With the founding of the United Nations after World War II, representatives of 44 nations met in conference at Bretton Woods, N.H., in July 1944, to form the International Monetary Fund. The IMF is a specialized agency affiliated with the United Nations, designed to stabilize international monetary exchange rates instead of relying on the gold standard. It has no authority to dictate national monetary policies, however.
The members of the IMF, it was decided, would all deposit quotas in the fund, only one-quarter of which had to be in gold, and the rest in their own currencies. From this fund, members could purchase with their own national currencies the gold or foreign exchange they needed.
The IMF, then, became the world’s largest source of quickly available international credit. By June 1972, the 124-nation fund had provided $24.6 billion in short-term financial assistance.
Only the United States decided to keep its currency convertible at all times into gold. The United States pledged at Bretton Woods to convert foreign holdings of dollars into gold on demand at the fixed rate of $35 an ounce. The other countries could hold and count dollars as part of their reserves as if dollars were gold. Thus, the dollar became the center of the world’s monetary system.
Each member of the IMF was required to maintain the dollar or gold parity ($35 an ounce) of its currency by buying its currency when the price fell to 1 percent below parity or selling if the price rose 1 percent above parity.
The London gold market reopened in 1954 after World War II had forced its close in 1939. From 1954 to 1957, the price of gold on the London market fell consistently below $35 an ounce. Private demand for gold was composed almost entirely of industrial-artistic use and hoarding in countries where savings are traditionally held in gold.
Despite the growth in industrial use of gold and that gold, at a fixed price, was cheap in comparison to other commodities, private demand generally did not absorb all newly mined gold and the gold purchased from Communist stocks during this time. Except when the monetary authorities purchased gold to maintain its price at $35 an ounce, most countries bought relatively little gold, and instead built up their dollar holdings.
The gold drain
The system ran into difficulty in 1958 when the United States saw its first significantly large balance of payments deficit. This is a name given to the excess in the amount of dollars going abroad for foreign aid, for investments, for tourist expenditures, for imports and for other payments, in comparison to the amount of dollars coming in for payments of U.S. exports to foreign countries. This meant a heavy drain on U.S. gold supply.