military spending abroad, investment and aid, which put more dollars into foreign hands. At the same time the US gold stock was shrinking, roughly halving between the late 1950s and 1968. Foreign governments, notably France, sometimes converted dollars into gold, and the more they did so, the more others wondered whether the promise could be kept. This was an old tension, often called the Triffin dilemma after the economist Robert Triffin: the world needed a growing supply of dollars, but a growing supply of dollars weakened confidence in the gold backing.
The creation of the pool
There was another problem. Gold also traded on the private market, principally in London, and if the market price rose above $35 it would be profitable to buy gold from central banks and sell it on. A sharp rise would also show that confidence in the dollar was falling. In 1961, following a spike in the London price in October 1960 that had alarmed officials, the United States and seven European countries set up the London Gold Pool. The members were the US, Britain, West Germany, France, Italy, Belgium, the Netherlands and Switzerland.
The idea was simple. The Bank of England acted as agent, and when demand pushed the price up, it sold gold from the pool’s stocks to bring the price back to about $35. When supply was heavy, the pool bought gold. The members contributed shares in agreed proportions, with the United States responsible for roughly half. For several years the arrangement worked reasonably well, and the pool was at times a net buyer of gold.
1967: cracks appear
The strains grew during 1967. Fears about the dollar, driven by the cost of the war in Vietnam and a widening US budget deficit, combined with disorder in the Middle East after the Six-Day War, encouraged people to buy gold as a safe asset. The pool had to sell increasing quantities. France, under de Gaulle, was critical of the system’s dependence on the dollar and withdrew from the pool in June 1967, leaving the others to carry its share. De Gaulle’s government had been among those that cashed in dollars for gold in earlier years.
The pound devaluation of November 1967 turned the pressure into a rush. If sterling could be devalued, many traders reasoned, the dollar might be next, and the safest course was to buy gold. In the weeks after 18 November, the pool sold very large amounts of gold, reportedly the largest losses in its history, with December seeing particularly heavy demand. Central banks drew on their reserves and arranged extra credits, and the Americans insisted publicly that they would not change the $35 price.
Early 1968: the final stretch
The first weeks of 1968 brought no relief. On 1 January President Johnson announced measures to reduce the US balance of payments deficit, including restrictions on foreign investment by American companies and an effort to discourage overseas travel, which signalled how serious the situation had become. The Tet Offensive at the end of January increased doubts about the war and its cost, and the demand for gold continued. Congress also took up the question of the gold cover that backed Federal Reserve notes, a legal requirement that tied part of the money supply to the Treasury’s gold stock and which officials wanted removed so that the gold could be used in defence of the price.
By March, losses were running at a pace that could not continue. In the second week of the month the buying rose further, with the London market receiving heavy orders. On Friday 15 March 1968, the British government closed the London gold market, declaring a bank holiday, at the request of the United States. The market remained closed for about two weeks. The legal gold cover requirement for Federal Reserve notes was repealed in the same days, by a law signed on 18 March.
The two-tier market
Central bank governors met in Washington on 16 and 17 March and issued a communiqué announcing a new arrangement. They would no longer supply gold to the private market, and the price in the private market would be left to find its own level. Transactions among official institutions would continue at $35. This two-tier system ended the pool and separated the monetary role of gold from the commercial market. In effect, the private price could rise without forcing the central banks to sell, and when the London market reopened at the end of March the free price did move above $35.
The two-tier system did not solve the underlying problem. Central banks could still demand gold from the United States at $35, and the US kept running deficits. For a few years the arrangement held, but pressure on the dollar returned, and in August 1971 President Nixon ended the dollar’s convertibility into gold. The Bretton Woods system of fixed rates ended in the following years.
What to take from it
The pool’s story is a reminder that a fixed price can be defended only as long as the people defending it have enough resources and credibility. The scheme was undermined less by market speculation, which was a symptom, than by the underlying imbalance between American commitments and the gold available to back them. The details of the pool’s losses vary by source, and the figures here are intentionally approximate, but the sequence of events, from the French withdrawal to the March 1968 closure, is well established.