END OF BRETTON WOODS SYSTEM MARKS GOLD’S TAKEOFF

END OF BRETTON WOODS SYSTEM MARKS GOLD’S TAKEOFF

The Bretton Woods Agreement of 1944 launched the first system of con-vertible currencies and fixed exchange rates, requiring participating na-tions to maintain the value of their currency within a narrow margin against the U.S. dollar and a corresponding gold rate of $35 per gold ounce. But the U.S. dollar began to lose value in the 1950s and 1960s, due to surging U.S. capital outflows aimed at Europe’s postwar recovery, as well as an expanding global supply of U.S. dollars, which made it increasingly diffi-cult for the United States to convert dollars into gold on demand at a fixed exchange rate.

The surge of the Eurodollar market in the late 1960s—where interna-tional banks held U.S. dollars outside the United States—coupled with the escalating costs of the Vietnam War led to the near depletion of U.S. gold reserves and a devaluation of the U.S. dollar relative to gold. At the same time, the United States kept on printing more dollars for which there was no gold backing. This persisted as long as the world was willing to accept those dollars with little question. But when France demanded in the late 1960s that the U.S. fulfill its promise to pay one ounce of gold for each $35 it delivered to the U.S. Treasury, a shortage of gold began to ensue relative to a widening supply of dollars. On August 15, 1971, Nixon shut down the gold window, refusing to pay out any of the remaining 280 million ounces of gold. Figure 1.1 shows the inverse relationship between gold and the dollar since the fall of Bretton Woods.

A series of dollar devaluations in the early 1970s eventually led to the end of the Bretton Woods system of fixed exchange rates, paving the way for a long-drawn-out decline in the dollar. This triggered a rapid ascent in the dollar value of two of the world’s most vital commodities, metals

FIGURE 1.1 Gold prices generally move in inverse relation to the U.S. dollar as they compete over inflation risk, geopolitical uncertainty, and time value of money.

please read also : FED TIGHTENING AND FX INTERVENTIONS REIN IN GOLD RALLY

and oil. Oil producers holding the surplus of devalued U.S. dollars had no choice but to purchase gold in the marketplace, driving both the fuel and the metals higher and further dragging down the value of the dollar. A se-ries of devaluations in 1972 culminated in the end of the Bretton Woods system in February 1973. The dollar became freely traded and freely sold.

From January 1971 to February 1973, the dollar dropped 26.0 per-cent against the yen, 4.0 percent against the British pound, and 17 percent against the deutsche mark. And from 1971 to 1980, the dollar lost 30 per-cent of its value in trade-weighted terms against a basket of currencies (deutsche mark, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krone).

Subscribe to receive free email updates: