Guest Post: "Discussing The London Gold Pool and SWIFT", by James Gibson
Longtime TFMR member James Gibson volunteered this information in the hope of answering some questions on The London Gold Pool of the 1960s and the current SWIFT system of international payments.
Thanks to James for all his efforts in documenting this information and putting it out to the masses through his great book, "From East To West".
Recently, I noted that a Turdite requested the story of The London Gold Pool and several Turdites have been discussing the USA’s threat to expel China from SWIFT.
So, I thought that it might be appreciated if I quoted some extracts on these subjects from my book.
FROM WEST TO EAST
The Greatest Transfer of Power and Wealth in the History of Mankind
The London Gold Pool
Amongst the many initiatives agreed on at the Bretton Woods Conference was the intention to introduce a system described by many as a gold exchange standard, which was, in essence, a diluted variation of the classic gold standard.
Under this new Bretton Woods gold exchange standard, most countries fixed, or pegged, their currency’s exchange rate to that of the US dollar. National central banks could, if they so wished, exchange their US dollar holdings into gold at the official fixed rate of US $35 per ounce. However, that option was not available to corporations or individuals. Under this Bretton Woods system, all currencies pegged to the US dollar also had a de facto fixed value in terms of gold.
The gold exchange standard did not affect the independent global or regional markets in which gold was freely traded as a precious metal commodity. For the Bretton Woods system to have been effective on a sustainable basis, the fix of the US dollar to the price of gold should have been adjustable. Failing that, the free market price of gold would have to be maintained near the official Bretton Woods’s fixed price of $35 per ounce.
The larger the gap, known as the gold window, between the free market gold price and the official fixed price, the more tempting it was for nations dealing with internal economic or financial problems to buy gold at the Bretton Woods price and sell it in the open gold markets for the higher floating free price, which was dictated by supply and demand.
With post war economic activity picking up, international trade and foreign exchange reserves rose. However, there was only a marginal increase in global gold mine production. The result was that the gold window was experiencing upward pressure. The situation was not helped by the United States suffering from persistent trade imbalances. This begs the question: Why was gold not revalued to a suitable price so as to eliminate the pressure on the gold window?
US oil import quotas and restrictions on trade inflows proved insufficient to arrest the outflow of gold from its reserves. Things came to a head during the 1960 presidential election debates, when panic gold buying led to a surge in the open gold free market price to USD$40 per ounce. The US Federal Reserve and the Bank of England reached an agreement to stabilise the open market gold price at, or near, the official price, thus ending the drain on the United States’ gold reserves. They would do this by allocating a substantial tonnage of gold to be held by the Bank of England for sale; ergo, they sought to flood the market with sufficient gold to depress the free market price and discourage investment demand.
In November 1961, a total of eight nations entered into an agreement on a system to depress the free market price of gold back down to the official fixed price of USD$35 per ounce and thereafter defend that price by means of targeted gold sales and purchases on the free gold market.
This cartel of governments, and their creation, became known as the London Gold Pool.
As part of the agreement, each of the eight participating nations made a contribution of gold bullion to the London Gold Pool, led by the United States pledging to match all other contributions on a one-to-one basis, thus contributing 50 percent of the pool.
By 1965 the London Gold Pool was increasingly unable to balance the outflow of gold. Excessive inflation of the US money supply, in part to fund the costs of the Vietnam War, resulted in the United States no longer being able to redeem other nations’ US dollar holdings into gold, simply because the world’s gold reserves had not grown fast enough to keep pace with the United States’ trade deficit, which had grown to US$3 billion.
The London Gold Pool came under ever-increasing pressure of failure, causing France to announce its withdrawal from the agreement in June 1967 and physically remove a large amount of its gold bullion from New York to Paris.
Another 1967 run on gold and an attack on the British pound accelerated the rate of collapse of the London Gold Pool’s arrangements. By spring 1968, the international financial system was moving toward a crisis more dangerous than any since 1931.
Despite policy support and market efforts by the United States, the 1967 attack on the British pound, coupled with the run on gold, forced the British government to devalue the pound by 14.3 percent on 18 November 1967.
Additional measures were taken in the United States in an attempt to avoid a continuation of the run on gold and the attacks on the US dollar. On 14 March 1968, due to heavy gold demand, the US government requested the British government to close the London gold market. The British government petitioned the queen, who declared a bank holiday on Friday, 15 March.
A conference scheduled for that weekend in Washington served as the vehicle for emergency discussions on the international monetary situation and to reach a decision with regards to future policy on gold. The events of that weekend led the US Congress to repeal the requirement for a gold reserve to back US currency as of Monday, 18 March 1968.
The London Gold market remained closed for two weeks, whilst gold markets in other countries continued trading with increasing gold prices. These events led to the closure of the London Gold Pool.
With the temporary closure of the London gold market in March 1968 and the resulting instability of the gold markets and the international financial system in general, Swiss banks took urgent action to minimise effects on the Swiss banking system and currency. They did so by establishing a gold trading organization, called the Zurich Gold Pool, which helped establish Zurich as a major trading location for gold bullion.
The collapse of the London Gold Pool forced an official policy of a two-tiered gold market system by:
(1) Maintaining the official fixed price of gold at USD$35 per ounce
(2) Allowing free open market gold transactions
It was agreed that the London Gold Pool member nations would refuse to trade gold with corporations or private persons. In an attempt to minimize the gold window, the United States pledged to suspend gold sales to any government that traded in the free gold markets.
