International Economic History Congress, Helsinki, … only, not for citation 2/30 Introduction In...

International Economic History Congress, Helsinki, 21-25 August2006

Session 63

International Monetary and Financial Cooperation in the 20th Century.Markets, Policies and Institutions.

Piet Clement, Bank for International Settlements1

Central bank cooperation at the Bank for International Settlements and the transitionfrom a state-led to a market-led financial system, 1950s-1970s

June 2006

Contact:[email protected]

Draft only, not to be quoted

JEL classification: E42, E58, F33, N10, N20

Keywords: central banks, monetary systems, international cooperation,Bretton Woods, gold, BIS, European Payments Union

1 The views expressed in this paper are those of the author and do not necessarily reflect the views of the BIS.The author wishes to thank Stephan Arthur, BIS, for drawing the graphs reproduced here.

mailto:[email protected]

Draft only, not for citation

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IntroductionIn July 1944, while war was raging through Europe and the Pacific, a new world monetaryorder was being created at the United Nations Bretton Woods Conference. It postulated theideal of an open and stable international economy, based on free currency convertibility atfixed – but adjustable – exchange rates pegged to gold (or, as it turned out, to the gold-backed US dollar). However, while current account transactions were to be fully liberalised,capital controls were to be condoned. This was to allow countries to pursue full-employmentand growth policies, shielded from the effects of the kind of external shocks and hot moneyflows that were believed to have wrecked the interwar international monetary system. TheInternational Monetary Fund (IMF) was created as an intra-governmental organisation tooversee the implementation of this global framework. Thus, in essence, governments(Treasuries) were put in charge, with the central banks largely relegated to a supporting roleof an essentially technical nature. In theory, no deep international cooperation seemedrequired: as long as the participants in the system abided by its basic rules any adjustmentwould occur largely automatically (i.e. the constraints imposed by the system would force anygiven country that ran up a temporary imbalance to take timely corrective action) or through aprescribed procedure (an IMF-approved currency re-alignment – usually a devaluation – incase of a so-called “fundamental disequilibrium”).

In practice, the Bretton Woods blueprint led to two sets of issues which almost naturallyincreased the involvement and role of central banks and turned them into something akin tothe official custodians of the postwar “state-led” monetary and financial system. One issuewas the actual implementation of the Bretton Woods system, which, at least in Europe,required a rules-based approach to achieving currency convertibility (European PaymentsUnion or EPU). The second issue was how to make the Bretton Woods system work underconditions that deviated considerably from what had been originally envisaged. This“deviation” was brought on mainly by the preponderant role of the US dollar and theincreasing reluctance to let the built-in adjustment mechanism run its course. Thesechanging conditions led to a more prominent role assigned to the central banks, first in theday-to-day crisis management to keep the system running more or less smoothly, and,eventually, in trying to forestall its demise.

Was the part played by the central banks in this episode of international monetary historyconsistent, or did the central banks, in the process, become obstacles to the inevitabletransition from a “state-led” to a “market-led” system? This question seems particularlyrelevant, as recent literature attaches considerable weight to the postwar preference forcapital controls as an obstacle to financial development in the western world.2 This papertries to answer this question by looking in some detail at the role of western European centralbanks in the European Payments Union (1950-58), in the joint support mounted in favour ofthe dollar-gold price (Gold Pool) and pound sterling (1961-68), and, finally, in the debate onthe growing impact of the eurocurrency markets and the reform of the international monetarysystem from the late 1960s until the irrevocable breakdown of Bretton Woods in 1971-3.

These questions will be looked at through the Bank for International Settlements (BIS) prism.The BIS in Basel, Switzerland – the “bank of central banks” – founded in 1930 to settleGerman reparations under the Young Plan, acted throughout the Bretton Woods period as aforum for central bankers from the industrialised West, fostering cooperation in the monetaryand financial field, first mostly within Europe and from the early 1960s in the broader contextof the Group of Ten (G10). Looking at international monetary cooperation exclusively fromthe BIS perspective – and thereby blending out other crucial players, first and foremost the

2 See: Raghuram G Rajan and Luigi Zingales, “The great reversals: the politics of financial development in thetwentieth century”, In Journal of Financial Economics, 69 (2003), pp. 38-9.


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Treasuries and the IMF – would of course be an impossible reduction of historical reality. Ofnecessity, the analysis of what went on at and around the BIS has to be seen in conjunctionwith domestic monetary policy-making in the G10 countries and with international monetarydiplomacy through the IMF. Nevertheless, studying the BIS does provide a uniqueperspective, as this was (and largely remains) the central banks’ homebase. The BISmeeting weekends, that took place almost every month bringing together the governors andsenior officials of the main central banks in the industrialised world, were unique occasionson which information was exchanged freely and discreetly, opinions were formed and bondsforged and, occasionally, common action was agreed. They were, importantly, purely centralbank occasions, with no participation or interference from the Treausries or any othergovernment officials. At the BIS we can expect to see central bankers being themselvesamong peers – “letting their hair down” – and thus we may hope to gain some additionalinsight in the role the G10 central bankers have played during the Bretton Woods era.

Central banks and political expediency: the European Payments UnionAt the end of the Second World War, the European economy lay in tatters. It was clear that itwould take considerable time and effort to implement the Bretton Woods blueprint. Tradewas severely reduced and highly regulated through bilateral trade and clearing agreements.Currency controls and exchange restrictions prevailed. The pound sterling’s aborted attemptto restore convertibility in July-August 1947 only served to underline the risks of a prematuremove to free exchanges. In each country, economic and financial priorities were very muchfocused on domestic reconstruction and full employment. It was only gradually, and in partprompted by US leadership, that the Europeans turned their minds to the international arenaand began preparing for freeing up trade and restoring current account convertibility.

In 1947, a first step was taken by the conclusion of the intra-European Agreement onMultilateral Monetary Compensation, aimed at restoring multilateral payments betweenEuropean economies. The BIS was designated as the agent to which the participatingcountries had to report their bilateral payment balances each month with the aim of offsettingdeficits against surpluses. However, it was only with the establishment of the EuropeanPayments Union (EPU) in September 1950, under the aegis of the OEEC, that a trulymultilateral system was inaugurated, in which countries settled their cumulative paymentsurpluses and deficits with the Union as a whole rather than with each individual countrybilaterally.3 Any country that ran a trade balance deficit with its EPU partners was required tosettle only part of it in gold or convertible dollars, the largest part could be converted intolonger-term credits. This allowed deficit countries to save on their scarce foreign exchangeand gold reserves. However, the total amount of credit available to any given country wascapped by a system of country quotas. Also, to place the burden of adjustment not tooheavily on the surplus countries, the deficit countries were committed to gradually liberalisetheir trade with all EPU partners. Thus, in exchange for accepting the temporaryimmobilisation of their surpluses through credits, the surplus countries avoided the risk oftrade discrimination by deficit countries seeking to reduce their deficits. Finally, it wasplanned that, as time went by and the European economies gained strength, the debtorcountries would increasingly settle their deficits vis-à-vis the EPU in gold and convertiblecurrencies, relying less and less on credits. This was indeed what happened and by 1958

3 The authoritative history of the EPU is: Kaplan, Jacob J. and Günther Schleiminger, The European PaymentsUnion, Financial Diplomacy in the 1950s, Oxford: Clarendon Press, 1989. See also: Eichengreen, Barry, “TheEuropean Payments Union: an efficient mechanism for rebuilding Europe’s trade?”, In Barry Eichengreen(ed.), Europe’s post-war recovery, Cambridge: Cambridge University Press, 1995.


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almost all deficits were settled 100% in gold or cash, whereupon the EPU was wound up andfree currency convertibility was restored.

The BIS was called upon to act as the agent for the EPU, assembling all bilateral tradebalances and calculating the net position of each EPU member on a monthly basis. In itscapacity as agent, the BIS reported to the EPU Managing Board, based at the OEEC inParis. Soon, a close network was woven between Paris and Basel, with BIS expertsattending the EPU meetings in Paris and the central bank Governors, on the occasion oftheir regular meetings in Basel, informally discussing the operations of the EPU.4

The EPU has been hailed as a success story that “ended in triumph”.5 For indeed, the EPUachieved its goals of restoring current account currency convertibility and liberalizing intra-European trade, and this against the backdrop of strong economic growth, near-fullemployment and relative price stability. In many respects, though, the EPU ran counter to thecentral banks’ economic philosophy. As Per Jacobsson, the BIS’s economic adviser, put it:“..the EPU ought to be replaced as soon as possible by a more international system, basedon free exchange markets and convertible currencies”.6 In this view, the EPU was anartificial, rules-based system that allowed individual countries the continuation of restrictivepractices such as import licensing and foreign exchange rationing in order to insulate theireconomies from the international (particularly US) markets. In Jacobsson’s opinion the EPUarrangement, and the BIS’s role in it, had the unwelcome effect of placing trade financing“too much in the hands of central banks” rather than leaving it to the financial markets atlarge. As a result of these reservations, the BIS had initially even been somewhat reluctant toaccept acting as Agent to the EPU.7

Nevertheless, most European central banks supported the EPU scheme, or at least acceptedit as an inevitability. There were certainly economic arguments to postpone convertibility andinstead opt for a government-controlled, multilateral payments scheme. In 1950, in manyEuropean countries, postwar economic reconstruction had not yet been fully concluded. Mostimportantly, almost everywhere international reserves, depleted by the war, remained veryweak in relation to imports and recurrent trade deficits. Nonetheless, it has been argued thattechnically “most of the obvious preconditions for the viability of current account convertibilityappear to have been met when European countries opted instead for the EuropeanPayments Union in 1950”.8 A glance at the EPU positions in 1950-51 of Europe’s four largesteconomies seems to support this view (figure 1). Italy’s trade with the rest of Europe waslargely in balance, while both France and the UK registered considerable surpluses. OnlyWest Germany suffered important deficits, that were actually much larger than its meagerinternational reserves. Nevertheless, for most countries the reserves-to-imports ratioremained very low (in 1951-52, UK reserves equalled less than three months’ worth ofimports), and concerns over the large trade deficits vis-à-vis the USA – causing the so-calleddollar gap – were genuine. Most importantly, though, the political case for the EPU was

4 Hubert Ansiaux of the National Bank of Belgium, who attended the meetings of the EPU Managing Board asChairman of the OEEC Intra-European Payments Committee, was at the same time alternate member of theBIS Board of Directors. Two of the nine initial voting members of the EPU Board - Carli for Italy and Calvet forFrance - would later also become members of the BIS Board of Directors.

5 Toniolo, Gianni, with the assistance of Piet Clement, Central Bank Cooperation at the Bank for InternationalSettlements, 1930-1973, New York-Cambridge: Cambridge University Press, 2005, p. 345.

6 Jacobsson, Per, Some monetary problems, International and national, Oxford: Oxford University Press, 1958, p.295.

7 Carli, Guido, Cinquant’anni di vita Italiana, Rome: Laterza, 1993, p. 93.8 Eichengreen, Barry, Reconstructing Europe’s trade and payments, Manchester: Manchester University Press,

1993, p. 62.


