Gold Wars: the US versus Europe During the Demise of Bretton Woods
Gold Wars: the US versus Europe During the Demise of Bretton Woods
The untold story of how Europe's gold ambitions clashed with America's quest for dollar hegemony
Introduction
After the collapse of Bretton Woods in 1971, several European central banks attempted to establish a new gold pool to stabilize prices and move toward a quasi-gold standard. The United States, however, wanted to phase out gold from the system entirely and enforce a dollar standard on the world. What frightened the US was that Europe held the most gold and alluded to raising the gold price periodically to create liquidity, giving them the dominant means of creating reserves.
Through its military presence in Germany, protecting it from the Soviet Union, the US was able to pressure the Germans not to cooperate with the gold pool. Without Germany, the other European countries couldn't materialize the pool and gold lost its anchor role in the monetary system. In the meantime, the US made a secret deal with Saudi Arabia to recycle oil dollars into US government bonds.
Key Outcome: The United States didn't manage to phase out gold from the system altogether, but it did succeed in establishing a global dollar standard which yielded them unprecedented power. This historic battle between gold and the dollar continues to influence modern precious metals markets and the role of physical gold in investment portfolios today.
Table of Contents
The Beginning of the End
At a conference in Bretton Woods, New Hampshire, in July 1944, no less than 730 delegates from 44 nations forged a new international monetary system. With the currency wars of the 1930s in fresh memory, an agreement of fixed exchange rates and free trade was reached. Because the United States had the strongest hand at the negotiation table, only the dollar was convertible into gold at $35 per troy ounce, making it "as good as gold" and stimulating its use as a reserve currency.
The Bretton Woods System
Other currencies were pegged to the dollar (or gold). Gold was thus the ultimate anchor of "Bretton Woods," granted by the Federal Reserve that was obligated to convert (buy and sell) dollars into bullion for foreign central banks. This system created unprecedented demand for dollars as a trade, intervention, and reserve currency.
While pound sterling was still held by central banks worldwide from the previous arrangement, Bretton Woods incentivized central banks to hold dollars and gold as reserves. An advantage of the dollar, relative to gold, was that it accrued interest; a disadvantage was that it could devalue against gold (or be seized).
The United States' balance of payments deteriorated, resulting in a buildup of dollar balances held abroad and a decline of the US's monetary gold stock.
The United States' external dollar liabilities exceeded its monetary gold holdings, prompting global concern. A run on the dollar could coerce a devaluation or default of the US.
President of the Federal Reserve Bank of New York, Alfred Hayes, presented a plan to collectively defend the price of gold at $35 per ounce. European central banks agreed to form a Gold Pool with the US.
The Pool operated by buying and selling gold in the London Bullion Market to keep the free market price close to the official price, protecting the international monetary system from disintegrating. France accepted to join on the condition the US would restore its balance of payments deficit.
Charles de Gaulle's Criticism
In February 1965, French President Charles de Gaulle gave a speech criticizing America's "exorbitant privilege": to the extent countries were willing to hold dollars in reserve, the US could print dollars out of thin air to pay for imports and make investments abroad. According to De Gaulle, international settlement should be done in gold and the use of reserve currencies had to be limited.
As the US started printing more money to finance the war in Vietnam throughout the 1960s, downward pressure on the dollar mounted. The Pool was challenged, with France dropping out in June 1967 when the Pool's resources needed to be increased.
The Heat is On
In November 1967, Great Britain was forced to devalue pound sterling. If sterling could fail, so could the dollar, the market reckoned. Things started spiraling out of control and the Pool was confronted with significant losses.
Crisis Point: From March 8 through 14, 1968, the Pool sold nearly 1,000 tonnes of gold. "US air force planes rushed more and more Fort Knox gold to London, and so much piled up in the Bank of England's weighing room that the floor collapsed," writes Timothy Green in The New World of Gold.
Belgium and Italy also became anxious to opt out as their gold reserves contracted. It became senseless to sell gold into a black hole. On March 15, 1968, the London Bullion Market was closed for two weeks at the behest of the US.
A prominent figure at this time was Jelle Zijlstra, President of the Dutch central bank and Chairman of the BIS from 1967 until 1981. Zijlstra noted that the Europeans had a different interpretation than the US from the agreements reached in Washington:
"Some countries were of the opinion that the only decision taken in Washington was to abolish the gold pool... The Americans took the position that it had also been decided that the central banks would never again buy gold on the free market, or in other words, that a first step had been taken towards the removal of gold from the international monetary system."
The Pool was disbanded and the free market price of gold was allowed to float. This created a two-tier gold market: private entities could trade gold at the free market price while central banks could transact at the official price.
European Gold Holdings
By this time, Europe held the largest gold reserves, and it would have been a significant loss to render it useless. This concentration of gold in European hands would become a key factor in the coming monetary battles.
Zijlstra's Solutions
The official gold prices in all currencies should have been raised to increase global liquidity and ensure the dollar would stay convertible into gold. However, the Americans opposed these solutions "tooth and nail."
European central banks continued converting dollars at the Federal Reserve, while the Americans tried to block such requests. Germany, having American troops on its soil protecting it from the Soviets, came at a cost: not being allowed to convert dollars at the Fed.
