1900 to 1929: US had fixed amount of Dollar held can be exchanged for Gold coins. And every country allowed its individual currencies to be exchanged for gold, where every currency was fixed in reference to the amount of gold they held.
1929-1933: Great Depression
Consequence of Great Depression: US Changes its policy towards Gold.
Effect of Gold Policy Changes: Federal Reserve system should have kicked in when the systemic failure occurred during Great Depression, which did not take place. For the Fed reserve to function as expected in future for such failures, US took two steps.
1) Gold Reserve Act of 1934 brought the power for US to accumulate over large share of gold with US Treasury. As one would expect the US pegged more $ for the gold that was held by US citizens, with a 60% increase in price for gold. ($20 gold, was valued at $35). i.e. US Devalued its currency ($) against Gold.
2) Planned on Bretton Woods, NH meet by 44 nations to reach an agreement for future of stable currency standard for the world.
1930 - 1933: Gold standard collapsed under Bretton Woods Agreement
Note: Allied nations were preparing for World War II during this time.
Total Number of Nations: 44 (Allied Nations)
Bretton Woods agreement: Under this agreement , it was a setup of system of rules, institutions and procedures to regulate IMF and International Bank for Reconstruction and Development (IBRD) (Today’s World Bank)
This system started to run effectively after 1944/45.
Each Countries had an obligation: Every country will tie its currency to the US Dollar (with 1% parity) and ability of IMF to bridge temporary imbalance of payments. Where US Dollar becomes the base currency and US will link its $35 to one troy ounce.
1944 - 1969: Stability of Gold against an unstable Currency.
The gold price continued to increase beyond $35 per troy ounce due to demand, which resulted in pressure for US to print more of US$, and was forced to devalue its own currency irrespective of domestic market. To give a sense of what it looked like at that time, the price of gold rose from $35 per troy ounce in 1935 to $41.28 in 1969.
1970's US cost over Vietnam War and Increased domestic spending by Government resulted in high inflation.
US were running balance of payments deficit and trade deficit. In other words, it had to either pay gold, or pay $ to its lenders in order to meet those payment deficits. Till 1970, foreign countries held US Dollar bills and tied their currency to the US Dollar, with confidence on US market and ability to cut its budget and trade deficit.
In 1971, US printed more US Dollars, in order to pay for nation’s military spending and private investments. This was a devaluation of US Dollar by 10%. In other words, now one troy ounce of gold was $41. As per Bretton Woods agreement, countries will have to tie their currency to US Dollar. Since now US has devalued their currency, other countries that tied up to US Dollar also had to devalue their currency. West Germany (prior to 1989/90, Germany was divided as West and East) was the first country to withdraw from Bretton Woods agreement, since it did not want to devalue its currency. The move by West Germany strengthened their economy, and was value of US Dollar dropped by 7.5% against West German Currency (Deutsche Mark). Due to excess of dollars printed by US, and negative trade balance (lenders around the world), many countries started demanding US to meet their promise to pay as per Bretton woods agreement by exchanging gold for the US Paper dollars given back by those countries, they did not want the Dollars. They wanted to dump US Dollars back to US, and exchange for gold in return. Switzerland was followed by France in demanding gold in return of US Dollar Papers. Switzerland next withdrew from Bretton Woods agreement. Soon US Dollar began losing its value against European Currencies. All these events resulted in high inflation and greater spending by the US Government in domestic market, and on Vietnam War. To stop other countries from demanding gold on basis of promise to pay, US President Nixon gave a shock to the entire world by announcing the closure for gold window, where convertibility between US Dollar and Gold came to an End.
After 1971: Bubble begins to build on GOLD
After Nixon’s Shock, US Dollar was not longer tied to gold in direct proportions of closer to 1ounce / $35, but the price was declared to fluctuate based on market demand for gold. Ever since 1900 till 1971, it was mostly the Kingdoms around the world, the Central Banks & IMF which held huge reserve of gold (IMF sells gold when needed at the market price to raise fund for operational cost and other expenditures and welfare of developing / poor nations). Among the Central Banks, US Fed Reserve still holds huge amount of gold / major share of gold in its reserve. This leads to the phenomenon of linking US Economy (major stake holder of gold reserve) to gold price. In summary, market price after 1971 could go any way by supply, demand for gold and stability of global economy, since many central banks have began stacking up more of gold. In reference to the inflation between 1971 and 2011, today’s price of gold is over inflated when in reference to US economy but with globalization and taking different world economies in picture, today's price could be closer to where it is currently in ref. to adjusted global inflation in average, but its still a GOLD BUBBLE long due for burst since 1971.