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overwhelming. The EPU allowed governments to focus on domestic policy goals, includingfull employment and welfare state policies, without having to worry too much about theexternal position. Importantly, though, the EPU agreement also entailed the obligation for itsmembers to gradually liberalize their external trade. Indeed, the USA had made this aprecondition for putting up the EPU’s starting capital of $350 million. This assured the centralbanks that in the medium-term free trade based on freely convertible currencies remainedthe stated goal. Moreover, the potential distortions in terms of trade, competitiveness andprices that might have been expected from a controlled payments union scheme, seem tohave remained largely in check.9

Table 1 – The Big Four: EPU positions, 1950-58Net surpluses or deficits (-) vis-à-vis EPU: annual cumulative figures at 30 June of each year (exceptfor 1950: cumulative figure at 31 December 1950)In millions US dollars, and as a percentage of GDP and of monetary reserves

1950 1951 1952 1953 1954 1955 1956 1957 1958

France EPU surpl./def.

In % of GDP

In % of reserves

214

0.73

25.6

196

0.55

21.8

-605

-1.44

-62.6

-425

-0.97

-40.4

-158

-0.34

-12.1

109

0.22

5.56

-183

-0.33

-10.2

-975

-1.69

-129

-588

-0.99

-61.9

Germany EPU surpl./def.

In % of GDP

In % of reserves

-369

-1.58

-166

-285

-1.00

-65.6

584

1.80

84.5

266

0.76

21.7

530

1.44

26.5

310

0.72

13.1

600

1.27

15.1

1,357

2.64

27.8

854

1.55

15.2

Italy EPU surpl./def.

In % of GDP

In % of reserves

-31

-0.23

-5.4

-30

-0.19

-4.8

197

1.09

30.0

-221

-1.10

-27.8

-211

-0.99

-22.8

-228

-0.97

-20.1

-130

-0.51

-10.3

-99

-0.36

-6.6

216

0.74

9.6

United Kingdom EPU surpl./def.

In % of GDP

In % of reserves

476

1.49

13.4

608

1.72

21.4

-1484

-3.84

-64.0

355

0.85

11.8

90

0.20

2.8

126

0.27

4.8

-337

-0.66

-10.7

-236

-0.43

-7.1

-328

-0.58

-8.0Sources: country net positions vis-à-vis EPU taken from BIS, Reports made to the EPU Managing Board, 1950-58, In BISA, 7.14 – European Payments Union; Reserves = annual total of gold and short-term dollar holdings atyear-end (as of 1956 includes available credit facilities in IMF), compiled from BIS, Twenty-first to Twenty-ninthAnnual Report, Basel, 1951 to 1959; GDP figures taken from B R Mitchell, International Historical Statistics,Europe 1750-2000, Palgrave Macmillan: London, 2003 (all figures at current prices, converted into US$ usingofficial exchange rates, see: Statistische Beihefte zu den Monatsberichten der Deutschen Bundesbank, Reihe 5:Die Währungen der Welt, Frankfurt am Main, February 1974, pp. 38-39).

9 Eichengreen, Barry, “The European Payments Union: an efficient mechanism for rebuilding Europe’s trade?”, InB. Eichengreen (ed.), Europe’s post-war recovery, Cambridge: Cambridge University Press, 1995, pp. 187-91.


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Central banks by and large followed the political lead in the creation of the EPU. They wereclosely involved in the running of the system (not least through the BIS) and endeavoured toapply its rules as strictly as possible, hoping to render it superfluous within a reasonabletime-frame. In doing so, central bankers on occasion found themselves at loggerheads withtheir political masters. A classic case is that of the German central bank (Bank deutscherLänder), when in October 1950, in the midst of a severe balance-of-payments crisis, itpushed through an increase of the discount rate from 4 to 6% against the opposition ofChancelor Adenauer.10 This was a shot across the bows, a warning that the primacy ofdomestic policy goals should not go too far at the expense of the external position. At thesame time, the central bank spoke out clearly against any attempt to reverse the trendtowards trade liberalization.

Discreetly, more than one central bank worked behind the scenes to bring about thetermination of the EPU at the earliest possible moment. None was more active than the Bankof England. It spearheaded, together with the UK Treasury, a plan to introduce sterlingconvertibility as early as 1952, based on a floating exchange rate (code-name ROBOT). TheChurchill cabinet soon shelved the proposal as it was held to be too risky given the UK’sprecarious reserves position and its potential impact on domestic growth. This did not stopBank of England Governor Cobbold from pressing the Chancellor of the Exchequer time andagain to speed up the move toward convertibility. His tenacity was partly dictated by theBank of England’s desire to restore the prestige of sterling and allow the London City toresume its leading role in the foreign exchange markets.11 Other central bankers too did nottire of pleading the case for free convertibility. Governor Carli of the Bank of Italy warned thatconvertibility with continued import restrictions would be a “caricature”. Rossy of the SwissNational Bank and Ansiaux of the National Bank of Belgium argued that convertibility shouldnot remain restricted to current account transactions, but would logically have to be extendedto capital movements as well.12 In the discussion on the termination of the EPU, the BIS putin its penny’s worth as well. In June 1954, the BIS Annual Report concluded:..it is now becoming clearly understood that the solution of the world’s monetary problems is to befound not in the building-up of a number of separate currency systems but in action to enableinternational settlements to take place freely throughout the largest possible area – in other words inthe restoration of currency convertibility.13

By the mid-1950s, the necessary conditions to move to current account convertibility seemedto have been met in nearly all EPU member states. Between 1950 and 1955, their officialgold and short-term dollar reserves had risen by over 50%. While the UK had actuallysuffered a decline in its reserves, other countries, such as France, Italy and the Netherlands,had roughly doubled them. West Germany had increased its reserves ten-fold, from anadmittedly low starting point. Intra-European trade had already been freed from exchangerestrictions, import quota and other discriminatory measures to a very large extent. Somecountries had even gone a long way in liberalizing their trade with the dollar area (byNovember 1954, the Benelux countries had freed 86% of their dollar imports, Germany hadfreed 79% of imports of manufactured goods from the dollar area)14. Notwithstanding these

10 Holtfrerich, C.-L., “Monetary Policy under Fixed Exchange Rates (1948-1970)”, In Fifty Years of the DeutscheMark, Central Bank and the Currency in Germany since 1948, Oxford: Oxford University Press, 1999, pp. 333-41.

11 See for instance: Schenk, Catherine R., Britain and the Sterling Area, From devaluation to convertibility in the1950s, London-New York: Routledge, 1994, pp. 124-25.

12 Kaplan and Schleiminger (1989), pp. 186-7.13 Bank for International Settlements, Twenty-fourth Annual Report, Basel, 14 June 1954, p. 32.14 Kaplan and Schleiminger (1989), p. 205.


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encouraging developments, the lifespan of the EPU was extended with a few more years.The EPU was officially wound up on 29 December 1958, after which its member states’currencies became fully convertible for current account purposes.

Table 2 – Reserves Position and GDP: selected EPU countries, 1950-58In millions US dollars, current prices

1950 1951 1952 1953 1954 1955 1956 1957 1958

BelgiumGDP/GNP

Reserves

7,080

848

8,160

897

8,580

1,035

8,660

1,098

8,560

1,044

9,140

1,201

9,740

1,224

10,340

1,245

10,420

1,617

FranceGDP/GNP

Reserves

29,140

834

35,710

899

42,000

967

43,710

1,052

46,290

1,306

49,430

1,957

55,140

1,798

57,860

758

59,290

950

GermanyGDP/GNP

Reserves

23,290

222

28,330

434

32,380

691

35,000

1,225

37,620

1,999

43,100

2,374

47,380

3,979

51,430

4,877

55,000

5,615

ItalyGDP/GNP

Reserves

13,500

573

15,600

635

18,100

655

20,000

795

21,300

925

23,400

1,137

25,400

1,264

27,200

1,496

29,300

2,260

Netherl.GDP/GNP

Reserves

5,105

559

5,660

524

5,900

815

6,260

1,055

7,000

1,118

7,800

1,100

8,500

1,248

9,240

1,228

9,320

1,679

SwedenGDP/GNP

Reserves

6,205

205

7,650

223

8,350

275

8,580

335

9,140

406

9,820

429

10,670

588

11,400

570

12,040

596

Switzerl.GDP/GNP

Reserves

4,550

2,023

4,940

1,973

5,200

2,053

5,420

2,133

5,740

2,185

6,150

2,354

6,600

1,785

6,980

1,885

7,140

2,053

UKGDP/GNP

Reserves

31,920

3,557

35,280

2,842

38,640

2,318

41,720

3,009

43,960

3,190

47,320

2,600

51,240

3,143

54,320

3,340

56,560

4,087Reserves = annual total of gold and short-term US dollar holdings at year-end. As of 1956, includes IMFpositions. BIS, Twenty-first to Twenty-ninth Annual Report, Basel, 1951 to 1959.GDP/GNP = B R Mitchell (2003) (all figures at current prices, converted into US$ using official exchange rates,see: Statistische Beihefte (1974).


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The reasons for this delay were partly of a political nature, but basically boiled down to thedeterioration in the external position of both France and the UK.15 For obvious reasons,deficit countries, such as France, and around the middle of the 1950s also Italy, wanted topostpone the break-up of the EPU in order to have more time to redress their situation. Thesurplus countries, first and foremost Germany and the Benelux, basically agreed as theypreferred to wait until a collective move towards convertibility would be possible. A splitbetween convertible and inconvertible currencies in western Europe would likely lead to arelapse into trade and foreign exchange restrictions, thereby jeopardizing everything that hadbeen achieved so far. The UK, finally, reserved the right to determine for itself when the timewould be ripe to make sterling convertible. In Europe it was feared that the UK might make apremature move on its own, relying on a floating sterling rate and allowing it to depreciate,which might undermine the other countries’ stabilisation efforts. Notwithstanding thepostponement of “convertibility day”, the creditor countries, with the strong support of thecentral banks, succeeded in “hardening” the EPU rules considerably after 1955. The EPUcountry quotas were increased, thereby reducing the likelihood of quota exhaustion. At thesame time, monthly surpluses and deficits had henceforth to be settled 75% in gold orforeign exchange (dollars), and only 25% could be converted into credits (as opposed to,respectively, 40 and 60% in the initial agreement). Thus, after 1955 the EPU was in any caseincreasingly approaching de facto convertibility.

The G10 central banks to the rescue of the Bretton Woods systemWith the introduction of current account convertibility on 1 January 1959, the Bretton Woodssystem was fully operational in the western world. However, it soon became clear thatunderlying imbalances existed, which over time might threaten to undermine the entireedifice. The story has been recounted many times. Michael Bordo has provided a thoroughreview of the three, closely interconnected problems facing the Bretton Woods system:liquidity, adjustment and confidence.16 These problems were in many respects specific toBretton Woods, because the system encouraged countries to pursue independent domesticgrowth policies (shielded by persistent capital controls), and because the system developedinto a de facto gold/dollar exchange standard (thus placing a high premium on gold and onthe stability of the dollar as the system’s main reserve currency).

