Anthony J. Pennings, PhD


From Gold to G-20: Flexible Currency Rates and Global Power

Posted on | November 11, 2018 | No Comments

When British author Ian Fleming published the James Bond spy novel Goldfinger in 1959, the world was locking into a new framework for managing global trade and foreign exchange transactions. The New Deal’s Bretton Woods agreements tied participating currencies into a fixed exchange rate with the US dollar that itself was tied to $35 for an ounce of gold. The Goldfinger movie (1964) centered around the stocks of gold nestled away at the Fort Knox Bullion Depository, Kentucky. The sinister plan (spoiler alert) suggested Auric Goldfinger was conspiring with the mafia to rob the famous bank, but the actual plan was to work with the Chinese to nuke Fort Knox so that the rest of the world’s gold supplies (that he had been buying up) increased dramatically in value. Below is a clip of the conclusion of the movie.

This post discusses how the major industrialized nation-states organized to manage the transition from fixed exchange rates to the global, floating, digital trading environments that emerged in the 1970s and shaped the modern world.

President Franklin Delano Roosevelt (FDR) created Fort Knox in 1935 during the New Deal after outlawing the use of gold for private wealth holdings and as common currency. The Public Works Administration began construction of the giant vault in 1935 as fears of spreading fascism in Europe convinced him to move US-held gold from mints and treasuries along the Eastern seaboard and store them far inland and next to Fort Knox, a US military training facility that had pioneered the use of tank tactics during World War I.

As the Nazis began to conquer neighboring countries to steal their gold, much of the durable metal escaped and flowed into Fort Knox. Britain bought US military equipment and supplies, and other countries sought refuge for their metallic wealth. By the end of the war, most of the world’s gold was tucked away at Fort Knox and formed the basis for a new international currency arrangement.

As the war was coming to an end, the Allies met in Bretton Woods, New Hampshire, to iron out a new international framework for currency control and trade. The resulting 1944 agreement created the International Monetary Fund (IMF), the World Bank, and a precursor to the World Trade Organization (WTO), and the International Trade Organization (ITO). The ITO was defeated by the US Congress at the time, but the main result of the conference was an agreement to stabilize world currencies by tying the US dollar to gold at $35 an ounce and requiring trading partners to keep the value of their currencies connected to the dollar by 1-3 percent in value. This arrangement was successful but started to fall apart due to spread of dollars around the world that were circulating back to the US as a claim to the gold at Fort Knox.

When Richard Nixon shocked the world of the Bretton Wood’s gold-dollar standard in 1971, he initiated what would become a new global economy based on flexible currency exchange rates with the US dollar as the principal currency. The USD became “fiat” money, no longer tied to the promise of gold convertibility. His New Economic Policy (NEP) was partially responsible for the transition to digital currency trading as commercial financial institutions intensified their interest in the F/X markets. As the international financial system became more electronically-based and transactions escalated in scale and scope, a new regime of power emerged. However, the process was a long and often painful one.

The announcement that Nixon merely “closed the gold window,” made to a national television audience on August 15th of that year, was a rhetorical understatement meant to lessen the startlingly dramatic changes he was imposing on the world economy. Nixon was stating that the US was not going to intervene in the foreign exchange markets to manage the price of the dollar or continue to deplete US gold reserves. To give him a bargaining chip in future international negotiations, he also added a 10 percent surcharge to imports in his NEP. The move destabilized the world of fixed currency rates and ended the Bretton Woods control over international finance. It concluded what had in effect beena gold standard.[1]

The Nixon moves were strongly opposed by Japan and Western Europe, fast becoming major economic competitors due to automobiles and other cheap and attractive imports. The “Nixon Shokku” drove the value of the US dollar down and made exports into the US more expensive, increasing price inflation. He responded with charges that his economic counterparts were trading unfairly with mercantile tactics, and freeloaded off the US by failing to contribute to the NATO defense effort. The US dollar lost nearly a third of its value during the first six years after the dollar had its link to gold severed.

