Europe’s Preparations for a Return to a Gold-Backed Currency System
Step back in time to the early 1970s when a momentous decision altered the global financial landscape forever. As the U.S. unpegged the dollar from gold, signaling the end of the Bretton Woods system, Europe embarked on a different path—one that has been veiled in secrecy and strategic maneuvering for decades.
Unknown to many, European countries have been diligently preparing for a return to a gold-backed currency system, countering the dollar hegemony and shaping a new equitable financial order.
Europe Initiated Secret Plans as the USA Abandoned the Gold Standard
The early 1970s marked a pivotal moment in the history of the global financial system. As the United States unilaterally severed the link between the dollar and gold, dismantling the Bretton Woods system, the world embarked on an uncertain journey toward a new monetary landscape.
Amidst this turbulence, a hidden and lesser-known story was unfolding in the corridors of power in Europe. Unbeknownst to many, European countries were not merely spectators in this grand financial transformation—they were secretly laying the groundwork for a momentous shift of their own. For decades, behind closed doors, Europe had been engaged in strategic preparations to return to a gold-backed currency system, countering the dollar hegemony and forging a new equitable financial order.
In this revealing account, we unearth the extraordinary efforts undertaken by European central banks, from equalizing gold reserves to promoting gold ownership, and explore the unmistakable signals pointing towards a return to the golden standard. The implications of Europe’s well-prepared stance reach far beyond its borders, hinting at a significant transformation in the global monetary system and a potential surge in the value of the precious metal.
Here are the hidden facts of European Gold Currency preparations—where the past, present, and future collide in a tale of power, strategy, and gold’s enduring financial significance in global economic landscapes today.
Key Terms and Organizations referenced in this Article Series:
- Fiat Currency System: The current international monetary system based on paper money not backed by a physical commodity like gold.
- Gold Standard: A monetary system where a country’s currency is directly linked to a specific amount of gold.
- Bretton Woods: The international monetary system established after World War II, where the U.S. dollar was pegged to gold at $35 per ounce.
- London Gold Pool: A consortium of eight Western central banks set up in 1961 to stabilize the gold price in the free market.
- European Economic Community (EEC): An economic organization established by the Treaty of Rome in 1957, which later evolved into the European Union (EU).
- Central Bank Gold Agreements (CBGA): A series of agreements signed by European central banks to coordinate and limit gold sales.
- Bank for International Settlement (BIS): An international financial institution that serves as a bank for central banks.
- Special Drawing Right (SDR): A reserve asset issued by the International Monetary Fund (IMF).
- Shanghai Gold Exchange (SGE): The largest physical gold exchange in the world, based in China.
- European Monetary System (EMS): A system launched in 1979 by European countries to stabilize exchange rates and pave the way for the Eurosystem.
- Eurosystem: The monetary authority of the eurozone countries responsible for monetary policy and the issuance of the euro currency.
- Central Bank of Hungary (MNB): The central bank of Hungary responsible for monetary policy and currency issuance.
- Central Bank of Poland (NBP): The central bank of Poland responsible for monetary policy and currency issuance.
- Central Bank of Italy: The central bank of Italy responsible for monetary policy and currency issuance.
- Banque de France: The central bank of France responsible for monetary policy and currency issuance.
- Deutsche Bundesbank: The central bank of Germany responsible for monetary policy and currency issuance.
- National Bank of Romania (BNR): The central bank of Romania responsible for monetary policy and currency issuance.
- Bank of England: The central bank of the United Kingdom responsible for monetary policy and currency issuance.
- Bank of Japan: The central bank of Japan responsible for monetary policy and currency issuance.
- International Financial Forum (IFF): An international organization focusing on global financial matters.
Early 1970’s: The End of the US Dollar Gold Standard and European Reactions
In 1971, the United States officially terminated the gold standard, marking the end of the Bretton Woods international monetary system. The U.S. dollar, previously backed by gold at a fixed parity of $35 per ounce, was transformed into a pure fiat currency. European central banks found themselves in a challenging position, forced to go along with the dollar hegemony due to prevailing circumstances. However, sentiment in Europe was to counter dollar dominance and gradually prepare for a new monetary arrangement that incorporated gold.