The liquidity problemThe liquidity issue refers to the widespread concerns in the late 1950s and early 1960s thatthe sources of world liquidity were insufficient to sustain the continued expansion of outputand trade. Monetary gold stocks grew only slowly, especially as the fixed gold price mademining increasingly less lucrative. The resources available through the IMF werecomparatively low, even though member quotas had been raised across the board in 1959.The supply of US dollars, the world’s main reserve currency, provided a third source ofliquidity, but one that was utterly dependent on the US balance of payments. Robert Triffinwas one of the first to point to the dilemma this posed to the international monetary system.17

On the one hand, the large US deficits registered since 1957 provided the internationalmonetary system with the liquidity necessary to increase other countries’ dollar reserves andsupport their expansionary policies. However, it was believed that sustained US deficits

15 For a detailed account: Kaplan and Schleiminger (1989), pp. 229-321.16 Bordo, Michael D., “The Bretton Woods International Monetary System: A Historical Overview”, In Michael D.

Bordo and Barry Eichengreen (eds.), A Retrospective on the Bretton Woods System, Chicago-London: TheUniversity of Chicago Press, 1993.

17 See: Triffin, Robert, Gold and the Dollar Crisis, New Haven & London, Yale University Press, 1960.


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would in the end cause what has become known as the Triffin dilemma. Either the USbalance of payments would remain in deficit with the result that US dollar liabilities wouldcontinue to grow at a much faster pace than world gold stocks, thereby causing the goldcover ratio of the dollar to decline and thus undermining confidence in the dollar’s goldconvertibility. This process would prompt foreign central banks, anticipating the crisis, toconvert their dollar holdings into gold, thus in fact sterilising liquidity and speeding up thedrain on the US gold reserves. Inevitably, the gold dollar standard would collapse.Alternatively, the USA might adopt restrictive economic policies to slash its deficits, but bydoing this it would deprive the world of the expansion of international reserves required for acontinued growth in trade and output, as gold stocks alone could not possibly fulfil this role.In Triffin’s analysis, in either scenario the world monetary system faced a severe shortage ofinternational reserves and risked a deflationary crisis analogous to the disastrous 1931meltdown. The perceived threat of a liquidity crunch led to intensive international negotiationson a reform of the monetary system, eventually culminating in the creation of the IMF SpecialDrawing Rights (SDRs) in 1967-69. These negotations took place largely in the context of theIMF, and more specifically of the Group of Ten (G10). The G10 was the group of leadingindustrial countries, who were behind the 1961 General Arrangements to Borrow (GAB), anagreement to provide, in case of need, additional funds to the IMF beyond the country quotasystem.18 Sooin, the G10 also established itself as the main organisational grouping withinthe BIS framework: the central banks of the European G10 members were alreadyrepresented on the BIS Board, and from the early 1960s central bankers from the USA,Canada and Japan increasingly participated in expert meetings in Basel.

Adjustment – Sterling support in the 1960sThe adjustment problem referred to the medium-term restoration of equilibrium betweensurplus and deficit countries and how this was to be achieved. The persistence of highexternal deficits or surpluses was likely to undermine the longer-term stability of the system.When adjustment did not occur automatically (eg through gold out- and inflows as under theclassical Gold Standard), it had to be achieved either through discretionary monetary andfiscal policy, or through changes in the exchange rate. The Bretton Woods agreement didprovide for exchange rate changes in case of a “fundamental disequilibrium”, but politiciansand central bankers alike grew increasingly reluctant to resort to them. After thecomprehensive round of currency devaluations in 1949, monetary policymakers came to fearthat any further exchange rate adjustment might prove a slippery slope toward prolongedexchange rate instability. Writing in 1957, Per Jacobsson, who had moved on from the BIS tobecome Managing Director of the IMF, spoke out against devaluations and floating rates:European (..) experiences lead to the conclusion that a policy of generous credit expansion followedby devaluations at various intervals will not be conducive to the sustained development of a country’seconomy. Circumstances do, of course, occur when a devaluation becomes necessary, but barringthese exceptions, most important in 1949, Europe has opted for stable exchange rates. Europeansbelieve that a fluctuating rate – a floating currency – will be a falling currency, and that they want toavoid.19

Re-valuations too were frowned upon: it was only with the greatest reluctance thatBundesbank President Blessing succumbed to government pressure, agreeing to revalue theD-Mark with a rather modest 5% in March 1961.

18 James, Harold, International Monetary Cooperation Since Bretton Woods, Washington and New York-Oxford:IMF and Oxford University Press, 1996, pp. 161-65. The G10 countries were: Belgium, Canada, France,Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the United States. Switzerlandbecame an associated member soon afterward.

19 Per Jacobsson, “Europe’s Postwar Monetary Experience”, In IMF, International Monetary Problems 1957-1963, Selected Speeches of Per Jacobsson, Washington: International Monetary Fund, 1964, p. 7.


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With regard to adjustment, the obvious political question was: who, between the surplus anddeficit countries, was to bear the heaviest burden? In the early 1960s, a large consensusexisted, backed up by strong American leadership, to tackle this problem in a cooperativespirit. If automatic adjustment did not take place because of capital controls, and if exchangerate changes were not really an option, than, surely, adjustment would have to be achievedthrough a mix of domestic monetary and fiscal policies shored up, where necessary, byinternational credit. However, throughout the 1960s, the system’s two main deficit countries,the USA and the UK, proved to be rather reluctant to implement stringent domestic policymeasures, as they did not want to jeopardize economic growth and full employment. As aresult, international credit played an increasingly important role in tackling the adjustmentproblem. Much of this credit had to be provided by the central bank community. Notsurprisingly, as time went by, this process exposed the growing divergences between centralbanks across the Atlantic and between central banks and governments with regard to theappropriate level of management of the international monetary system. This was nowhereclearer than in the case of pound sterling.

Throughout the 1960s, sterling fell victim to recurrent crises, until devaluation became aninevitability in November 1967. This inherent weakness was mainly caused by structuralfactors: relatively low output and productivity growth, a weak balance of payments situationcoupled to a weak reserves position, and the so-called sterling balances overhang (largesterling holdings outside the UK that might be presented for exchange into gold or dollars atany time thereby threatening sterling’s stability). At the same time, sterling fulfilled the role ofa (junior) reserve currency in the international monetary system. In the early 1960s roughlyone third of international trade was still being financed in sterling. For this reason, the UK andUS authorities were adamant to defend sterling’s parity at all cost. It was widely held that ifsterling devalued, the US dollar might be the next victim, and the bottom might fall out of thesystem.20 The first wake-up call came in March 1961, when foreign exchange marketsreacted badly to the D-Mark revaluation. In the anticipation of further exchange raterealignments, market pressure on the pound sterling mounted rapidly. The European centralbanks, gathered for their regular meeting in Basel, reacted by issuing a strong statementexcluding any further currency adjustments and by arranging a support package for the Bankof England. Under this “Basel Agreement”, over $900 million was made available over thenext three months to defend sterling’s $2.80 parity.21 The Continental central bank Governorsunquestioningly participated in this show of solidarity. Governor Cobbold of the Bank ofEngland took it as proof that all involved recognised “..that we are all in the same boat, thatthreats in either direction to any currency are harmful to all of us, and that the dollar/sterlingstability is the key-note of the whole thing”.22 This rather optimistic assessment may haveheld for the early 1960s, when most participants felt they were benefiting in roughly equalmeasure from the stability offered by the Bretton Woods system. This, however, was tochange over the years to come.

Further sterling crises followed with depressing regularity. In early 1963, after De Gaulle’srejection of the UK’s application to join the EEC, sterling once again came under pressure.$250 million in support was provided by the central banks of France, Germany, Italy andSwitzerland. In September 1964, a new balance of payments crisis was countered with a $1billion package put together by the Americans, Canadians and six European central banks.However, as new credit lines were opened, the question arose whether they were having thedesired effect. In 1963, a procedure had been agreed by which bilateral assistance offered

20 Gilbert, M., Quest for World Monetary Order, New York: John Wiley & Sons, 1980, p. 135.21 “Known assistance to the United Kingdom, 1961-62”, In BISA, 7.18(21) – Papers Mayer, f. Assistance to UK.22 Cameron Cobbold to Per Jacobsson, 17 March 1961, In BEA, OV 44/34 – Sterling Policy, 1961.


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by one central bank to another in the context of a joint support operation had to be reportedto the BIS. In that way, all participants in the operation were kept fully in the picture abouteach central bank’s contribution and the drawings and reimbursements made by theborrower, thus avoiding information asymmetry that might have been disadvantageous to thecreditors. In 1964, this practice was expanded and improved upon through the introduction of“multilateral surveillance” among the G10 countries, ie the sharing and joint monitoring ofconfidential statistical information on how each member country financed its external accountimbalances.23 Notwithstanding improved information and transparency, it was clear that theshort-term emergency credits granted by the central banks did not give them with any realleverage as regards the domestic policies pursued by the beneficiaries. Already in 1964, theBIS conceded that “..cooperation so far has been more successful in providing liquidity thanin securing basic adjustments in both deficit and surplus countries”.24

The sterling crisis of November 1964, immediately following the Labour party’s return topower, proved something of a turning point. Having inherited the UK’s largest external deficiton record, the Wilson cabinet nevertheless refused to contemplate devaluation. Instead, apackage of half-hearted administrative controls and fiscal measures was announced. Marketpressure on the pound continued unabated. At their regular meeting at the BIS on 8November, continental central bank Governors urged Lord Cromer, Governor of the Bank ofEngland, to raise the Bank rate. This, however, was a Treasury prerogative, and when, a fewdays later, Cromer formally asked the Chancellor to raise Bank rate by 1%, he wasrebuffed.25 As the Bank of England’s reserve losses mounted, the Treasury finally yieldedand on 23 November Bank rate was increased from 5 to 7%. However, what might havebeen taken as a sign of resolve if implemented only two weeks earlier, now failed to stem thetide. The Wilson government began to contemplate possible alternative action – short ofdevaluation or drastic deflation – such as a tightening of exchange controls or theintroduction of a floating exchange rate.

Then, on the evening of Wednesday 25 November 1964, at the end of another day of heavyreserve losses, Governor Cromer informed the Chancellor that at short notice a $3 billionstand-by credit in support of sterling had been arranged with a group of ten central banks,the US authorities and the BIS. On receiving the news, “ministers were jubilant” and saw noneed to give further consideration to the alternative lines of action contemplated earlier. The$3 billion credit indeed succeeded in calming the markets, although a steady drain on the UKreserves continued over the following months.