Amidst accelerating inflation in the United States, this unsustainable situation collapsed in May 1971, when West Germany was the first nation to withdraw support for the US dollar and officially abandon the Bretton Woods accords, precipitating a quick decline in the value of the US dollar. Under pressure from currency speculators, Switzerland also withdrew support in August 1971 with USD$50 million in gold purchases; France followed suit with gold purchases of USD$191 million. This brought the US gold reserves down to approximately eight thousand one hundred tonnes, from an all-time high at the end of World War II in excess of twenty thousand tonnes!
It is worth noting that there has been no independent audit of the United States of America’s official gold reserves since 1953.
There is an old saying that goes “He who owns the gold, makes the rules.”
One cannot help but wonder how much of the gold sold during through the London Gold Pool ended up in the vaults of the Puppeteers.
Nixon Opts Out of the Gold Exchange Standard in Favour of Fiat Currency
The significant and rapid depletion of the United States’ national gold reserves was clearly unsustainable. President Nixon was faced with two choices:
- significantly devalue the US dollar against the price of gold
- terminate the Bretton Woods gold exchange standard
Nixon, like most politicians, did not wish to be fiscally restrained by gold, so, on 15 August 1971, he chose the easy option and temporarily suspended the gold exchange standard. As with all “temporary” government measures, it became permanent in March 1973.
Effective from 1 January 1975, it once again became legal for US citizens to own gold. The events of 1971 ignited a bull market
In 2012, under pressure from the United States, Iran was expelled from the world’s international banking transfer system (SWIFT), which had a profoundly adverse impact on Iran’s economy. This US-driven action only served to galvanise China to develop and introduce, as a matter of great urgency, an international transfer system capable of operating independently of the US dollar and SWIFT, as it was obviously critical to China’s national and economic security.
By the fall of 2016, China had very substantially put in place the essential financial infrastructure required to operate an international financial system independent of the US dollar, should that need become imperative. Detailed below are the principal building blocks of that system:
- An alternative international payment system to SWIFT, called CIPS (China International Payment System), is now operational.
- Foreign central banks are now able to participate in the Chinese interbank bond market.
- China has granted permission for twelve foreign central banks to participate in the Chinese onshore foreign exchange market, with further approvals expected.
- Precious metals markets are open to international participation through the Shanghai International Gold Exchange.
- Some commodity markets are now open to international participation by commodity trading and brokerage firms.
- Stock markets are open to international participation through the Hong Kong-Shanghai stock connect programme.
- The BRICS New Development Bank has been established, which will provide similar services as the World Bank.
- The Asian Infrastructure Investment Bank (AIIB) has been established to focus on supporting the rapid infrastructural development in Eurasian (Silk Route), BRICS, and affiliated nations.
- A gold fund with a seed capital of yuan 100 billion (~USD$16 billion) has been established, with the specific objective of building up the sovereign gold reserves of the BRICS and SCO countries, through acquiring/building gold mines along the new Silk Route.
- Chinese and Russian credit card systems, which are settled in yuan and rubles, are operational and handle very substantial settlement volumes. *
- Multiple bilateral currency swap agreements for the settlement of trade in yuan have been signed with over thirty countries, including the United Kingdom, Germany, France, Switzerland, and Australia. This enables settlement of international trade without using the US dollar.
- The introduction and development of yuan bond markets in key major financial centres around the world is progressing steadily, in line with China’s plans to internationalise the yuan.
- The introduction of a Chinese twice-a-day gold fix in yuan became operational on 19 April 2016.
- The establishment of an oil futures market priced in yuan, open to international participation, is expected to open in the second half of 2017.
- The yuan became one of the basket of major currencies that make up the IMF’s SDR (Special Drawing Rights) on 1 October 2016, which de facto makes the yuan one of the world’s secondary reserve currencies.
- Russia is in the final stages of preparation for the launch of its own oil futures market priced in rubles in the second half of 2017.
*In 1999, China had just one supercomputer, whilst the United States of America had some 250. Today China has 168 supercomputers, whilst the United States is down to only 165, but China’s supercomputers, being more modern, include many of the fastest.
It is not widely appreciated, but supercomputers have enabled China to become the number-one processor of credit and debit card payments worldwide. The Chinese state-owned China Union Pay has issued more debit and credit cards than Visa and MasterCard combined, and its cards are used in approximately 150 countries.
Supercomputers have also been instrumental in China becoming a world leader in virtual cyber currencies, such as Bitcoin, using blockchain technology. Cyber currencies require exceptionally complex and sophisticated software for their creation and use, only made possible by using supercomputers. Supercomputers also provide the processing power and capabilities necessary to handle and keep track of financial transactions in a highly secure, decentralized environment that minimizes the possibility of hacking.
The bottom line is, that if the USA expels China from SWIFT that would very likely provide the necessary trigger for China and Russia to launch their own international financial system operating independently from the current US Dollar dominated international financial system. Under those circumstances both China and Russia would very likely also launch their separate oil futures markets, as well as providing the facility to switch the proceeds of oil sales denominated in yuan and rubles into physical gold bullion. That would be the last thing that the USA would wish to see happen, as it would lead to the death of the US Petrodollar.