Bretton Woods and the London Gold Pool
Following World War II, the Bretton Woods international monetary system was established, with the U.S. dollar designated as the world reserve currency, backed by gold at $35 per ounce. Under this system, participating countries agreed to peg their currencies to the U.S. dollar, creating a gold exchange standard. To stabilize the gold price in the free market at $35 per ounce, a consortium of eight Western central banks set up the London Gold Pool in 1961. However, France, critical of U.S. monetary policy, repeatedly redeemed dollars for gold at the U.S. Treasury, leading to the depletion of U.S. gold reserves.
The Collapse of the London Gold Pool and the Two-Tier Gold Market
As pressure on the dollar increased between 1965 and 1968, the London Gold Pool had to supply substantial amounts of gold to maintain the peg. European central bankers began considering ways to exit the Pool agreement, as they did not want to indefinitely defend the peg, which was primarily caused by U.S. monetary policies. Consequently, on March 15, 1968, the London Gold Pool ceased its operations, and the gold price in the free market was allowed to float. This development led to the emergence of a “two-tier gold market,” wherein central banks continued trading gold among themselves at $35 per ounce but refrained from buying and selling in the free market.
What was the Two-tiered Gold Market?
- The two-tiered gold market refers to a system in which there are two distinct markets for gold with different pricing mechanisms. This system was introduced in the late 1960s as a response to the challenges faced by the Bretton Woods monetary system, which was based on the fixed exchange rate of the U.S. dollar to gold.
- Under the Bretton Woods system, the U.S. dollar was officially pegged to gold at a fixed rate of $35 per ounce, and other participating countries committed to pegging their currencies to the U.S. dollar. However, as the U.S. printed and exported more dollars than it had gold reserves to back them, foreign central banks began to redeem their dollars for gold from the U.S. Treasury. This led to a depletion of the U.S. gold reserves and raised concerns about the sustainability of the $35-per-ounce gold price.
- To address this issue, a two-tiered gold market was established in 1968. In the first tier, central banks continued to trade gold among themselves at the fixed rate of $35 per ounce. This arrangement allowed central banks to settle international transactions and maintain some stability in the gold market.
- The second tier, on the other hand, allowed gold to trade freely in the open market, where its price was determined by market forces of supply and demand. This market-driven price was often higher than the official fixed rate of $35 per ounce. Central banks agreed not to buy or sell gold in this free market to avoid disrupting the official fixed exchange rate.
- The two-tiered gold market allowed central banks to manage their gold reserves more flexibly while still adhering to the Bretton Woods system. However, as the pressures on the dollar continued to mount, the system ultimately proved unsustainable. In 1971, the U.S. unilaterally decided to suspend the convertibility of the dollar into gold, effectively ending the Bretton Woods system and the two-tiered gold market. This event marked the beginning of the era of fiat currencies and the gradual shift away from the gold standard in the international monetary system.
U.S. Decision to End Bretton Woods and Europe’s Response
In early August 1971, France’s move to exchange dollars for gold by sending a battleship to New York signaled ongoing concerns about the dollar’s value. Just days later, on August 15, 1971, the United States unilaterally decided to end Bretton Woods by suspending dollar convertibility into gold. This decision led to a significant diplomatic conflict between Europe, Japan, and other countries, as their dollar reserves were no longer backed by gold.
The U.S. Efforts to Replace Gold with Treasuries
Since the 1960s, the U.S. had been encouraging foreign central banks to reinvest their dollar reserves in U.S. government bonds (Treasuries) instead of redeeming them for gold. This strategy aimed to replace gold with Treasuries in the international monetary system, allowing the U.S. to continue printing money for imports and financing fiscal deficits. However, this move was not seen as an equitable system by European central banks.