It was no accident that the Bank of England had turned to the central bank community andthe BIS to arrange this credit. Based on previous experience, the Bank of England and theUK Treasury had come to the conclusion that to meet a possible speculative attack onsterling “the balance of argument was distinctly in favour of looking to Basel assistance first,rather than going straight to the Fund”, not least for reasons of speed and unconditionality.26

23 The multilateral surveillance exercise was, however, disliked by the Americans, who went along with it mainly toplacate the Europeans. Gavin, F. J., Gold, Dollars and Power, The Politics of International MonetaryRelations, 1958-1971, Chapel Hill: University of North Carolina Press, 2004, pp. 118ff. Milton Gilbert,economic adviser at the BIS comented sarcastically that “the ‘multilateral’ part of the exercise has proved tobe much easier than the ‘surveillance’”. Gilbert, M., “Problems of the international monetary system”, 14September 1964, In BISA, HS 381 – mimeo, p. 3.

24 BIS, “Group of Ten: short-term credit arrangements among central banks and monetary authorities”, 22 January1964, In NARA, RG 56 – US Treasury / OASIA, 56-75-101, b. 131.

25 Alec Cairncross, The Wilson Years, A Treasury Diary 1964-1969, London: The Historians’ Press, 1997, p. 15. Itwas argued that raising the rate just after the budget had been announced would give the impression of panic.

26 Note S. Goldman to W. Armstrong, 8 April 1964, UKNA, T 318/93 – UK balance of payments: short-termassistance to sterling under the Basel arrangements, 1962-65.


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The unconditionality of the credit was indeed crucial. As prime minister Wilson stressed whenhe informed his ministers about the $3 billion being made available, it came “withoutstrings”.27 Asking the central banks to put $3 billion on the table without making any formalcommitments in return was indeed a piece of bravado. Maurice Parsons of the Bank ofEngland wondered how the Old Lady could invite support from the other central banks with aclear conscience, as they were “in effect pledging the good behaviour of the government”.28

Table 3 – Sterling in decline: UK reserves, sterling balances and international supportorganised through or with the BIS, 1961-70

In millions of US dollars, current prices

UKreserves

Sterlingbalances

International support via/with BIS

June 1961Dec 1961

June 1962Dec 1962

June 1963Dec 1963

June 1964Dec 1964

June 1965Dec 1965

June 1966Dec 1966

June 1967Dec 1967

June 1968Dec 1968

June 1969Dec 1969

June 1970Dec 1970

June 1971

2,772

3,318

3,433

2,806

2,713

2,657

2,705

2,316

2,792

3,004

3,276

3,100

2,834

2,695

2,683

2,422

2,443

2,527

2,791

2,827

3,619

10,349

9,929

9,845

10,816

10,850

11,486

12,228

11,592

11,057

11,407

12,001

11,166

11,670

8,856

8,102

8,112

8,599

8,942

10,049

10,128

11,479

904 (Basel Agreement)

250 (package 29 March 1963)

1,000 (package 21 September 1964)

3,000 (package 25 November 1964)

925 (package 14 September 1965)

1,000 (first Sterling Group Arrangement)

1,700 (package 13 September 1966)

1,750 (packages 15 and 22 November 1967)

1,075 (package 21 March 1968)

2,000 (second Sterling Group Arrangement)

Sources, see: Toniolo, G. (2005), pp. 396-7.

27 Alec Cairncross, The Wilson Years, A Treasury Diary 1964-1969, London: The Historians’ Press, 1997, p. 18.28 Alec Cairncross, The Wilson Years, A Treasury Diary 1964-1969, London: The Historians’ Press, 1997, p. 19.


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Things went further than that. There was an aborted attempt to shift some of theresponsibility for the United Kingdom’s necessary adjustment onto the creditors. At the BISGovernors’ meeting on the weekend of 13-14 December 1964, the sterling crisis was themain topic of discussion. President Hayes of the New York Fed pressed his Europeancolleagues for a public statement endorsing the UK government’s policy in order to furthershore up confidence in sterling. The Europeans were not amused. Providing unconditionalcredit to a fellow central bank was one thing, providing unconditional political backing to agovernment on which they had no direct influence was clearly of a different order. TheEuropean central bankers refused to go along with this proposal. Quite on the contrary, theGovernors made it clear that in their eyes the UK government’s policies were falling wellshort of what was required. They impressed upon their British colleague the need for aserious incomes policy. Holtrop, President of the Netherlands Bank and of the BIS, speakingat the traditional G10 Governors Sunday evening dinner in Basel, bluntly favoured a sterlingdevaluation of about 10% in order to redress the situation.29 This went directly against theofficial UK position – strongly backed by the Americans – which had declared devaluation“unmentionable”. It was a measure of the Europeans’ frustration over their lack of leveragewith UK and US policymakers, and of their lack of trust in the eventual success of theadopted policy course, that the Committee of Governors of the EEC Member States – onwhich only France, West Germany, Italy and the Benelux countries were represented – soonbegan discreet contingency planning in case the pound would be devalued in spite of thesupport already given.30

The 1964-65 sterling crisis marked the beginning of a growing divergence in views betweenthe Anglosaxon and continental central banks. They remained united in their desire to avoida currency realignment, but whereas in particular the Americans continued to canvass forliberal credit facilities to help the UK weather the storm, the Europeans increasingly grewwary and emphasised the need for more restrictive monetary and fiscal policies. InSeptember 1965, they flatly refused to join the New York Fed and Bank of England in aconcerted market intervention aimed at punishing those speculating against sterling.31 Asimultaneous Bank of England attempt to obtain from the G10 central banks andgovernments a strong joint declaration in support of UK policies was likewise rejected.32 MostEuropean central banks did, however, participate in another sterling support package,totalling $925 million, later that month. In a first defection, the Bank of France declinedparticipation.

By the mid-1960s, most central bankers still believed that a sterling devaluation might spelldisaster for the entire international monetary system33, but loosing faith in repeatedemergency measures they began to look out for a more permanent solution to one of the

29 A. Hayes, “Notes on December BIS meeting”, December 1964, NARA, RG 56 – US Treasury / OASIA, 69A-7584, box 26.

30 “Procès-verbal de la cinquième séance du Comité des Gouverneurs des Banques Centrales des Etatsmembres de la Communauté Economique Européenne tenue à Bâle le 8 février 1965”, ECBA – Committee ofGovernors. It was agreed that the EEC countries would do nothing if the pound were to devalue by less than10%, that a 10-15% devaluation would be considered a danger zone, and that anything above 15% wouldmean that the EEC countries would have to follow.

31 Coombs, Charles A., The Arena of International Finance, New York: John Wiley & Sons, 1976, pp. 107-30.32 Roy Bridge of the Bank of England had been hoping for a joint declaration comparable to the 1936 Tripartite

Agreement, but nothing came of it. See: Bridge to O’Brien, 2 September 1965, In BEA, OV 44/125 – SterlingSupport Operation, The Initiative 1965.

33 See: Coombs, Charles, “Report on special BIS meeting, 5 September 1965”, In NARA, RG 56 – US Treasury /OASIA, 69-A-7584, b. 26. President Schwegler of the Swiss National Bank, for instance, referred to a possiblesterling devaluation as “..a disaster of the first magnitude”.


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underlying problems, namely that of the sterling balances overhang. These efforts led to twoso-called Sterling Group Arrangements concluded at the BIS. The first one, which ran fromJune 1966 until January 1971, provided a $1 billion medium-term credit to offset any futurereduction in UK reserves caused directly by a liquidation of sterling balances held primarilyby non-sterling area countries. The second one, in place from September 1968 untilSeptember 1973, was in effect a $2 billion long-term “safety net” in order to offset reservelosses incurred through the conversion of official sterling balances held mainly by the 40-oddsterling area countries. In essence, the Sterling Group Arrangements, negotiated at the BIS,helped the Bank of England organise an orderly retreat from sterling’s role as an internationalreserve currency. Significantly, the Bank of France was unable to participate in the SecondGroup Arrangement as “in the French Government’s opinion the problem at issue was of agovernmental nature, [and therefore] ..the Bank of France was not allowed to enter into acommitment in this regard”.34

In the meantime, the sterling malaise had deepened once more when a new balance ofpayments and confidence crisis developed over the summer of 1966. It took all thepersuasive powers of the US and UK authorities to put together yet another supportpackage, and once again the French remained on the sidelines. The end of the road wasreached in 1967.35 Over summer, the UK trade deficit again shifted into deficit and reservelosses accelerated. By early November the game was up. The UK Treasury’s hope that anew, large support package might be organised proved illusory. The European central banksreferred the Bank of England to the IMF, and this time even the US authorities saw no wayout. On 15 November the Labour government decided to devalue the pound by 14.3% from$2.80 to $2.40. The “disastrous blow” to the international monetary system, predicted by somany, was maybe not immediate apparent, but soon considerable pressure shifted to thedollar via the London gold market. Sterling was not out of the doldrums either. Additionalcentral bank support to the tune of $1.5 billion was organised to provide the Bank of Englandwith new ammunition immediately after devaluation. A further package was granted in March1968.

The confidence problem – the Gold Pool, 1961-68Finally, we must turn to the third problem threatening the longer-term viability of the BrettonWoods arrangement, that of confidence. As noted earlier, the Bretton Woods gold exchangestandard had in fact developed into a gold-dollar standard. As a result, the credibility of thesystem increasingly hinged on the credibility of the fixed dollar-gold parity of $35 per ounce,or, in other words, the continued commitment of the US to convert dollars into gold at thisfixed price (a commitment that was in practice only valid for US dollars held by monetaryauthorities). From the late 1950s, developments in the world economy cast some doubt onthe long-term credibility of this commitment. First there was the slow growth in world goldstocks, insufficient to keep pace with the monetary expansion required by the rapid growth inglobal output and trade. Secondly, growing US balance of payments deficits had theircounterpart in rising US dollar holdings in the central bank coffers of America’s main tradingpartners. The steady decline in US monetary gold reserves raised the spectre of what mighthappen if more and more of these dollar balances were to be presented for conversion intogold. This was the same problem identified earlier as the Triffin dilemma: in the BrettonWoods system concerns over world liquidity and over the credibility of the dollar-gold paritywere two sides of the same coin.

34 Declaration Governor Brunet in “Minutes of the meeting of central bank Governors at the BIS on 8 September1968, In BISA, 7.18(12) – Papers Dealtry, b. DEA 15, f. Sterling balances, 1968-71.

35 For a detailed analysis see: Cairncross, Alec and Barry Eichengreen, Sterling in Decline, The Devaluations of1931, 1949 and 1967, Oxford: Basil Blackwell, 1983.


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In 1954, a free gold market had reopened in London, which gained in importance with therestoration of convertibility from 1959. The US monetary authorities were concerned that incase the gold price on the free market would become detached from the official gold price,this might act as an incentive to other monetary authorities to convert their dollar holdingsinto gold, thereby adding further pressure on the gold price and further depleting the US goldstock. A first foretaste of what might be in store came in October 1960, when, presumably onspeculation that John F Kennedy would win the US Presidential elections and introduceinflationary policies, the London gold price temporarily shot up to just over $40 per ounce. Itwas brought down again by sustained gold sales by the Bank of England. On this occasion,the Bank of England had only been able to act after it had obtained a formal commitmentfrom the US Treasury to replenish its gold stock at the end of the operation.