Nixon was also working with the OPEC countries to raise oil prices and cripple his economic foes, who were much more reliant on external petroleum production than the US. OPEC was essentially a cartel designed to managed the price of oil, which were priced the US dollar. The floating exchange rates were leading to a dramatic fall in the value of the US dollar and nations had to buy dollars first to purchase OPEC crude. Consequently, OPEC countries started to increase the price of oil.

Nixon had strong allies in the banking community who were intrigued by the profit possibilities in arbitrage, consulting, and hedging. The policy signaled a significant shift away from government control to a new, free yielding environment where US banks could break out of their highly regulated and geographically limited reins. Walter Wriston, who would later coin the term “information standard,” argued that in this new environment, his Citicorp enterprise, “ought to have a price-to-earnings (P/E) ratio of 15 to 20, typical of growth stocks, rather than a ratio of 5 to 6, which was typical of public utility companies.” In the next few years, Citicorp stock reached a P/E ratio of 25. The stock moves invigorated the banking industry as they began to move into international activities such as Eurodollar lending.[3]

To buy time to sort out the implications of the broken Bretton Woods system, the US initiated a conference via the IMF on world monetary reform. The IMF was organized around its Articles of Agreement consented to by its participating countries, although the US held a privileged place due to its overall power and dollar’s strength. The IMF set up the Committee of 20 (C-20) in 1972 to prepare proposals for a new financial regime in the wake of Nixon’s closing the gold window. The committee was made up of representatives of the twenty countries most involved in non-communist international trading and finance.

The C-20 met between 1972 and 1974 to develop a new international system that would subordinate currencies to Special Drawing Rights (SDRs), a global reserve asset created in 1969. Although SDRs allocations provided some liquidity and supplemented member countries’ official reserves, it proved inadequate to stabilize the monetary system. The C-20 broke down in 1974 over concerns about countries being forced to inflate their currencies to buy up excessive US dollars.

Concerns were raised by the Group of Ten (G-10). They had created the infamous Interim Committee that had been responsible for the ill-fated Smithsonian Agreement in December 1971. Those accords had established a new dollar-gold standard, where the currencies of many industrialized nations were again pegged to the US dollar, but at an inflated $38 an oz. A crisis ensued, and the US dollar continued to drop in value.[3]

The committee reconvened on March 25, 1973, at the White House to discuss the international monetary crisis at the invitation of US Secretary of the Treasury, George Schultz and his undersecretary Paul Volcker (later appointed as Federal Reserve Chairman). Their list included finance ministers from England, France, and Germany. Although they resolved to address the issue of destabilized currency rates, late that year, overwhelmed by the first Middle East “Oil Crisis,” the Group of Ten decided by default that exchange rates would float.[4]

The Oil Crisis, sparked by OPEC’s embargo of petroleum to the US for its support of Israel, increased widespread volatility in the foreign exchange markets. A beneficiary was a startup project by Reuters called Money Monitor Rates. A well-established news agency, Reuters created a two-sided electronic market for currency markets. It charged selling banks to list currency prices on computer monitors, while also charged buying banks to access the currency prices. The crisis helped the Reuters endeavor become profitable as currency traders valued the electronic information.

Schultz and Volcker next agreed to invite the Japanese, and the news media labeled the group the “G-5” and began to refer to the “Group of Five” meetings. The next year, two of the finance ministers became the head of government. When Valery Giscard d’Estaing from France and Helmut Schmidt from Germany became leaders of their respective countries, they attempted to elevate the meetings to include not only the ministerial, but heads of government as well.

The new group met for the first time during November 15-17, 1975 at the Chateau de Rambouillet, France.[5] At that meeting the heads of state and the finance ministers of France, Germany, Japan, the United States, and Great Britain, the G-5 prepared (some reluctantly) the Declaration of Rambouillet. They forsook a system of stable monetary rates for a “stable system of exchange rates.”[6] Instead of governments agreeing to peg currencies according to political agreements, they instead would manage the macro-environment in which foreign exchange rates would be set by market forces.

