4 - The Bank's External Responsibilities to 1964

Summary

In the nineteenth century, the Bank's principal function had been to maintain gold convertibility. In the 1920s, there was an attempt to restore the gold standard that had been disrupted by war and that was achieved somewhat unsatisfactorily as the gold exchange standard. And although central banks were in the main still private institutions, the discipline of maintaining gold convertibility was felt to be a sufficient check on their activity. After 1945, the desire was to return to something close to the nineteenth-century gold standard but with improvements. The Bretton Woods arrangements, however, were faulty and stumbled along uncertainly from their introduction in 1947 through their fuller realisation in 1958 to their demise at the end of the 1960s. The period sees sterling and the ‘system’ under constant pressure – sterling because it was one of the two reserve currencies, and if it went, pressure would shift to the dollar. Thus the background to the problems that were to dominate in international finance in the 1960s lies in the nature of the Bretton Woods arrangements. At the heart of the problem lay the scale and distribution of gold reserves and how they might change. At the end of the Second World War, the United States had gold reserves of $20 billion, about 60 per cent of total official gold reserves. That seemed more than enough to defend the dollar parity. In fact, US reserves grew and peaked at $25 billion in 1949.