Smaller countries began holding more of these currencies instead of gold. The result was an accentuated consolidation of gold into the hands of a few large nations. The stock market crash of was only one of the world's post-war difficulties.
The pound and the French franc were horribly misaligned with other currencies; war debts and repatriations were still stifling Germany; commodity prices were collapsing; and banks were overextended. Many countries tried to protect their gold stock by raising interest rates to entice investors to keep their deposits intact rather than convert them into gold. These higher interest rates only made things worse for the global economy. In , the gold standard in England was suspended, leaving only the U.
Then, in , the U. S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U. Gold production soared so that by there was enough in the world to replace all global currency in circulation. As World War II was coming to an end, the leading Western powers met to develop the Bretton Woods Agreement , which would be the framework for the global currency markets until Within the Bretton Woods system, all national currencies were valued in relation to the U.
The global financial system continued to operate upon a gold standard, albeit in a more indirect manner. The agreement has resulted in an interesting relationship between gold and the U. Over the long term, a declining dollar generally means rising gold prices. In the short term, this is not always true, and the relationship can be tenuous at best, as the following one-year daily chart demonstrates. In the figure below, notice the correlation indicator which moves from a strong negative correlation to a positive correlation and back again.
The correlation is still biased toward the inverse negative on the correlation study though, so as the dollar rises, gold typically declines. The high inflationary environment of the late s sucked out the last bit of air from the gold standard. In , a Gold Pool, which included the U. S and a number of European nations, stopped selling gold on the London market, allowing the market to freely determine the price of gold. From to , only central banks could trade with the U.
By making a pool of gold reserves available, the market price of gold could be kept in line with the official parity rate. This alleviated the pressure on member nations to appreciate their currencies to maintain their export-led growth strategies. With a surplus turning to a deficit in and growing fears that foreign nations would start redeeming their dollar-denominated assets for gold, Senator John F.
Kennedy issued a statement in the late stages of his presidential campaign that, if elected, he would not attempt to devalue the dollar. The Gold Pool collapsed in as member nations were reluctant to cooperate fully in maintaining the market price at the U.
In the following years, both Belgium and the Netherlands cashed in dollars for gold, with Germany and France expressing similar intentions. In August of , Britain requested to be paid in gold, forcing Nixon's hand and officially closing the gold window. By , it was official; the dollar would no longer be defined by gold, thus marking the end of any semblance of a gold standard.
In August , Nixon severed the direct convertibility of U. With this decision, the international currency market, which had become increasingly reliant on the dollar since the enactment of the Bretton Woods Agreement, lost its formal connection to gold. While gold has fascinated humankind for 5, years, it hasn't always been the basis of the monetary system. A true international gold standard existed for less than 50 years—from to —in a time of world peace and prosperity that coincided with a dramatic increase in the supply of gold.
The gold standard was the symptom and not the cause of this peace and prosperity. Though a lesser form of the gold standard continued until , its death had started centuries before with the introduction of paper money—a more flexible instrument for our complex financial world. Today, the price of gold is determined by the demand for the metal, and although it is no longer used as a standard, it still serves an important function.
Gold is a major financial asset for countries and central banks. It is also used by the banks as a way to hedge against loans made to their government and as an indicator of economic health. Under a free-market system, gold should be viewed as a currency like the euro, yen or U. Gold has a long-standing relationship with the U. With instability in the market, it is common to hear talk of creating another gold standard, but it is not a flawless system.
Viewing gold as a currency and trading it as such can mitigate risks compared with paper currency and the economy, but there must be an awareness that gold is forward-looking. If one waits until disaster strikes, it may not provide an advantage if it has already moved to a price that reflects a slumping economy. The National Archives. Congressional Research Service. Accessed Sept. United States Government. Peter Bernstein. Allan L. University of Chicago Press, Actively scan device characteristics for identification.
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This was a wonderful article by the way. It was both informative and extremely interesting! Just my 0. Doing research on de-dollarisation by China and Russia, please keep me informed of their progress on their intended Gold Standard and monetary policies. The internet proves to be one big lie right after another. Could anyone recommend a good place to start, or at least point me in the right direction? At this point I am very confused. I may not be the sharpest crayon in the box, but I did graduate from high school.
I have no confidence in the media. This is alot harder than I thought. I just need a phone number or an email address to some where some one knows what the hell they are talking about….?? Can you help me? Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Submit Comment. This site uses Akismet to reduce spam. Learn how your comment data is processed. Written by Andrew Henderson. Feature Articles Finance. Topics Covered.
Author Recent Posts. Andrew Henderson. Andrew Henderson is the world's most sought-after consultant on international tax planning, investment immigration, and global citizenship. He has personally lived this lifestyle for over a decade, and now works with seven- and eight-figure entrepreneurs and investors who want to "go where they're treated best". What is gold used for? What is the boiling point of gold? What is the Latin word for gold? What year was gold discovered in California?
When did the Gold Rush end? When did the Gold Standard end? Where is gold found in the world? Where is gold found on earth? Where is gold found? Who first discovered gold? Who discovered the element gold? Who was president during the California gold rush? Why were there so few easterners involved in the California gold rush? Pre-decimal Calculator Calculate the value of your pre-decimal coins.
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