The Second Amendment to the IMF’s Articles of Agreement officially eliminated the unique role of gold and legitimized floating exchange rates in 1978. The governments of the major currencies decided to let the “markets” decide the proper exchange rates for its currencies. In the future, it would be infeasible for sovereign governments, except maybe the US, to be able to dictate the value of their money.

The next year Canada attended, and after the fall of the USSR, Russia began to participate. In the wake of Bretton Woods demise, the G-# summits played an important role in providing overall stability for the foreign exchange markets and world economy as a whole. Although America clearly led the group, and volatility was rampant, the group produced global coordination and symbolic power.[7] One of its most important roles is to solidify the notion of national sovereignty. In the age of the transnational money markets, the individual nation-state needed to be reified. That is, propped up in part to maintain the system of different currencies. Notable examples were the debt crises of the 1980s and the Asian currency crisis in 1997.

Susan Strange:

    The Group of Ten developed countries, by contributing to rescue funds for troubled Asian economies, reiterated more forcefully than ever the conviction that in the modern international financial system, bankruptcy was not an option, at least, not bankruptcy in the sense that a failed business closes down, gets sold off to the best bidder or taken over lock, stock, and barrel. The appearance of an immortal, sovereign state was to be preserved—not for its own sake, but for the greater security of the world system.

The financial disruptions of the 1990s, particularly in Asia and the USSR, led to the formation of the G-20 in 1999 at the G-7 Cologne Summit. They saw the need include “systemically important countries” in the discussions about the global economy. Initially, it was the finance ministers who met every year, until George W. Bush invited the G-20 leaders to Washington DC to discuss the unfolding economic crisis.

After its inaugural meeting of the national leader’s summit in 2008, the G-20 announced in September 2009 that it would replace the G-8 as the main economic council of wealthy nations. The Obama administration pushed for the change in the midst of the Great Recession in recognition of the influence of many other countries on the global economy and the need to coordinate policy among the major countries.

The G-# summits have been held annually since that time to address a number of macroeconomic issues affecting the global political economy as well as crime, drugs, the environment, and human rights. During the 1990s, they synchronized the “global information infrastructure” and its transition to the global Internet.

Meanwhile, the financial system’s “information standard” has solidified its power as the replacement for the gold with the extraordinary increase in digital money and flows of currency. In junction with the G-#’s political power, a modicum of systemic stability and coordination keeps the world turning, as James Bond would have it.

Citation APA (7th Edition)

Pennings, A.J. (2018, Nov 11). From Gold to G-20: Flexible Currency Rates and Global Power.



[1] Greider, W. (1987) Secrets of the Temple. How the Federal Reserve Runs the Country. New York: Simon and Schuster. pp. 337-338. A very extensive treatise on the economic conditions of the 1970s.
[2] Smith, R. (1989) The Global Bankers. New York: Truman Talley Books/ Plume. p. 34.
[3] The G-10 consisted of governments of eight International Monetary Fund (IMF) members—Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, and the United States—and the central banks Germany and Sweden. This group was, by default, in charge of maintaining the economic growth and stability of international currencies. Although in effect, its powers are limited, it still presented an important image of national sovereignty.
[4] Gowan, P. Global Gamble: Washington’s Faustian Bid for World Dominance. London: Verso. p. 20-21.
[5] G-7/G-8 Summits: History and Purpose. Fact sheet released by the Bureau of European and Canadian Affairs, U.S. Department of State, April 30, 1998 accessed on May 01, 2001 from:
[6] Eichengreen, B. (1996) Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press. I am indebted to his fifth chapter, “From Floating to Monetary Unification,” which contains a good overview of this process. Pages 136-141 were particularly useful.
[7] Peter Gowan (1999) makes a strong case for the dominance of the US in the G-7 oligarchy in his book The Global Gamble: Washington’s Faustian Bid for World Dominance. London: Verso.
[8] Strange, S. (1997) Mad Money: When Markets Outgrow Governments. Ann Arbor: University of Michigan Press. p. 9.


AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.


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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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