In a message on the US balance of payments crisis, issued shortly after taking office inFebruary 1961, President Kennedy reaffirmed his administration’s commitment to the $35per ounce gold price.36 In the following years, the US monetary authorities would displaygreat activism in devising new ploys and ad hoc arrangements to convince the markets of thelasting credibility of this commitment and to protect the US gold stock. However, they couldnot do this on their own. One of the very first initiatives of this kind led in late 1961 to a ratherinformal arrangement with a number of European central banks, in which the BIS becameclosely involved, the so-called Gold Pool.

The idea was simple enough. In order to counteract pressure on the official gold price in theLondon market, the central banks of the main industrialised countries were to act jointly onthat market. The idea had floated around ever since the October 1960 episode, but it was USSecretary of the Treasury Dillon who first raised it officially with the British Chancellor on 21September 1961, on the occasion of the IMF autumn meeting in Vienna.37 The USgovernment was particularly concerned that the international tensions provoked by thebuilding of the Berlin Wall in August of that year would add to the upward pressure on thegold price. Washington and London agreed that the other industrialised countries ought toshare in the burden of keeping the Bretton Woods system intact, as the ensuing stability wasobviously also to their benefit. The Europeans were certainly not averse to this. As a matterof fact, on 22 September 1961, Bundesbank President Blessing had already proposed tomake gold available to the Bank of England for interventions in the London market. As theBundesbank held a large proportion of dollars in its reserves, it was clearly in WestGermany’s best interest to prevent the dollar price of gold from changing.

Discussions on the Gold Pool scheme were initially conducted at the governmental level.Dillon left it to his Undersecretary for Monetary Affairs, Robert Roosa, to first negotiate withthe British and then reach an agreement with the other Europeans. The UK had to beconvinced that the special position of sterling as a reserve currency would be taken intoaccount. In particular it was agreed that British participation in the Gold Pool should notpreclude the Bank of England from earmarking gold with the US Treasury in order to protectsterling’s exchange position. Concerns that the US proposal might be a first step in a broaderstrategy to limit and eventually close down the free gold market in London were allayed. Mostimportantly, the British argued that if at any point in future the Gold Pool scheme would haveto be abandoned or the UK would be forced to leave the scheme, the psychological effectswould be detrimental and no doubt lead to a run on gold. At the same time, though, the UKauthorities recognised that something had to be done and decided to agree to the American

36 A copy of Kennedy’s statement, dated 11 February 1961, in BISA, 7.1(3) - BIS Board of Directors, b. 14.37 Rickett, DHF, “Note for the record: meeting of the Chancellor with Mr Dillon and Mr Roosa at the British

Embassy in Vienna on 21 September 1961”, In UKNA, T 312/312 - London Gold Market, Schemes for co-ordinated purchases and sales of gold by central banks, 1961-62.


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proposal, if only because they were convinced that the Europeans would do the same andthey could ill afford to be left outside such a scheme.38 Then the Europeans had to bebrought on board. Rather than going through the official channels and engaging in laboriousbilateral negotiations, the Americans were easily convinced by the British to turn to Basel topresent the scheme to the Governors gathered there for the monthly BIS Board meeting. It iseasy to see what attracted the Americans to Basel: combined the USA and the central banksrepresented on the BIS Board controled roughly 80% of the world monetary gold reserves.

At the BIS meeting weekend of 11-12 November 1961, Alfred Hayes and Charles Coombs ofthe Federal Reserve Bank of New York first discussed the Gold Pool proposal with theGovernors individually. Then there was a meeting of all Governors, which agreed to give thescheme a trial run of one month. The contributions of the individual central banks were fixedat $35 million for West Germany, $25 million each for France, Italy and the UK, $10 millionfor Belgium and the Netherlands and $5 million for Switzerland. The USA would match thecombined contributions of the others, so that a total of $270 million would be available forinterventions in the London gold market. The actual operations would be carried out onbehalf of the Gold Pool by the Bank of England. They would be monitored on the occasion of

38 “The broad position is that none of us can be sure about what the full implications may be later on if we agree toparticipate in the gold pool scheme. In short, we cannot be certain that we shall know what we may be lettingourselves in for. But despite this and despite the special position of sterling as a reserve currency based ongold, I am clear (and so is the Governor) that we cannot take the line that we must stand aside from thescheme if it commands general acceptance elsewhere.” Sir Lee to Mr Hubback for the Chancellor,“US/European Gold Pool”, 7 November 1961, In UKNA, T 312/312 - London Gold Market.


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the BIS Board meetings and the participants would reimburse the Bank of England at the endof each month. No publicity would be given to the scheme.

In fact, not all Governors present were enthusiastic about the Gold Pool initiative. While theyall shared a clear interest in the maintenance of dollar stability, some surely regretted losingtheir operational freedom in the gold markets, and felt they were drawn into an open-endedarrangement of which the ultimate outcome was uncertain and from which it would be difficultto disentangle themselves. The Bundesbank was among the most outspoken advocates ofthe Gold Pool as a large share of its reserves was in dollars rather than in gold. The Bank ofFrance was rather lukewarm for the exact opposite reason. The Bank of England, finally,went along because it didn’t want to be left out, but at the same time feared the schememight undermine the hitherto unchallenged position of the London gold market and inparticular Britain’s privileged relationship with the main gold suppliers, in casu South Africa.On the other hand, the agreed amounts were relatively modest, with the US taking thelargest share, so the risks for each individual central bank remained limited.

The BIS, from its side, had some serious misgivings about the whole scheme. AsMacdonald, Manager in the BIS Banking Department, put it in an internal memo:We have long argued in favour of market forces and are now asked to participate in a scheme whichaims at setting these on one side, so that the inconvenience of certain financial policies can beavoided. This may be justifiable at short term but in the longer term could be disastrous, not least of allfor the US.39

Obviously, the BIS was also concerned that its own gold operations, mostly undertaken onbehalf of the central banks, would be undermined:...in the opinion of the [BIS] Banking Department the present [Gold] Club is [not] necessarily a goodthing or equally favourable to all participants. Furthermore, the producing countries and the directinterests of the BIS suffer. This might well be judged to be worthwhile if the scheme would contributeto the maintenance of confidence in the dollar. There is, however, no guarantee that it will.

It was, however, a testimony to the preponderance of the United States in world economicand financial affairs that, in spite of their reservations, all major central banks and the BISwere prepared to go along with the American Gold Pool scheme. The BIS was in any casesatisfied as the Americans soon acquiesed in a resumption of its gold operations as long asthey did not go counter the objectives of the Gold Pool and on the condition that the BISwould report on a monthly basis all its operations to the members of the Gold Pool.40

At Hayes’ insistence, the Gold Pool was activated immediately. This allowed the Americansto counter growing criticism in Congress by discreetly informing members of the FinanceCommittee that the Federal Reserve with support from the European central banks was infact already acting on the London gold market to keep a lid on the gold price. It is worthmentioning that the scheme was set up at the BIS meeting without a formal, writtenagreement. No lengthy political negotiations were required. The communality of purpose andmutual trust engendered by the BIS network, and the authority of each Governor to commithis country’s reserves, did the job.

After one month, the operations of the Gold Pool were evaluated by the participatingGovernors on the occasion of the BIS Board meeting of 9 December 1961.41 As pressure onthe London gold price had been limited, sales by the Gold Pool had not exceeded $17million. The Governors decided to discontinue interventions for the time being, and agreed,

39 Memo DH Macdonald, “Gold Club”, 11 January 1962, In BISA, 7.18(16) - Papers Hall, b. HAL 2, F01.40 Note Marcel Van Zeeland, “Opérations sur or”, 13 March 1962, In BISA, 7.18(16) - Papers Hall, b. HAL 2, F01.41 Note Rickett to Allen, “Gold”, 15 December 1961, In UKNA, T 312/312 - London Gold Market.


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at the request of the Americans, to abstain from buying gold in the market directly on anindividual basis. However, many European central banks were keen to replenish their goldstocks at the earliest opportunity. To this end it was decided to have the Gold Pool act notonly as a selling but also as a purchasing syndicate.42

From 1962 the central banks’ Gold Pool, operated from the BIS in Basel, played a crucialrole in stabilising the free gold price in the London market.43 In fact, at least until the end of1964 the Gold Pool had a smooth ride, except for one or two minor glitches (one caused bythe Cuban missiles crisis of October 1962). Increased output from the South African goldmines and regular Russian sales raised the supply sufficiently, satisfying not just privatedemand, but also allowing the Gold Pool to buy over $600 million worth of gold in 1963 andagain in 1964, distributing this welcome bonus among its member central banks.44

However, results in 1965 were mixed. The sterling crisis of November 1964 led to a surge inthe demand for gold. So did the public announcement by the French authorities in January1965 that France intended to convert its “excessive” dollar holdings into gold and was infavour of monetary reform to turn the Bretton Woods system into a true gold standard. At thesame time, the supply of gold lagged, so that the Gold Pool had to step in. Later in the yearconditions improved somewhat and the Pool was able to close 1965 with a small surplus. Asfrom 1966, however, the Gold Pool was forced to step up its sales progressively as thesupply of new gold from traditional sources such as Russia and South Africa further declinedand private demand continued to rise, reflecting mounting doubts about the medium-termstability of sterling and the dollar. Now that the market mood had turned definitely against theGold Pool, some of its members began to question the longer-term viability of the scheme. InJune 1967, just after the outbreak of the Six-Day War in the Middle East, the situationworsened considerably. In response to heavy gold losses, an emergency meeting of thecentral bank gold and foreign exchange experts was called in Basel.45 While therepresentatives of the Federal Reserve Bank of New York, the Bundesbank and the SwissNational Bank spoke out in favour of continuing Gold Pool operations, the others were ratherlukewarm. The Bank of France, for its part, called for a radical rethinking of the Gold Poolstrategy. Before the end of the month, it notified its Gold Pool partners that it had decided towithdraw from the scheme with immediate effect. The Bank of France’s share in the GoldPool was taken over by the Federal Reserve, and, by mutual agreement, the defection waskept secret from the market.

Over the summer and autumn of 1967, upward pressure on the gold price continued to buildup, in parallel with the mounting onslaught on pound sterling. The European central banksbegan to look for an exit-strategy, but the alternatives considered, ranging from gold salescontrols to the creation of gold value certificates, were all rejected as unworkable or likely toproduce undesired side-effects. As some at the Bank of England, the BIS and elsewhere hadforeseen from the outset, it now proved very difficult for the central banks to disentanglethemselves from their commitment to control the gold price through official interventions inthe market. The Americans, for their part, did not tire exhorting the Europeans to hang in,promising tough new measures to address the US balance of payments deficit that ought tosoothe speculation on the gold market.

