The suspension of the US dollar’s gold convertibility ($35 per fine ounce), on 15 August 1971, formally ended the Bretton Woods monetary arrangements that were established at the end of the Second World War. The official decoupling of the dollar from gold was clearly a significant event, but its immediate impact on the London gold market was less dramatic than an earlier monetary crisis in March 1968 (see Curator’s Corner on page 19). An examination of the different effects of these two events on the London gold market reveals how 15 August 1971 was actually a continuation of gold’s demonetisation and the liberalisation of gold markets around the world that had begun during the earlier crisis.
From the moment that the Bretton Woods monetary arrangements were fully operational at the end of 1958, a critical question was whether the US would prioritise defending the dollar-gold parity price over pursuing its economic and political objectives (Eichengreen 1996). Concerns only intensified throughout the 1960s as US overseas commitments rose (e.g. the Vietnam War), domestic spending grew (e.g. the Great Society programmes) and the amount of US dollars circulating outside the country increased. This crisis of confidence reached a critical turning point in 1971. In May of that year, central banks in Europe halted interventions that supported the US dollar in foreign exchange markets and, in August, press reports indicated that France and Britain were planning to convert dollars into gold. These dynamics preceding the suspension of convertibility resulted in increased prices, volatility and volume in the London gold market:
This crisis of confidence reached a critical turning point in 1971
“The uncertainties in the exchange markets led to a rise in London gold price from dollars 39.70 to above dollars 41 per find ounce early in May. The price then fell back for a time but subsequently rose again to reach dollars 42.47 – ½ at the end of July. The price continued to rise as a result of the uncertainties in the exchange market early in August and on August 9th, was fixed at dollars 43.94, the highest since the major central banks withdrew from the gold markets in March 1968. During this period, speculative demand more than offset the decline in activity that is unusual in the summer months.” (Comments by the Bank of England, 17 August 1971, C261, Federal Reserve Bank of New York Archives).
In the years that followed the end of convertibility, gold price levels rose well above parity and a new era of volatility ensued. As gold’s demonetisation progressed, gold ownership was liberalised and markets, such as New York and Hong Kong, emerged as major trading centres over the next decade.
While the suspension of convertibility was clearly a significant and dramatic event, the dynamics that catalysed it and the changes that resulted were not entirely new. They were a continuation of the precious metal’s de facto demonetisation that began with the March 1968 crisis. At this time, the London gold market was the focal point of speculative attacks on the dollar. This pressure resulted in financial authorities closing the London gold market for two weeks while they reorganised the broader gold market into two segments. In the first tier, the gold-dollar parity price was maintained, but only central banks and national financial authorities could trade in it. The decision divorced new production from monetary gold and was intended to signal that the parity rate could be maintained with existing monetary stocks. The new arrangements effectively demonetised new gold production (Gavin 2004). The second tier was a free gold market in which the price of gold was allowed to fluctuate according to supply and demand. Only private citizens permitted to own monetary grade gold (999.5/1000 fineness) could trade in this segment. In the wake of these developments, the private market for gold expanded. Holland and Singapore immediately lifted restrictions preventing their residents from owning gold and created their own gold fixing during the London gold market’s two-week closure. In May 1968, Frankfurt established a similar pricing mechanism. Hong Kong also took a step toward liberalising its market in 1970 when it legalised trading in monetary gold.
Speculative attacks on the dollar resulted in financial authorities closing the London gold market for two weeks
When the suspension of the dollar’s gold convertibility is placed within the trajectory of the events in March 1968, it appears to be less of a singular, dramatic rupture in the gold market and the Bretton Woods system. Rather, it should be understood as the continuation of the demise of the post Second World War monetary order that began earlier with the creation of the two-tier market. Within this context, the suspension of convertibility was simply another step in this process towards the official demonetisation of gold and the liberalisation of markets that laid the foundations for a round-the-world, round-the-clock gold market and historically never imagined gold prices.
Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley. Barry will be delivering the keynote address at the upcoming virtual LBMA/LPPM precious metals conference on 20 September
Eichengreen, Barry. 1996. Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press.
Gavin, Francis J. 2004. Gold, Dollars, and Power: The Politics of International Monetary Relations, 1958-1971. Chapel Hill and London: The University of North Carolina Press.