In the 1960s, the United States Federal Reserve and seven central banks in Europe undertook an extraordinary effort to stabilize the price of gold at $35 per ounce. This initiative, known as the London Gold Pool, was a cooperative agreement among the eight central banks to control the supply of gold and defend the exchange rate of the U.S. dollar to gold established by the Bretton Woods system. However, by 1968, growing economic pressures led to its collapse, ushering in a new era for the global gold market. This article explores the London Gold Pool’s formation, why it failed, and how its demise transformed gold trading forever.
What Was the London Gold Pool?
The London Gold Pool was a pool of gold from the United States and seven European nations. It was designed to prevent drastic fluctuations in the London gold price and preserve global financial stability. The Pool functioned through coordinated efforts among the participating central banks, ensuring that gold supplies were available when market conditions demanded intervention.
The London Gold Pool was established in November 1961 to prevent market gold prices from rising above the fixed $35 per ounce exchange rate set under Bretton Woods. The participating countries included the United States, United Kingdom, Germany, France, Italy, Belgium, Netherlands, and Switzerland. These nations committed to pooling their gold reserves to counteract speculative pressures and maintain confidence in the U.S. dollar. The Bank of England played a crucial role in managing these gold sales on behalf of the Pool. When demand increased, central banks released reserves into the market, and when demand decreased, members could replenish their reserves accordingly.
The Gold Crisis of 1961
Following World War II, the global monetary system was anchored to the Bretton Woods Agreement. This agreement created the International Monetary Fund (IMF), which was tasked with maintaining international currency exchange rates. This was the “Bretton Woods system,” in which the U.S. dollar was directly linked to gold at an exchange rate of $35 per ounce, and other currencies were pegged to the dollar. Because of this, foreign central banks also held U.S. dollars since they were convertible to gold without exchanging their currency.
This system functioned smoothly in the early years, as the United States held nearly 75% of the world’s official gold reserves. However, economic conditions began to shift by the late 1950s and early 1960s, and the Bretton Woods system wasn’t designed to control the free market price of gold.
The United States was facing significant trade deficits, and Cold War military expenditures, particularly those tied to the Vietnam War, were placing immense strain on its finances. Inflationary pressures raised concerns about the dollar’s stability and caused panic buying of gold. By 1960, the London price of gold had reached $40 per ounce on the free market. Western nations agreed to intervene in the gold market by selling off their reserves when necessary to prevent a speculative rush that could undermine confidence in the dollar.
Formation and Function of the London Gold Pool
The London Gold Pool was created to maintain stability within the Bretton Woods system. The participating countries aimed to prevent speculative attacks on gold and defend the dollar’s standing as the world’s reserve currency.
Each participating nation contributed gold to a shared reserve, used to intervene in the market by selling or buying gold to maintain price stability.
Gold Contributions by Country at Formation
| Country | Gold Contribution (Metric Tons | Percent of Total |
| United States | 120 | 50% |
| United Kingdom | 22 | 5% |
| Germany | 27 | 11% |
| France | 22 | 9% |
| Italy | 22 | 9% |
| Belgium | 9 | 4% |
| Netherlands | 9 | 4% |
| Switzerland | 9 | 4% |
How the London Gold Pool Worked
- Selling Gold: When gold demand increased, the Pool released gold from its reserves to prevent prices exceeding $35 per ounce.
- Buying Gold: If demand fell, the Pool repurchased gold from the market to replenish reserves.
- The Bank of England acted as the operational hub, managing transactions on behalf of the participating nations.
- Intervention Strategy: When market pressures rose, nations would meet to discuss strategies and allocate additional gold as needed.
This mechanism allowed central banks to counteract speculative pressures, maintain confidence in the U.S. dollar, and ensure gold supply stability.
Why Did the London Gold Pool Collapse?
By the mid-1960s, the London Gold Pool faced mounting pressure as global confidence in the U.S. dollar declined. Investors and foreign central banks increasingly questioned whether U.S. gold reserves could maintain the $35 per ounce peg.
A critical blow came in 1965 from French President Charles de Gaulle, a skeptic of U.S. monetary dominance. Convinced that the U.S. could not sustain its gold obligations, he spearheaded a policy of exchanging dollars for gold from the Fed. France’s substantial withdrawals encouraged other nations to follow suit, intensifying the crisis.
The situation worsened in 1967 when the devaluation of the British pound sterling raised fears of a similar fate for the dollar, triggering a surge in gold purchases and further depleting the Pool’s reserves.
By early 1968, demand for gold had reached unsustainable levels, forcing the London Gold Market to close temporarily on March 15th. This unprecedented move confirmed market fears that the system was collapsing. The London market stayed closed for two weeks while other markets continued to trade at higher and higher gold prices. When trading resumed, it became evident that central banks could no longer control gold prices. Faced with an untenable situation, they abandoned price controls, leading to the official dissolution of the London Gold Pool by the end of March.
The Gold Window
After the London Gold Pool’s collapse, the global gold market underwent a dramatic transformation. The U.S. attempted to maintain stability by continuing to exchange dollars for gold at the official $35 per ounce rate. However, gold prices climbed higher in the free market, creating a two-tiered system that increased strain on U.S. reserves. Some central banks took advantage of the price gap, called the gold window, by exchanging dollars for gold at the official rate and reselling it at higher market prices. In response, the U.S. pressured its allies to limit redemptions and selectively restricted gold outflows, though countries like France continued to drain reserves by aggressively converting dollars into gold.
By 1971, it was clear the system was unsustainable. On August 15, President Nixon announced that the U.S. would no longer convert dollars to gold, effectively closing the window for foreign governments. This move, later called the Nixon Shock, dismantled the Bretton Woods system and led to a global shift toward floating exchange rates. With no fixed peg to the dollar, gold’s value surged in the following years, cementing its role as a free-floating commodity rather than a fixed monetary anchor.
With gold now a freely traded commodity, prices surged as investors recognized its value as a hedge against inflation and economic instability. By 1974, gold had reached $180 per ounce, and by 1980, during a period of severe inflation, it peaked at an astonishing $850 per ounce. This shift solidified gold’s role as an essential asset in the global financial system and paved the way for the investment markets we see today.
