While gold had circulated as money for thousands of years, the nineteenth century saw the advent of formal gold standards where countries linked their currencies formally to gold, and gold coinage circulated freely as currency.
This was led by Britain in 1816 which took the initiative to move to a full gold standard, defining the value of Britain’s currency, the pound sterling, in terms of gold. Gold coins circulated freely as domestic currency, and paper bill currency was convertible into gold.
The era of the classical gold standard (in which countries linked their currencies to gold ) really got underway later in the nineteenth century, spurred by the growth of worldwide gold supply following the major gold discoveries in the US, Australia and South Africa.
Germany introduced a gold standard in 1871.
Belgium, France, and Switzerland did likewise in the 1870s, followed closely by Italy and Holland, and Japan in 1897.
The US, which had introduced a bimetallic standard of gold and silver in 1792, moved to a full gold standard in 1900.
During the First World War, many countries, including Great Britain, suspended gold convertibility, while the US kept its gold standard in place at an official gold price of $20.67 per troy ounce.
Following the post-war Genoa Conference in 1922, a new ‘gold exchange standard’ was launched where countries could link their currencies to the British pound and US dollar, with the dollar and pound convertible into gold.
Britain re-entered this new gold standard in 1925, but dropped out again in 1933, with many participating countries also dropping out at that time.
The US then went off its gold standard domestically in 1933, inflating its money supply and outlawing gold ownership for US citizens.
In 1934, the US government enacted legislation transferring all Federal Reserve held gold held to the US Treasury, while raising the official gold price to $35 per ounce, further inflating the US money supply.
At that time the US money supply was still 40% backed by gold.
Just prior to the end of World War Two, the US and Britain devised and rolled out a new international gold exchange standard at the Bretton Woods monetary conference, a currency system stabilised by gold that aimed to manage official fixed exchange rates between the world’s currencies. The institution created to manage this system was the International Monetary Fund (IMF).
Gold was the anchor of this system with the US dollar officially convertible into gold at $35 per ounce. Currencies of participating countries were then convertible into the US dollar at fixed par values. Only central banks and government monetary authorities were permitted to convert US dollars into gold at this official price of $35 per ounce via the US Treasury ‘gold window’, managed by the New York Federal Reserve.
As gold traded freely elsewhere in the world at higher ‘free market’ prices than the $35 per ounce official price, the guardians of the IMF system subsequently spent years intervening into the London market with physical gold sales in an attempt to keep the international market price of gold as close as possible to the official price of $35 per ounce.
They did so through the Bank of England and the US Federal Reserve, initially informally in the 1950s and then more formally in the 1960s with the infamous London Gold Pool of eight central banks from the US, Britain, France, Germany, Switzerland, the Netherlands, Belgium, and Italy, coordinated by the Bank of International Settlements (BIS) in Switzerland.
When market speculative activity became so intense that the US ran out of acceptable gold bars in early 1968 to supply the gold price suppression scheme, the London Gold Pool collapsed in March 1968.
The US then fully scrapped the gold ratio requirement (gold backing) of the US dollar money supply which at that time had fallen to 25%.
From March 1968, central banks were still able to convert US dollar surpluses to physical gold using the US Treasury’s gold window at the New York Fed. However, due to continued demand by foreign central banks to swap their surplus US dollars for US Treasury gold, this agreement was famously reneged on by the US in August 1971, with the announcement by US President Richard Nixon that the US was closing the ‘gold window’ and suspending convertibility of US dollars into gold.
This move essentially ended the Bretton Woods system of fixed exchange rates tied to gold.
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