The Creation of the Euro to Counter Dollar Dominance
To counter dollar dominance and provide an alternative to the U.S. dollar as a global reserve currency, Europe embarked on a path towards integration. The Treaty of Rome in 1957 gave birth to the European Economic Community (EEC), marking the first step in European integration. The euro, later introduced as a common currency, was envisioned as a means to challenge the dollar’s hegemony and create a more balanced international monetary system.
From the events described here in Part 1, it is evident that Europe has been diligently preparing for a return to a gold-backed currency system since the 1970s. European central banks have taken careful and gradual steps to pave the way for a new monetary system based on gold, signaling their intent to move away from the current fiat international monetary system. The subsequent part of this report will delve deeper into the specific measures undertaken by European central banks to prepare for this transition and analyze their potential implications for the global financial landscape.
Declassified: The Battle for Economic Supremacy – Europe vs. the United States
In the early 1970s, a crucial turning point in the global economic landscape was unfolding as the United States, under the Nixon administration, decided to abandon the gold standard. The U.S. National Security Advisor, Henry Kissinger, and Deputy Secretary of the Treasury, William Simon, were at the forefront of discussions shaping the U.S.’s stance on the international monetary system.
Kissinger, in a phone call with Simon on March 14, 1973, revealed his concerns about a unified European monetary system, fearing it would challenge the dollar’s dominance. He stated, “I basically have only one view right now which is to do as much as we can to prevent a united European position without showing our hand… I don’t think a unified European monetary system is in our interest.”
The European solution, which aimed to fix exchange rates of the European Economic Community (EEC) currencies and float as a bloc against the dollar, was perceived as a move to leave the United States out of the global financial equation. Kissinger’s intelligence report on discussions in the German Cabinet further fueled his resolve to prevent Europe from unifying its monetary system.
However, the EEC was determined to assert its economic independence and unity. The EEC publicly declared its commitment to international monetary reform that would consider the interests of developing countries. French President Georges Pompidou emphasized that multiple centers of economic and political power would bring stability to the world. He said in a meeting with U.S. President Richard Nixon in 1970, “Power thus established never lasts long. The existence of more centers of economic and political power makes things more complicated but in the longer term has greater advantages.”
The U.S. opposed the end of the two-tier gold market, which allowed central banks to buy and sell gold among themselves at a fixed price while the free-market price fluctuated. Phasing gold out of the international monetary system was a priority for the U.S., aiming to maintain control and minimize the influence of other countries, particularly those in Western Europe, who held substantial gold reserves.
In a critical meeting in 1974, Secretary of State Henry Kissinger discussed the EC proposal to revalue gold and create a European Gold Standard Currency. Arthur Burns, Chair of the Federal Reserve, and Henry Wallich, an international affairs expert, weighed in on the matter, revealing the U.S.’s determination to prevent gold from reclaiming its position as the centerpiece of the global financial system.
Henry Wallich expressed his view that the European proposal would result in putting gold back into the system at a higher price, saying, “I think probably I do. The question is: Suppose they go ahead on their own anyway. What then?”
Kissinger echoed the U.S. opposition, stating, “My instinct is to oppose it. What’s your view, Ken?” to which Ken Rush, Deputy Secretary of the Treasury of the United States from 1972 to 1973, replied, “Well, I think probably I do. The question is: Suppose they go ahead on their own anyway. What then?”
The U.S. feared that Europe’s control over a large portion of the world’s gold reserves would give them leverage over international monetary matters. William Simon, U.S. Secretary of the Treasury from 1974 to 1977, argued, “If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power.”
In the face of Europe’s determination to challenge the dollar hegemony and promote an equitable monetary system, the U.S. remained steadfast in its opposition to any move that would reestablish gold’s prominence. The battle for control over the global financial order continued, with the outcome having far-reaching implications for the stability and power dynamics of the world economy. The struggle between Europe and the United States was far from over, and the path to a new monetary system based on gold would prove to be an intricate and contentious journey.
TO BE CONTINUED IN PART 2