42 Note JMS, “Gold: talks in Basle 6/7 January 1962”, In UKNA, T 312/312 - London Gold Market.43 Coombs, Charles A., The Arena of International Finance, New York, 1976, pp. 42-68 and 152-173.44 See: “Coordinated gold operations, Experiences of the past year”, 12 January 1963, In BISA, 7.18(16) – Papers

Hall, b. HAL2, f. 01. Also: Bank of England, Quarterly Bulletin, IV, 1 (March 1964), pp. 20-21.45 “Meeting, 10 June 1967” (handwritten notes), In BISA, 7.18(16) – Papers Hall, b. HAL2, f. 01.


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In the immediate wake of sterling devaluation, in November 1967, the London gold marketwitnessed the biggest gold rush in its history. To make matters worse, news about the Bankof France’s withdrawal from the Pool leaked at this very moment. Soon gold losses incurredby the Pool surpassed the $1 billion mark and there was no sign of any let up. In earlyDecember, in a somewhat dramatic gesture, US Under-Secretary of the Treasury Demingflew in to a BIS meeting in Basel to persuade the European Governors to hold the line.46 Hemet with considerable scepticism. In particular the Belgian, Dutch and Italian central banksmade it clear they were not prepared to go on selling gold and accumulating dollars,depleting their gold reserves to the benefit of private hoarders. On 1 January 1968, PresidentJohnson announced a drastic balance of payments programme as well as legislation toremove the gold cover requirement for the dollar (thereby freeing up the entire US gold stockto defend the dollar parity). This won the Gold Pool two more months of reprieve.

46 D Macdonald, “Meeting of the Governors and the US Under Secretary of the Treasury”, 11 December 1967, InBISA, 7.18(16) – Papers Hall, b- HAL2, f. 01.


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Finally, in March 1968 the game was up. Amidst a new speculative onslaught, with the Pool’scumulative gold losses exceeding $3.5 billion, the US Treasury advised President Johnson todiscontinue market interventions with immediate effect. On Friday 15 March, the London goldmarket was temporarily closed and an emergency meeting of the Gold Pool members wascalled in Washington for the weekend of 16-17 March. Two scenarios were given seriousconsideration: a substantial increase in the official price of gold or, alternatively, the creationof a two-tier gold market. An increase in the official gold price, supported by GovernorO’Brien of the Bank of England, Zijlstra of the Dutch central bank and the BIS, waseventually rejected, most vehemently by the US Federal Reserve, on the grounds that itwould be inflationary and would constitute an undue reward to gold producers and hoarders.The proposal to create a two-tier gold market – with an official market reserved to monetaryauthorities dealing among each other at $35 per ounce next to a free market in which thecentral banks would no longer intervene – was most eloquently defended by Governor Carliof the Bank of Italy and finally carried the day. A third alternative – cutting the link to goldaltogether and floating the dollar as well as the other currencies – was raised but notseriously considered.

The main risk associated with introducing a two-tier gold market was that the official and freegold price might diverge rapidly to an extent that would become untenable. On 1 April 1968,when the London gold market reopened, the free gold price settled first at some $38 perounce. Over the next three years it remained relatively in check (see Graph 2). The factremained, that with the creration of the two-tier gold market the Bretton Woods gold-dollarstandard had in effect been replaced by a de facto dollar standard.

The Gold Pool was an important confidence building measure, intended to shore up thelonger-term viability of the Bretton Woods system. It worked well for quite some time,keeping the gold price stable until the very end. The cost, spread out over the eightparticipating central banks, remained very low until the last few months of operation. As a UKTreasury memorandum commented with some resignation: “Was our $220 million [the Bankof England share in Gold Pool sales] worth it? I suppose the answer is we had no realalternative – and the operation as a whole was certainly worth trying”.47 However, at the endof the day, it was nothing more than a ploy, an artificial device to keep the market in line withofficial policy. From the outset, many central bankers had nurtured reservations about thewisdom of manipulating the free gold market. They had gone along with the scheme,because it was so strongly advocated by the US monetary authorities, with whom theyshared an overriding interest in maintaining the stability of the Bretton Woods system. Thefact that the Gold Pool, during its first years of operation, was actually able to buy substantialquantities of new gold to be added to its members’ reserves did certainly make it easier forthem to set aside their objections of principle. In reality, the Gold Pool commitment did neverdeflect the European central banks from their primary goal to build up their own goldreserves. Consequently, throughout the lifespan of the Gold Pool, they converted dollarsurpluses into gold at the US Treasury window, immediately seeking compensation – andmore – for the gold they had to give up to the market via Gold Pool sales. This tendencygrew even stronger as the Gold Pool arrangement led to ever increasing gold losses, so thatby early 1968 it had by and large become a one-man show, the US Treasury in effect makingup for 80% of the gold losses.

The practice of converting dollar surpluses into gold was followed by the majority ofEuropean central banks, as is apparent from the table in Annex 2, but it was normally donediscreetly and in close consultation with the US monetary authorities. For political reasons,France turned this discreet practice into a vocally stated policy – considerably increasing its

47 Secret note D A Bleach to Peterson, 26 March 1968, In UKNA, T 312/2041 – Gold operations on behalf of theBasle syndicate, 1967-68.


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dollar conversions during the first half of 1965 – what was immediately interpreted by themarkets and the US monetary authorities alike as an open attack against the dollar and theBretton Woods gold-dollar standard.48 However, done discreetly or otherwise, the net effectof these central bank dollar conversions was the same: a steady decline in the US monetarygold stock. In that sense, the central banks were themselves contributing to the erosion inconfidence they were trying to prevent through measures such as the Gold Pool. Only twocentral banks clearly refrained from putting even more pressure on the US gold position: theBank of England and the Bundesbank. In the case of the Bank of England this was of coursea reflection of its own weak reserves position and the recurrent sterling crises. As for theGermans, it was to a large extent the result of the close interconnection that existed in the1960s between balance of payments and gold-dollar issues on the one hand and the USA’sstrategic exterenal policies on the other.49 The Bundesbank’s commitment not to convert itsrapidly increasing dollar holdings into gold was part of a broader deal in which the Germangovernment compensated the United States for the extensive military protection US troopsoffered along the Iron Curtain. The effect was double. Not only did it take some of thepotential pressure off off the US gold stock, it also reinforced the ties of interest linking theUS and German monetary authorities. Sitting on a growing pile of dollars it was obviously inthe Bundesbank’s self-interest to do everything possible to maintain the value of the dollar.However, this “politicalization” of a central bank’s reserves policy could easily be taken toofar. In early 1967, US pressure was such that Bundesbank President Blessing reluctantlyagreed to publish a letter in which he stated that for years the Bundesbank had refrainedfrom conversion of dollars into gold and that the United States “may be assured that also inthe future the Bundesbank intends to continue this policy and to play its full part incontributing to international monetary cooperation”.50 Later, in 1971, after the currencyturmoil of 1968-69 and the American retreat into a policy of “benign neglect”, Blessingregretted this public statement of support for US monetary policies.

The G10 central banks and the end of Bretton WoodsAt the beginning of the 1960s, the G10 central banks were remarkably united on how best todeal with the three main problems that seemed to be threatening the long-term viability of theBretton Woods system. The liquidity problem was not considered to be particularly acute andcould best be tackled in the context of the IMF. The balance of payments imbalances thatcalled for adjustment did not seem out of control. There was a broad consensus among theEuropeans that, in the interest of the stability of the system, the United Kingdom and theUnited States should be allowed sufficient time to gradually reduce their deficits. Finally, theG10 central banks were, for the same reason, ready to assist in confidence-buildingmeasures, accepting an activist American leadership. The result was a large degree ofmonetary stability – a high level of relative price and exchange rate stability – supportingstrong and sustained output and trade growth across the western world.

This happy state of affairs did not last. The sterling crisis of November 1964 was animportant turning point, as it gave rise to considerable frustration among the Europeancentral bankers with regard to the lack of durable adjustment in a key deficit country. It was

48 France’s policy was, however, consistent with its long-held views favouring a return to a pure gold standard.See: Bordo, M D, D Simard and E White, “France and the Bretton Woods International Monetary System:1960 to 1968”, NBER Working Paper no. 4642, 1994.

49 Gavin, F J, Gold, Dollars and Power, The Politics of International Monetary Relations, 1958-1971, Chapel Hill:University of North Carolina Press, 2004.

50 Zimmerman, H, Money and Security, Troops, Monetary Policy and West Germany’s Relations with the UnitedStates and Britain, 1950-1971, Cambridge: Cambridge University Press, 2002, pp. 221-9.


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the start of a gradual erosion of the transatlantic consensus underpinning the successfulmanagement of the system. The point was brought home most spectacularly in early 1965,by France’s public declaration in favour of a return to a more automatic adjustmentmechanism, based directly on gold at the expense of the US dollar. Although the move wascertainly not masterminded by the Bank of France and earned very little support from othercentral banks, it was illustrative of a much broader change. Between the mid-1950s and mid-1960s, European central banks, buoyed by strong economies and burgeoning reserve levels,had grown more self-confident. They also grew more critical in the face of Americanleadership, and were not prepared to go along as easily as before with arrangements thatthey felt might go against their own convictions and domestic interests. For instance, afterthe November 1964 crisis, European central banks grew increasingly reluctant to be drawninto each new round of sterling support. Nevertheless, central bank cooperation did continue.The G10 framework operational at the BIS had welded a strong bond of communality ofpurpose and solidarity among the main central banks, and at least outwardly, thiscooperation continued to yield tangible results for a few more years.

From the mid-1960s, the consensus among the G10 central banks was not only affected byeconomic and geopolitical power shifts, it was also put severely to the test by the market.Market forces were increasingly pushing the limits of the Bretton Woods system, and thewillingness of the central banks to defend those. This was apparent in three main areas:gold, capital mobility and inflation.

The Gold Pool had taught the central banks the expensive lesson that in a liberalisedeconomy market forces could not be steered or controlled indefinitely. In the end, Europeancentral banks were not any longer prepared to sacrifice their gold reserves in a futile attemptto appease speculators and hoarders. In any case, by that time the burden-sharing amongcentral banks that had been at the basis of the Gold Pool when it was first set up, hadbecome largely theoretical, as most participants increasingly turned to the US Treasury goldwindow in order to recoup their losses. The crisis of March 1968 marked the practical end ofUS dollar-gold convertibility and thereby removed one of the main constraints that until thenhad forced the USA to follow a more or less stable monetary policy.

