The Bretton Woods system was intentionally set up to funnel monetary convertibility through official channels. The primary characteristic of any true gold standard is that any person who wishes can change paper claims into hard money. It was as much true in any one country as between those bound by the same legal framework (property). What might differ were the standards for satisfying those claims (“good delivery” wasn’t a uniform idea, which is why gold swaps first arose), but overall people could access gold on an individual basis.
Blaming the people for the Great Depression, economists saw no need to replicate the error (as they saw it). Thus, gold would be maintained as the primary monetary basis worldwide but would be subject to it in a very narrow context. Central banks would do the converting, meaning that if you were a bank in Germany who came into possession of dollars your recourse was Bundesbank rather than Morgan Guarantee.
This unintentionally alleviated the private merchant market for global trade of a great deal of risk. That risk didn’t disappear, it was merely transferred to the public sector where astute and enlightened economists were thought dispassionately equipped to properly handle it. John Maynard Keynes, one of the primary architects of Bretton Woods, was convinced this was the case.
If that was so, the Bretton Woods standard only lasted a little more than a decade before the “cheating” began. The formation of the London Gold Pool in late 1960 was by the standards of gold a default event. Policymakers were simply unprepared for the technological changes of that era which spilled over into evolving monetary arrangements. A modernizing world yearned for the flow of capital, even if the private side were to have to invent it.
After the formation of the London Gold Pool, it became rather common for foreign central banks to circumvent the rules of Bretton Woods in other ways. Many nations in order to keep their currencies pegged were given statutory standards that would trigger convertibility of either sterling (the earlier years) or dollars (especially after 1955). If private banks in a particular nation, primarily Europe, were to accumulate dollar balances and seek protection (inflation risk) from them, they would convert them into local currency at a fixed rate with their central bank. That central bank now in possession of dollars would, if above that threshold, normally obtain US gold but increasingly went in another direction.
From the FOMC Memorandum of Discussion for their November 1962 policy meeting:
Furthermore, the forward operations of the Treasury and, to a much smaller extent, the System swap arrangements have enabled some countries to convert straight dollar holdings into holdings protected by an exchange value guarantee. During the first nine months of this year, more than $600 million were thus converted by continental European countries. While the eight major continental European countries statistically increased their dollar holdings by $150 million, they actually reduced their uncovered holdings by $450 million. Only Austria, France, and Sweden accumulated any significant amounts of uncovered dollars; and Austria has meanwhile converted its entire accrual into gold or guaranteed dollars, while France continually converts dollars into gold and presumably intends to use the rest of its accruals for further debt prepayments. Only Sweden among all European countries apparently still adheres to the policy of keeping the bulk of its very modest reserves in straight dollars. [emphasis added]
US officials were, by their self-imposed ignorance, painted into a corner. They could either let their central bank counterparties claim more US gold and threaten the nation’s gold stocks that much more, or they could in a swap arrangement take on the currency risk while allowing their foreign central bank counterparty to duplicitously remove their dollar balance from their books (thus satisfying local statutes about holding dollars).
You see, under the swap arrangement the US Federal Reserve or more so the US Treasury did not repossess the dollars; they merely guaranteed a price for them so that the other central bank would continue to hold them. But because that other central bank could not legally do so, alleviated of currency risk it simply disposed of them by another means – the eurodollar market.
If there will forever be a mystery as to where eurodollars came from, there is none as to how during especially the 1960’s it grew so large and systemically important. It was aided at every step by central banks, including the Federal Reserve that was increasingly desperate under Bretton Woods. The eurodollar thus became the noose for the gold system, as each time the swaps were arranged that meant more dollars in offshore places which would then threaten US gold, and so on.
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