1944 - Establishment of the IMF
The first international agreement on gold came with the signing of the International Monetary Fund’s articles of agreement in July 1944.
The IMF was created in order to rebuild the global monetary system after the Second World War, and its articles laid down that all member countries should establish ‘par values’ for their currencies in terms of gold, or in terms of the US dollar which was itself pegged to gold. One dollar was valued at 0.888671 gram of fine gold, or US$35 an ounce.
The agreement confirmed the price of gold as established by President Roosevelt in 1933, and gold became the foundation of the first international monetary system established by international agreement. It was the ‘glue’ that held the system of exchange rates together.
To give the new IMF usable resources to enable it to start lending, members were also required to pay 25 per cent of their subscription to the Fund in gold. Members had to buy and sell gold at the fixed price, plus or minus a margin set by the IMF. Gold was the ultimate reserve asset.
This requirement and the growth of membership resulted in IMF holdings of gold rising to 153 million ounces by 1975, at the time worth US$21 billion.
1960s – Central banks try to stabilise gold prices
In 1961, a ‘gentlemen’s agreement’ among central banks - known as ‘The Gold Pool’ - was established to hold the price of gold close to the then official price of US$35 an ounce.
The previous year, the price had risen to US$40 per ounce following panic buying of gold during the US presidential race and a speculative attack on the dollar. According to the Bank of England, “this state of affairs threatened the whole structure of exchange relationships in the western world”. The bank, with the support of the US authorities, sold gold on a substantial scale to bring the price down “to more appropriate levels”.
In October 1961, following a further speculative flurry, the central banks of Western Europe agreed to cooperate with the New York Federal Reserve Bank to stabilise the market.
A period of coordinated gold purchases followed the change of market conditions. However, the Cuban missile crisis of July 1962 triggered record demands for gold on the London market, which was again met by official selling. The objective throughout was to “avoid unnecessary and disturbing fluctuations in the price of gold in the free market”.
The Bank of England’s conclusion on this experiment was that “the knowledge that the central banks were working together in the gold, as well as in the exchange markets, has helped to maintain public confidence in the existing international monetary structure”.
The central banks abolished The Gold Pool in 1968, agreeing that they would no longer supply gold to the market but transact only among themselves at the official price. This established a two-tier system – one for private transactions, where the price fluctuated according to supply and demand, and the other for official transactions.
This agreement lasted until November 1973, when the price of gold was allowed to move freely, following the suspension of dollar convertibility into gold—the end of the IMF gold standard—in August 1971.
1978 - The IMF attempts to write gold out of the system
In the late 1970s, the United States led an attempt to remove gold from the international monetary system. The Second Amendment of the International Monetary Fund’s articles was intended to achieve this aim by barring members from fixing their exchange rates to gold and removing the obligation on members to conduct transactions in gold at the officially mandated price.
The amendment followed the failure of previous attempts to establish a new international monetary system, including the inability of European countries to force the United States to either settle its deficit in gold, or else devalue the dollar against gold.
Not only did the United States refuse to keep gold in the system, it then led a crusade against gold—while being careful to keep a very large strategic stock of gold in its own reserves, sealed off from the outside world.
Symbolising the plan to drive gold out of the system, the IMF was instructed to dispose of 50 million ounces of its gold stock of 153 million ounces. It achieved this partly by sales to the market and partly by giving some gold to members.
Ironically, this exercise had the effect of spreading gold much more widely through the international community than ever before, and gave many countries a new interest in the gold market. Few countries showed any inclination to sell the gold handed to them, and in the vast majority of cases it continues to sit on their books.