The growing divergences in monetary and economic policy objectives between the G10countries in the late 1960s were perhaps best epitomised by the difference in appreciationregarding the growth of the so-called eurocurrency market. The eurocurrency market can bedefined as a market for short-term deposits and credits, denominated in a currency differentfrom that of the country in which the deposit-taking and credit-giving bank is located. Thismarket developed strongly from the early 1960s onward, with the City of London as its mainhub and the large majority of funds being denominated in US dollars. It proved an attractiveoutlet for American banks, seeking to “escape from a stifling banking environment in theUnited States”51, and helped fuel the expansion of US corporations in Europe and elsewhere.Within a decade, from 1963 to 1973, the estimated annual volume of the eurocurrencymarket boomed from some $7 billion to over $130 billion.52 While the British on principlewelcomed this financial innovation as it reinforced the leading position of the City, theAmericans looked upon it as a challenge, potentially compounding but possibly also easingthe USA’s balance of payments problems. The Europeans, and first and foremost theGermans, viewed the eurocurrency market as a real problem, exacerbating speculativecapital flows, thereby undermining the effectiveness of domestic monetary policy and

51 Sylla, Richard, “United States Banks and Europe: Strategy and Attitudes”, In S Battilossi and Y Cassis (eds.),European Banks and the American Challenge: Competition and Cooperation in International Banking underBretton Woods, Oxford: Oxford University Press, 2002, p. 71.

52 Bank for International Settlements, Annual Report, Basel, 1964 and 1974.


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jeopardizing the fixed exchange rate regime. On this issue, paths really diverged. At a BISG10 Governors meeting in March 1969, the Governor of the National Bank of Belgiumacrimoniously accused the United States of “bankrupting” Europe by its tight monetary policythat forced US banks to borrow heavily on the eurocurrency market, thereby pushing interestrates to record highs.53 While many were of the opinion that something needed to be done,no-one really agreed on what could or ought to be done.

The frantic development of the eurocurrency market in 1969-70 caused widespread concern.In September 1970, Pierre-Paul Schweitzer, Managing Director of the IMF, wonderedwhether “maybe the central banks could do something”.54 A number of special meetingsorganised at the BIS highlighted the monetary policy implications of the market anddiscussed the possibility of joint supervision of it. This led, in April 1971, to the creation of aG10 Standing Committee on the Euro-Currency Market at the BIS. One of the first practicaloutcomes of these discussions was a decision by the G10 Governors to freeze and thengradually reduce their own investments in the eurocurrency market.55 However, it provedimpossible to reach a consensus on possible joint central bank intervention in the privatemarket to try to bring it under control. While for instance the Dutch and German central banksspoke out clearly in favour of joint open-market operations or the harmonisation of interestrates, others, such as the Bank of England, argued that there was no immediate reason forintervention. Soon, this discussion would lose its edge: the definitive abandonment of fixedfor floating rates in early 1973 meant that the adjustment to speculative flows couldhenceforth be shifted from domestic monetary policy (interest rates) to the politically lesssensitive exchange rate. Moreover, the eurocurrency market would soon prove a useful toolin helping to recycle the flood of petro-dollars generated by the oil-exporting countries after1973.

To the central bankers of the surplus countries, the inexorable rise of the eurocurrencymarket also posed an inflationary threat, as the recurrent speculative liquidity inflowsincreased their dollar reserves. Inflation in the US economy had been creeping up graduallysince the mid-1960s, partially as a result of increased government spending on the Vietnamwar and on President Johnson’s Great Society programme. The removal of the goldconstraint in early 1968 did not help either. The weakening of the dollar in conditions ofeconomic boom led the Federal Reserve to adopt a tight monetary policy stance by the endof 1968. By the spring of 1969, the discount rate had been raised to 6%, the highest level inforty years. As a result, three-month eurodollar rates in London rose to an unprecedentedlevel of 10.5% by May 1969. Hence the Europeans’ complaint that the eurodollar market wasacting as a powerful transmission mechanism injecting US inflation into their domesticfinancial systems. Already in the autumn of 1968, the Bundesbank had become convincedthat a revaluation of the D-Mark would be unavoidable, and indeed necessary to buttress thestability policy. The German government, however, rejected the suggestion. In a tellingreversal of roles as compared to the 1961 D-Mark revaluation, it was now the central bankurging the government to take this radical step towards external adjustment, rather than theother way around. In the second half of 1969, the Bundesbank began to tighten monetarypolicy, attracting even more foreign capital, in order to force the government to revalue the D-Mark.56 The German elections of 28 September 1969 brought a new coalition government to

53 J. Ghiardi, “Notes on Governors’ meeting, March 9, 1969, Basel”, In FRBNY, 797.3 – BIS, First file, 1960-70.54 Note J. Zijlstra, “BIS Working Group“, 17 February 1971, In BISA, 7.18(23) – Papers Gilbert, b. GILB1.55 “Informal record of a meeting of the Standing Committee on the Euro-Currency Market held at the BIS on 6

November 1971”, In BISA, 1.3a(3) – Meetings of Experts, 1971-72, vols. 9-11.56 Holtfrerich, C.-L., “Monetary Policy under Fixed Exchange Rates (1948-1970)”, In Fifty Years of the Deutsche

Mark, Central Bank and the Currency in Germany since 1948, Oxford: Oxford University Press, 1999, pp. 384-90.


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power, which first let the D-Mark float upwards and then fixed it at a new parity equalling a9.3% revaluation.

In early 1970, the Federal Reserve began to relax its squeeze on bank credit, just at a timethat monetary policy in Europe, and particularly in Germany, was moving in the oppositedirection. The result was a renewed influx of dollars. For the whole of 1970, Germany’s short-term capital account registered a surplus of D-Mark 18 billion, while the Bundesbank’sforeign assets (mostly dollars) nearly doubled. Indeed, between mid-1969 and mid-1972 theofficial reserves held by the G10 central banks nearly doubled, and the increase was entirelyattributable to the burgeoning foreign exchange (dollar) reserves held by Germany, Japanand the other G10 surplus countries (see Graph 3). This liquidity flood combinedunfavourably with the re-emergence of an important wage-pull inflation across Europe, andwith a general political reluctance to apply strong fiscal brakes in order to dampen a boomingeconomy.

By early 1971, monetary policies on both sides of the Atlantic had been at odds with oneanother for more than two years, a situation that contributed greatly to the strains weighingdown on the Bretton Woods system. For largely domestic reasons, the main players hadbecome less willing to make compromises where their own interests were at stake. TheUnited States had retreated in a policy of “benign neglect”, while Germany, one of thestaunchest supporters of US monetary leadership in the early 1960s, “..abandoned themultilateral approach, because it transparently had failed to produce any change in US policyor any substantial coordination in Europe, and went on an isolated course”.57 The crisis finally

57 James, H., , International Monetary Cooperation Since Bretton Woods, Washington and New York-Oxford: IMFand Oxford University Press, 1996, p. 215.


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came to a head in May 1971, demonstrating, in the words of the BIS, “..what can happenwhen the monetary policies of major countries are applied forcefully in opposite directions”.58

A further large inflow of dollar funds led the German authorities to close the exchangemarket. The German government had come to the conclusion that it was impossible tomaintain the fixed exchange rate in the face of increased and often disrupting capitalmobility, and tried to convince its EEC partners to adopt a joint float vis-à-vis a now seriouslyovervalued dollar. Consensus could not be reached and the Bundesbank too stronglyopposed floating, pleading instead for the introduction of capital controls to deter furtherinflows. In the end, the government prevailed and the Bundesbank was freed from itsobligation to intervene on the currency market in support of the D-Mark. Other Europeancurrencies, such as the Dutch guilder and Belgian franc followed the German lead, or, as inthe case of the Swiss franc and Austrian schilling, simply revalued. The fixed exchange rateregime had been breached.

Table 4 – Inflationary pressures, 1968-73Consumer price index, year-on-year percentage changes

France Germany Italy Japan UK USA

1968 5.3 1.7 1.3 3.9 5.9 4.7

1969 5.9 2.8 4.3 6.4 4.7 6.1

1970 5.3 3.8 5.3 8.3 7.9 5.5

1971 6.1 6.3 4.7 5.9 9.0 3.4

1972 8.7 6.3 7.4 5.3 7.7 3.4

1973 8.5 7.8 12.9 19.1 10.6 8.8Source: BIS, Annual Reports, 1970-74.

On 15 August 1971, President Nixon, acting on advice of the US Treasury, suspended thegold-convertibility of the dollar. The Chairman of the Board of the Federal Reserve System,Arthur Burns, spoke out strongly against this unilateral move, but he was overruled by theSecretary of the Treasury, Connally, who believed that for too long the United States hadcarried the heaviest burden in shoring up the Bretton Woods system. The Europeanexchange markets remained closed for a week after Nixon’s announcement. When theyreopened, all currencies, with the exception of the French franc, were allowed to float and thedollar immediately declined. Thus, the fixed exchange rate system had effectively beensuspended and a long overdue adjustment process was set in motion. Nevertheless, theofficial position remained that the G10 countries wanted to restore fixed rates on a new, morerealistic basis. At the IMF meeting in September 1971, Federal Reserve Board ChairmanBurns asked Jelle Zijlstra, who was at the same time President of the Netherlands Bank andof the BIS, to sound out the G10 central bank Governors about the feasibility and possiblerange of a negotiated realignment of exchange rates. In his report, Zijlstra expressed graveconcern with regard to the prevailing state of uncertainty which was already “intensifying the

58 BIS, Forty-second Annual Report, Basel, 12 June 1972, p. 25.


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recessionary trends”.59 An agreement on the restoration of fixed rates was reached once theAmericans had yielded to European pressure to match a revaluation of most Europeancurrencies with an official devaluation of the dollar. The Smithsonain Agreement of 17December 1971 entailed a dollar devaluation by 7.9% (from $35 to $38 per ounce of gold),while four other countries agreed to revalue their currencies in terms of gold: Belgium andthe Netherlands by 2.8%, Germany by 4.6% and Japan by 7.7%. The agreed new rates wereinitially received very positively, “reflecting relief that the period of floating exchange rateswas over”.60 However, as a relatively wide disparity in interest rates between the UnitedStates and other countries continued to exist, the problem of short-term capital movementsputting pressure on the official exchange rates persisted. Since the convertibility of the dollarinto gold remained suspended under the Smithsonian Agreement, any addition to globalreserves in the system could only be provided by a new allocation of Special Drawing Rights,an increase in IMF quotas, or, the further accumulation of dollars (or other currencies, butnone enjoyed reserve currency status like the dollar did). The confidence problem remainedbasically unresolved: the markets did not believe that the newly fixed exchange rates wouldhold for long, especially as there was little evidence of domestic monetary and fiscal restraintin the USA. Speculative capital flows continued unabated, forcing the central banks tointervene ever more forcefully in the exchange markets in order to uphold the fixed rateregime, accumulating even more dollar reserves in the process. The breaking point wasreached on 1 March 1973, when the Bundesbank closed the exchange markets after it hadhad to purchase over $2.5 billion in just one day. On 12 March the EEC countries collectivelyset their currencies floating against the dollar. Bretton Woods was dead. Over the followingyears, the central banks had to learn to cope with exchange rate volatility, against abackdrop of economic stagnation and high inflation, a very different environment from that ofthe 1960s.

