Gold Price History: Pre-1971 Standard System

For centuries, the price of gold has fluctuated in response to economic, financial, and geopolitical events. During most of the 20th century, governments attempted to manage and control gold prices to support their monetary policies.

That period, known as the Bretton Woods system, established a fixed price for gold and pegged currencies to the US dollar.

This article will give you insight into the history of gold prices under the Bretton Woods system and what factors led to its eventual collapse.

What Was the Bretton Woods System?

In the aftermath of World War 2 and the preceding Great Depression, leading allied nations saw a need to establish a more coherent global monetary order to facilitate post-war recovery and international trade.

In July 1944, delegates from 44 countries participated in the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire.

The conference aimed to develop a framework to prevent competitive currency devaluations like those experienced after 1931 and stabilize exchange rates. To achieve this, the Bretton Woods system was founded on a platform of fixed but adjustable exchange rates pegged to the US dollar.

The dollar was convertible into a fixed amount of gold at $35 per ounce.

This "gold-exchange standard" allowed foreign central banks to buy and sell dollars from the US at this official price to maintain their pegs.

It imbued the monetary system with discipline while utilizing an international gold reserve asset. By combining fixed rates and dollar linkage to the precious metal, authorities hoped currencies would be stable and cross-border trade would be encouraged.

The system also aimed to establish conditions favouring high global growth by avoiding beggar-thy-neighbour policies, as seen during the Great Depression.

It laid the foundation for postwar boom years and a revived international economic order, with the International Monetary Fund (IMF) and World Bank also established as pillars.

However, strains would emerge from successive US monetary expansions, destabilizing the dollar-gold convertibility link over time.

How Was Gold Price Set Under Bretton Woods?

During this period, the price of gold reflected the fixed $35 per ounce US dollar price dictated through government fiat. Central banks aimed to keep their currencies stable by intervening in markets as needed to buy or sell dollars for gold.

For nearly 30 years, this standardized gold price history promoted confidence in post-war recoveries through steady currency values and predictable exchange mechanisms.

However, loose US monetary and fiscal policies placed pressure on dollar liquidity. By 1969, mounting deficits drove demands for dollars into dollars held by foreign governments.

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Why Did Bretton Woods Collapse?

Loose U.S. fiscal and monetary policies created substantial balance of payments deficits as foreign dollar holdings grew far larger than American reserves could stabilize. This "Triffin dilemma" inherently conflicted long-term national interests with the demands of the fixed standard.

Additionally, the Vietnam War was escalating public debt levels and currency erosion. Meanwhile, Lyndon Johnson's "Great Society" programs stoked inflation at home.

The dollars accumulated abroad placed mounting redemption pressures on US reserves as trust in long-term convertibility weakened.

In 1967, coordinated central bank intervention stabilized currencies, and gold began to break down when Britain could no longer afford to maintain its overvalued pound.

By 1971, tensions boiled over. Speculation swirled that dollars in foreign hands could no longer be redeemed at $35/ounce as the gold price climbed above this official level.

Faced with a crisis, then-President Richard Nixon temporarily froze dollar convertibility into gold on August 15, 1971.

From 1972 to 1973, the Bretton Woods Accord was officially replaced by a floating, market-based system without reserve asset backing. This "Nixon Shock" severed the last link between the dollar and gold, freeing governments from fixed exchange rate discipline as mounting imbalances overwhelmed the constrained regime.

The demise highlighted gold's limitations in monetary theory. By abandoning Bretton Woods' untenable anchors, policymakers gained flexibility, though at the cost of stability.

Its collapse marked global finance's transition to pure fiat currency management, absent constraints of redemption into precious commodities. Lessons were learned about maintaining long-term equilibrium within such controls.

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New Monetary Paradigm

Following the closure of the London Gold Pool in early 1968, speculative pressures on both the dollar and gold price mounted. The pool's demise marked the end of coordinated central bank intervention to stabilize rates.

With U.S. gold reserves dwindling with dollars issued, defending $35 per ounce became untenable as supply outstripped the demand for redeemability.

Afterwards, gold was traded as a commodity independent of government price settings. The transition ushered in a new era of monetary management centred around flexible exchange rates rather than gold price history anchors.

However, it created rate volatility as currencies fluctuated freely without the discipline of convertibility into precious metals.

Over time, leading currencies stabilized versus each other, and gold found its value level through open-market dynamics rather than dictates.

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In Essence,

The history of gold prices under the Bretton Woods system highlights the challenges of maintaining a fixed price for gold and pegging currencies to it over an extended period.

While the system initially promoted stability, external economic and policy factors eventually overwhelmed the constraints of the fixed exchange rate regime tied to gold.

The collapse of Bretton Woods marked a transition to the modern era of floating, market-determined exchange rates and fiat currency management untethered to gold.

Traders must learn about the history of gold pricing to better understand the factors that caused the shift from fixed to market-based pricing.

Knowledge of economic and political events that influenced gold prices in the past will help traders anticipate how similar events could impact gold prices in the future.

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