The Blessing Letter
Germany's commitment not to convert dollars was sealed in a letter to the Fed, dated March 30, 1967, by Karl Blessing, President of the German central bank. Blessing also agreed to invest $500 million in US government bonds, financing both America's balance of payments and fiscal deficit.
A European Gold Pool
The US received intelligence that the Europeans were preparing to mobilize their gold by transacting bullion among themselves at the free market price. Then Secretary of the Treasury, George Shultz, wrote to President Nixon about European officials who "see the proposed move as enhancing the probability that gold will work its way back into the center of the international monetary system."
In a 1973 Wikileaks cable, the Minister of Finance of the Netherlands, Willem Duisenberg, told an American ambassador that all currencies should be convertible "or money has no meaning." France wanted to regulate (stabilize) the free market price of gold and the EEC oriented to use their gold for international settlement.
Zijlstra made his views public in a speech in Zurich, Switzerland, advocating for central banks to be free to buy and sell gold in the free market and use it in settlements between one another.
The Ministers of Finance of the EEC held a conference in Zeist, the Netherlands, producing concepts for: monetary authorities to buy and sell gold at market-related prices, periodically fix minimum and maximum prices, and create a buffer stock managed by an agent.
The Americans countered the EEC from the inside. On June 3, 1975, Federal Reserve Chairman Arthur Burns wrote that he had "a secret understanding in writing with the Bundesbank—concurred in by Minister Schmidt—that Germany will not buy gold, either from the market or from another government, at a price above the official price."
Strategic Pressure
Advisors of US President Ford wrote on June 4, 1975: "We must first swing Germany, thus isolating France." On June 6, President Ford told Minister Schmidt: "We must ensure that there is no opportunity for governments to begin active trading in gold among themselves with the purpose of creating a gold bloc."
Without Germany, the EEC wasn't able to form a gold pool, stabilize the price, and use gold for international settlement. The Zeist initiative was strangely never realized, effectively blocked by German compliance with US demands.
Modern Implications: Today's gold market reflects many of the dynamics established during this period. Understanding these historical precedents helps explain why physical gold ownership remains an important portfolio diversification strategy, particularly during periods of currency instability and geopolitical tension.
The US Oil Deal with Saudi Arabia
Suppressing the role of gold was one part in the bigger picture of the US to install dollar hegemony. "Risk free" dollar assets were required to become the prime international reserves.
The oil crisis in the early 1970s was both a blessing and a curse for the US. It caused expenses to go up, but a higher price of oil also created more demand for dollars abroad. Now those dollars needed to be invested in US government bonds (Treasuries).
The Secret Deal
In July 1974, Secretary of the Treasury William Simon visited the Middle East to negotiate with Saudi Arabia. The deal encompassed Saudi Arabia supplying oil to the United States and investing the proceeds in Treasury securities.
Special Treatment
In return, the US would provide military aid and give the kingdom an "add-on" in the form of special treatment in Treasury auctions. The add-on allowed Saudi Arabia non-competitive bidding outside of normal auctions.
On request of Saudi King Faisal, the deal would remain "strictly secret." The arrangement allowed the Saudi Arabian Monetary Agency (SAMA) to avoid disrupting the market caused by large security purchases on their part.
Petrodollar System
For starters, $2.5 billion was expected to be invested by SAMA, but shortly after, the Treasury inadvertently raised $800 million more than it intended to borrow at auction. Dollars were recycled effectively, establishing what would become known as the petrodollar system.
This arrangement became a cornerstone of dollar hegemony, ensuring that oil transactions would generate demand for US Treasury securities and maintain the dollar's central role in global finance. The system continues to influence modern commodity markets, including precious metals pricing and international trade flows.
Conclusion
It wasn't all smooth sailing for the dollar in the 1970s, but the US managed to secure its currency as the sun in the international monetary cosmos. In his memoirs, Zijlstra reflects on how it happened:
"Gold disappeared as the anchor of monetary stability... The road from dollar supremacy, through endless vicissitudes, to a new dollar hegemony was paved with many conferences, with faithful, shrewd, and sometimes misleading stories... The political reality was that Americans supported or fought any change, depending on whether they saw the dollar's position strengthened or threatened."
According to Zijlstra and De Gaulle, final settlement in cross-border trade should be done in gold and the use of reserve currencies restricted. What frightened the US was that Europe held the most gold and alluded to raising the gold price periodically to create liquidity, giving them "the dominant means of creating reserves."
Historical Lessons
The 1970s gold wars demonstrate how monetary systems can shift dramatically based on geopolitical power rather than economic fundamentals alone.
Modern Relevance
Everything that held back the envisioned monetary system of Zijlstra and friends in the 1970s has been resolved. Gold is now more evenly distributed globally, and there is a liquid gold leasing market.
Future Implications
Experience from Bretton Woods suggests that any future European monetary arrangement would likely target gold prices in the free market to stabilize them.
Investment Perspective: The historical battle between gold and fiat currencies provides crucial context for modern investors. Understanding these dynamics helps explain gold's enduring role as a store of value and hedge against currency debasement. Today's investors can benefit from this knowledge when considering gold purchases or silver investments as portfolio diversification tools.
The remaining questions are: what could trigger Europe to stabilize the gold price in the future, and at what price level? The answers to these questions may well determine the next chapter in the ongoing evolution of the international monetary system.