In response, the London Gold Pool was formed on November 1, 1961. A run in the London gold market sent the price to $40 an ounce on October 20, 1960, exacerbating the threat to the system. International efforts were also made to stem a run on gold. The growth and need for the swap lines signaled that they were not just a temporary fix, but a sign of a fundamental problem in the monetary system. What started as a small, short-term credit facility grew to be a large, intermediate-term facility until the U.S. Altogether, the lines provided up to $900 million equivalent in foreign exchange.
In March 1962, the Federal Reserve established its first swap line with the Bank of France and by the end of that year lines had been set up with nine central banks (Austria, Belgium, England, France, Germany, Italy, the Netherlands, Switzerland, and Canada). The Federal Reserve structured the reciprocal currency arrangements, or swap lines, by providing foreign central banks cover for unwanted dollar reserves, limiting the conversion of dollars to gold. gold window in August 1971, the Federal Reserve relied on “currency swaps” as its key mechanism for temporarily defending the U.S. While the interventions were successful for a time, the Treasury’s lack of resources limited its ability to mount broad dollar defense.įrom 1962 until the closing of the U.S. The ESF buys and sells foreign exchange currency to stabilize conditions in the exchange rate market. Treasury’s Exchange Stabilization Fund (ESF), with the Federal Reserve Bank of New York acting as its agent, began to intervene in the foreign-exchange market for the first time since World War II. These were meant to be “quick fixes” until the balance of payments could readjust, but they proved to be postponing the inevitable. balance of payments and to uphold the Bretton Woods system, both domestically and internationally. Many efforts were made to adjust the U.S. government’s ability to meet its obligations, thereby threatening both the dollar’s position as reserve currency and the overall Bretton Woods system. The country was vulnerable to a run on gold and there was a loss of confidence in the U.S. Eventually, there were more foreign-held dollars than the United States had gold. Meanwhile, the gold supply had increased only marginally.
balance of payments, combined with military spending and foreign aid, resulted in a large supply of dollars around the world. share of world output decreased and so did the need for dollars, making converting those dollars to gold more desirable. In the 1960s, European and Japanese exports became more competitive with U.S. Since the United States held about three-quarters of the world’s official gold reserves, the system seemed secure. Japan and Europe were still rebuilding their postwar economies and demand for U.S. Initially, the Bretton Woods system operated as planned. The United States had the responsibility of keeping the dollar price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility. dollars were convertible to gold at a fixed exchange rate of $35 an ounce. Since 1958, when the Bretton Woods system became operational, countries settled their international balances in dollars, and U.S. The countries agreed to keep their currencies fixed (but adjustable in exceptional situations) to the dollar, and the dollar was fixed to gold. The international monetary system after World War II was dubbed the Bretton Woods system after the meeting of forty-four countries in Bretton Woods, New Hampshire, in 1944.
The new economic policy marked the beginning of the end of the Bretton Woods international monetary system and temporarily halted inflation. President Richard Nixon’s actions in 1971 to end dollar convertibility to gold and implement wage/price controls were intended to address the international dilemma of a looming gold run and the domestic problem of inflation.
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