You have read many times on Your Survival Guy about President Richard Nixon ending gold convertibility, putting the U.S. dollar onto its current fiat currency course, and the reduction in the value of your dollars since then.
But readers should be reminded that Nixon didn’t have much of a choice, and the bad decisions and circumstances that led to the demise of the convertibility of dollars into gold had begun much earlier. The breakdown of what was known as the London Gold Pool, or simply the Gold Pool, in the late 1960s preceded the eventual end of gold convertibility.
In a 2017 paper written for NBER, Michael Bordo, Eric Monnet, and Alain Naef explain the breakdown of the Gold Pool and how it subsequently led to the end of the Bretton Woods system, as well as gold convertibility. They conclude:
This paper showed how the 1967 sterling devaluation was the trigger for a speculative run on gold that undermined the gold-dollar parity. This run caused unbearable losses for the Gold Pool. The role of sterling in the demise of the Gold Pool had often been hypothesized or even anticipated but this claim had never been investigated in a quantitative perspective before. The impact of the devaluation of the pound was not visible in the price of gold in 1967 since it was stabilized around an upper bound thanks to large Gold Pool interventions. This paper was able to substantiate this claim thanks to unique archival data (that were not publicly released) on Gold Pool interventions and on central banks’ demand at the US gold window. We also show that contagion between the sterling exchange rate and the dollar price of gold had started much before and continued until the end of the Gold Pool in March 1968.
This paper also clarifies the position of France in the Bretton Woods system. Bordo Simard and White (1993) as well as Monnet (2013, 2017) have shown how France behaved opportunistically in the mid-1960s to benefit from Anglo-American weaknesses. French authorities liked to view themselves as a major power and troublemakers against US hegemony, while, for the US, France was a useful culprit. Evidence in this paper shows that the effects of France’s actions on the gold market and the Bretton Woods system were minor at best. The strong link between sterling and the London gold market appears to be a much more salient feature of the period 1964-1967.
This paper also has broader implications for central bank cooperation. Cooperation in the Gold Pool remained technical rather than political and no effort was made to correct imbalances. The US refused to stabilize inflation, which undermined the credibility of the gold dollar parity, and supported measures to delay the adjustment of sterling exchange rate. Europeans neither committed to implement policies to counter the inflows of US dollars (they finally did after the Gold Pool ended) nor to run domestic policies or adjust their peg in order 51 to avoid speculation against their currencies. In such circumstances, the contagion from the 1967 sterling devaluation to the US gold-dollar parity turned out to be a fatal blow. The Gold Pool first absorbed the shock (without France’s participation) but the cost proved to be too high and central bank cooperation was deemed insufficient. Missing coordination of domestic policies or rule-based domestic policies, the interventions of the Gold Pool were not able to stop contagion between the two main reserve currencies.
The authors place more blame on the 1967 devaluation of the pound sterling by Great Britain and push back on traditional theories that uncooperative behavior by the French was the cause of trouble in the Gold Pool.
Whatever the cause, the purchasing power of American dollars has suffered as the effect. You can see in the charts below what happened to gold and the dollar since Nixon ended convertibility:
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