ConclusionsAfter the Second World War, central banks found their position weakened. Misguided centralbank policies were widely blamed for the financial and economic debacle of the 1930s. As aresult, in most industrialised countries the Treasuries had reasserted their primacy inmonetary policy-making. Almost everywhere, between the late 1930s and late 1940s, centralbanks were nationalised. In a response to the hardship caused by the 1930s crisis and thewar, monetary policy after 1945 was clearly subordinated to the domestic economic policygoals of growth, full employment and social welfare. This meant, for instance, that centralbanks were expected to keep credit cheap, and therefore were often barred from using theinterest rate mechanism as a pro-active monetary tool.

Intellectually, most central bankers remained firmly rooted in the neo-classical tradition.Orthodox monetary policies, balanced budgets, low inflation, a strong currency and stableexchange rates were the cornerstones of their creed. Moreover, the interwar experience hadinstilled in both central bankers and politicans an aversion for speculative capital flows,competitive devaluations and beggar-thy-neighbour policies, which were held to havewreaked havoc on the world economy. From that perspective, it is hardly surprising that inthe postwar context both central banks and governments were proponents of a fixedexchange rate regime to promote international monetary and financial stability. At the sametime, they believed – perhaps to somewhat varying degrees – in trade liberalisation andcurrency convertibility. This creed was enshrined in the 1944 Bretton Woods Agreement, butat the same time it was realised that it would take time to fully live up to it, particularly in the

59 Jelle Zijlstra, “Secret Working Paper”, November 1971, In BISA, 7.18(31) – Papers Crockett.60 BIS, Forty-second Annual Report, Basel, 12 June 1972, p. 30.


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case of the battered European economies. The European Payments Union was designed tobuy Europe time, allowing it to focus on domestic economic recovery first and to graduallybuild up reserves before introducing currency convertibility. Central bankers may have hadtheir doubts about the desirability of the complex EPU mechanism – “placing trade too muchin the hands of the central banks” – but they welcomed its ultimate goal and were realisticenough to accept it as a political compromise. Thus, the only areas for potentialdisagreement between central banks and governments during the EPU era were with regardto the pace of introducing convertibility and with the ad-hoc role assigned to monetary policyin the economy (particularly: credit expansion or restriction).

Once current account convertibility had been achieved at the end of 1958, the BrettonWoods fixed exchange rate regime came into its own. And so did central bankers. It soonbecame obvious that automatic adjustment was an illusion and that, consequently, it wouldrequire a great deal of international mutual understanding and cooperation between thesurplus and deficit countries to keep the system going. In addition, at the latest from the briefgold crisis of October 1960, the system also had to deal with a potential confidence problemturning around the fixed gold price and the dollar-gold convertibility commitment. The USadministration took a lead in addressing these issues and quickly came round to the viewthat the G10 group of central banks, working together closely at the BIS, provided an idealforum for consensus building and joint action. “Instead of a community of equal currenciesmanaged by the IMF, the [Bretton Woods] system was managed by the United States incooperation with the other members of the G10”.61 And there was plenty of scope forcooperation. As Toniolo has commented, referring to the interwar Governor of the Bank ofEngland, a great believer in central banks’ operational independence and in internationalmonetary cooperation: “the 1960s would have been Lord Norman’s dream decade”.62

International monetary cooperation between 1959 and 1967 was largely successful ifmeasured against its stated goals (exchange rate and price stability promoting growth), andin function of the developments in the real economy. However, from 1964-65 onward theconsensus underpinning this success was being eroded. There were two main reasons forthis. First, no amount of central bank cooperation targeting a smooth day-to-day operation ofthe international monetary system could put its fundamental imbalances right. Moreover, asthe market forces increasingly turned against the flawed fundaments of the system – thefixed gold price, the position of sterling and the dollar, the lack of balance of paymentsadjustment – more and more central bankers began to question the longer-term wisdom offighting market currents. For instance, to the surplus countries repeated emergency supportextended to the Bank of England seemed to raise a moral hazard issue, as in their reading itallowed the United Kingdom to postpone tough domestic adjustment policies. The Gold Pooltoo raised fundamental questions as to the wisdom of continuous market interventions by thecentral banks, although it has to be said that these reservations only came to the fore from1966-67 onward, when the Pool started to run up ever bigger deficits. In short, from the mid-1960s the consensus previously prevailing among the G10 central banks grew more andmore precarious.

Secondly, as the day-to-day management of the system was beginning to reveal strains anda more fundamental reform of the system through the creation of Special Drawing Rights gotbogged down in the IMF, politicians once again moved into the territory they had largely leftto the central banks in previous years. President De Gaulle personally redefined (or

61 Bordo, M., “The Bretton Woods International Monetary System: an Historical Overview”, In Michael D Bordoand Barry Eichengreen (eds.), A Retrospective on the Bretton Woods System, Lessons for InternationalMonetary Reform, Chicago and London: University of Chicago Press, 1993, pp. 73-4.

62 Toniolo, Gianni, with the assistance of Piet Clement, Central Bank Cooperation at the Bank for InternationalSettlements, 1930-1973, New York-Cambridge: Cambridge University Press, 2005, p. 485.


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“clarified”) France’s international monetary stance in early 1965. Subsequently, the Bank ofFrance Governor, Brunet, cut a somewhat hapless figure in many of the BIS meetings as hewas usually prevented by his political masters from participating actively in furthercooperative actions, including sterling support and, eventually, the Gold Pool. Later in the1960s, central banks were frequently overruled by their governments in key monetary policyissues, as evidenced in the cases of Germany and the USA.

By the end of the 1960s, the combination of increased capital mobility and creeping inflationhad become a matter of grave concern to more than one central banker. In fact, the marketturmoil, highlighted by the French franc and D-Mark crisis in 1969 and the shooting up ofeurocurrency market interest rates, seemed to support the case for more market interventionand regulation rather than less. Hence the abortive attempts to slow down the growth of theeurocurrency market, and the inconclusive discussions at the BIS and elsewhere on howbest to strengthen and, after August 1971, revive the fixed exhange rate regime.

Over the years, based on a broad consensus between monetary policymakers andpoliticians, and prompted by active American leadership, the central banks had come to seethemselves as the official custodians of the Bretton Woods system, even to the point thatthey foresaw all kinds of calamities in case it should collapse. However, with hindsight, muchof the central bank cooperation that took place after 1967-68 must look like a rearguardaction, that could only temporarily slow down the inevitable triumph of market forces over astill largely state-led and rules-based system. From 1971, the central banks in the USA, theUK and elsewhere had to yield, once more, to their governments, for whom the political costsof the fixed exhange rate regime had become too high. The Great Inflation that ensued in the1970s would eventually bring the central banks back to the fore, preparing the ground fromwhich they would win their formal independence in the 1980s and 1990s, and would becomea driving force behind the second phase of the “great reversal”: the liberalisation of capitalmarkets.

Archives consultedBEA Bank of England Archive, London

BISA Bank for International Settlements Archive, Basel

ECBA European Central Bank Archive, Frankfurt am Main

FRBNY Federal Reserve Bank of New York Archive, New York

NARA National Archives and Records Administration, College Park, MD

UKNA United Kingdom National Archives, Kew, Richmond


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Annex 1 – World monetary gold reserves under Bretton Woods, 1946-74In million US$

Totalworldgold

reserves

Total G10

goldreserves

USA

goldreserves

UK

goldreserves

Germany

goldreserves

France

goldreserves

RestG10**gold

reserves

19461947194819491950195119521953195419551956195719581959196019611962196319641965196619671968196919701971197219731974

34,160

34,550

34,950

35,410

35,820

35,950

36,290

36,710

37,350

37,980

38,245

38,970

39,865

40,183

40,523

41,110

41,440

42,300

43,050

43,305

43,255

41,580

40,890

40,990

41,290

41,220

44,905

49,850

49,790

27,299

28,077

29,298

29,817

29,675

29,519

29,680

29,955

30,449

30,872

31,507

32,863

33,432

33,313

33,559

34,090

33,976

34,516

34,886

35,432

34,590

32,850

30,995

31,305

30,340

29,510

31,405

34,894

34,925

20,706

22,868

24,399

24,563

22,820

22,873

23,252

22,091

21,793

21,753

22,058

22,857

20,582

19,507

17,804

17,000

16,100

15,596

15,471

13,806

13,235

12,065

10,890

11,855

11,070

10,205

10,485

11,652

11,652

2,415

2,020

1,589

1,350

2,900

2,200

1,500

2,300

2,550

2,050

1,800

1,600

2,850

2,500

2,800

2,268

2,582

2,484

2,136

2,265

1,940

1,290

1,475

1,475

1,350

780

800

887

888

0

0

0

0

0

28

140

326

626

920

1,494

2,542

2,639

2,637

2,971

3,664

3,679

3,844

4,248

4,410

4,290

4,225

4,540

4,075

3,975

4,075

4,460

4,965

4,965

796

548

548

523

523

547

573

576

576

861

861

575

589

1,290

1,641

2,121

2,587

3,175

3,729

4,710

5,240

5,235

3,875

3,545

3,535

3,525

3,825

4,260

4,260

3,382

2,641

2,762

3,381

3,432

3,871

4,215

4,662

4,904

5,288

5,294

5,289

6,772

7,379

8,343

9,037

9,028

9,417

9,302

10,241

9,885

10,035

10,215

10,355

10,410

10,925

11,835

13,130

13,160* Gold valued at official price: 1946 through April 1972 = US$ 35 per ounc of fine gold; May 1972 throughSeptember 1973 = US$ 38 per ounce of fine gold; from October 1973 = US$ 42.22 per ounce of fine gold.** rest of G10 = Belgium, Canada, Italy, Japan, the Netherlands, Sweden and Switzerland.Sources: BIS, Annual Reports. IMF.

Annex 2 – US net monetary gold sales to (-) and purchases from (+) G10 monetary authorities, 1960-68Half-yearly figures, in millions of US dollars, at US$35 per fine troy ounce of gold

1960II

1961I

1961II

1962I

1962II

1963I

1963II

1964I

1964II

1965I

1965II

1966I

1966II

1967I

1967II

1968I

1968II

France -173 0 0 -141 -315 -202 -315 -202 -202 -631 -254 -324 -277 0 0 +220 +380

Germany -34 -23 0 0 0 0 0 -200 -25 0 0 0 0 0 0 0 0

UK -550 +75 -381 -331 -56 +125 +205 +330 +288 -47 +196 -26 +106 -31 -848 -850 +15

Italy 0 +100 0 0 0 0 0 +200 0 -80 0 0 -60 0 -85 -209 0

Rest G10 -645 -75 -219 +224 +5 0 0 -30 -151 -148 -21 +93 +30 +20 +100 -77 0

Total G10 -1,402 +77 -600 -248 -366 -77 -110 +98 -90 -906 -79 -257 -201 -11 -833 -916 +395

Grandtotal

world

-1,544 -187 -632 -393 -440 -196 -195 +67 -104 -1,369 -178 -201 -229 -3 -1,006 -1,331 +209

Source: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics 1941-1970, Washington, 1976, pp. 908-11.

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