London Gold Pool

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London Gold Pool 1

London Gold Pool

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.

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 when the system became

no longer workable because the pegged price of gold was too low, runs on gold, the British pound, and the US dollar

occurred, and France decided to withdraw from the pool. The 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 1944, before the conclusion of World War II, delegates from the 44 allied nations nations gathered in Bretton

Woods, New Hampshire, 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 were allowed adjustments when necessary and 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 and the United States dollar was recognized as the world's reserve currency, as an

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 therecessions of the 1950s, the US had to convert vast amounts of gold, and the Bretton Woods system suffered

increasing break downs 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 of US

election debates, panic buying of gold led to a surge in price to over US$40 per oz, causing 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.[]

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.
http://en.wikipedia.org/w/index.php?title=Bank_of_Englandhttp://en.wikipedia.org/w/index.php?title=Federal_Reserve_Systemhttp://en.wikipedia.org/w/index.php?title=Bretton_Woods_system%23U.S._balance_of_payments_crisishttp://en.wikipedia.org/w/index.php?title=Commodityhttp://en.wikipedia.org/w/index.php?title=Precious_metalhttp://en.wikipedia.org/w/index.php?title=Troy_ouncehttp://en.wikipedia.org/w/index.php?title=Reserve_currencyhttp://en.wikipedia.org/w/index.php?title=Gold_reserveshttp://en.wikipedia.org/w/index.php?title=Convertibilityhttp://en.wikipedia.org/w/index.php?title=Foreign_exchange_markethttp://en.wikipedia.org/w/index.php?title=Bretton_Woods_systemhttp://en.wikipedia.org/w/index.php?title=General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/w/index.php?title=General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/w/index.php?title=International_Bank_for_Reconstruction_and_Developmenthttp://en.wikipedia.org/w/index.php?title=International_Bank_for_Reconstruction_and_Developmenthttp://en.wikipedia.org/w/index.php?title=International_Monetary_Fundhttp://en.wikipedia.org/w/index.php?title=Bretton_Woods%2C_New_Hampshirehttp://en.wikipedia.org/w/index.php?title=Bretton_Woods%2C_New_Hampshirehttp://en.wikipedia.org/w/index.php?title=Allies_of_World_War_IIhttp://en.wikipedia.org/w/index.php?title=World_War_IIhttp://en.wikipedia.org/w/index.php?title=Nixon_Shockhttp://en.wikipedia.org/w/index.php?title=Goldhttp://en.wikipedia.org/w/index.php?title=Gold_fixinghttp://en.wikipedia.org/w/index.php?title=London_bullion_markethttp://en.wikipedia.org/w/index.php?title=London_bullion_markethttp://en.wikipedia.org/w/index.php?title=Troy_ouncehttp://en.wikipedia.org/w/index.php?title=Bretton_Woods_Systemhttp://en.wikipedia.org/w/index.php?title=Central_bankhttp://en.wikipedia.org/w/index.php?title=Gold_reserves


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London Gold Pool 2

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

announced in June 1967 a withdrawal from the agreements[4]

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, 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."[]

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.[5]

Although the gold pool members

refused to trade gold with private persons, and the United States

pledged to suspend gold sales to governments that trade in the

private markets,[6]

this created an open opportunity for some

market participants to exploit the gold window by convertingcurrency reserves into gold and selling the metal in the gold

markets at higher rates. This unsustainable situation collapsed in

1971, when West Germany was the first to officially abandon the

Bretton Woods accords, resulting in a sudden decline of the

dollar.[citation needed]

The United States, under President Richard Nixon, unilaterally without consultation with

international leaders abolished the direct convertibility of the United States dollar into gold resulting in 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.[7]

Member contributions

The members of the London Gold Pool and their initial gold contributions in tonnes (and USD equivalents) to the

gold pool were:[]

United States, 50%, 120t ($135 MM)

Germany, 11%, 27t ($30 MM)

United Kingdom, 9%, 22t ($25 MM)

France, 9%, 22t ($25 MM)

Italy, 9%, 22t ($25 MM)

Belgium, 4%, 9t ($10 MM)

Netherlands, 4%, 9t ($10 MM)

Switzerland, 4%, 9t ($10 MM)

Collapse

Despite policy support and market efforts by the United States,[8]

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%.[9][10]

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 theweekend in Washington, served the consideration of the international monetary situation and to reach a decision
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London Gold Pool 3

with regards to future gold policy.[]

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. The

events ended the London Gold Pool.

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 financial systems in general, Swiss banks acted immediately to minimize effects on the Swissbanking system and its currency by establishing a gold trading organization, the Zrich Gold Pool, which helped in

establishing Zrich as a major trading location for gold.[11]

Notes

[2][2] 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

[5][5] The two-tiered market system from 1968 to 1971 is described by

References

External links

Federal Reserve System - Monetary Policy (http://www.federalreserve.gov/monetarypolicy/)

What is The Gold Standard? (http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml) University

of Iowa Center for International Finance and Development

The Gold Battles Within the Cold War (PDF) (http://www.utexas.edu/lbj/faculty/gavin/articles/gold_battles.

pdf) by Francis J. Gavin (2002)

International Financial Stability (PDF) (http://people.ucsc.edu/~mpd/InternationalFinancialStability_update.

pdf) by Michael Dooley, PhD, David Folkerts-Landau and Peter Garber, Deutsche Bank (October 2005)

HL Deb 21 November 1967 vol 286 cc904-1036 (http://hansard.millbanksystems.com/lords/1967/nov/21/

devaluation-of-the-pound-sterling), House of Commons Lords Sitting on the devaluation of the Sterling
http://hansard.millbanksystems.com/lords/1967/nov/21/devaluation-of-the-pound-sterlinghttp://hansard.millbanksystems.com/lords/1967/nov/21/devaluation-of-the-pound-sterlinghttp://people.ucsc.edu/~mpd/InternationalFinancialStability_update.pdfhttp://people.ucsc.edu/~mpd/InternationalFinancialStability_update.pdfhttp://www.utexas.edu/lbj/faculty/gavin/articles/gold_battles.pdfhttp://www.utexas.edu/lbj/faculty/gavin/articles/gold_battles.pdfhttp://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtmlhttp://www.federalreserve.gov/monetarypolicy/http://en.wikipedia.org/w/index.php?title=Congress_of_the_United_States


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Article Sources and Contributors 4

Article Sources and ContributorsLondon Gold Pool Source: http://en.wikipedia.org/w/index.php?oldid=552497124 Contributors: Amelapay, Funandtrvl, Hmains, Joseph Solis in Australia, Kbrose, Mu, PFHLai, Rich

Farmbrough, Rod57, Sumsum2010, 7 anonymous edits

Image Sources, Licenses and ContributorsImage:Gold price.png Source: http://en.wikipedia.org/w/index.php?title=File:Gold_price.png License: GNU Free Documentation License Contributors: Donar Reiskoffer

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London Gold Pool