Understanding Why The Gold Standard Failed
John Paul Koning's recent work on the Gold Standard from 1934-1971 is phenomenal. In this two part essay, he details the U.S. Government's attempts to keep the price of gold pegged to $35/ounce. Throughout the work he details how the government's efforts always failed and the drastic measures employed to keep the price pegged, including resorting to military force. He even includes a couple of pretty charts =D [Koning is a financial writer and graphic designer]
Some excerpts from Part One:
Nineteen fifty-eight marked the first year in which foreign central banks exercised their convertibility rights in significant amounts and returned their dollars for gold. US gold reserves fell 10% from 20,312 metric tons to 18,290 that year, another 5% in 1959, and 9% in 1960. At the same time, the US Federal Reserve continued to increase notes in circulation, resulting in dollars being backed by ever smaller amounts of gold. Since this threatened future potential convertibility, rumors grew that the United States would be forced to devalue the dollar to staunch the outflow.
The US government tried to prevent gold from leaving by twisting the arms of foreign central banks to keep their dollars, and, later, setting travel limits on American tourists overseas and US private investment in Europe. By 1958, London gold was trading closer to its $35.18 upper limit rather than the bottom limit at $34.82, which it touched in 1957. Participants in the London market — increasingly dominated by throngs of private investors and speculators — were ever more certain that the United States' plunging gold reserves would force it to dramatically devalue the dollar.
In September 1960, the United States experienced its largest weekly decline in reserves since 1931 as foreign central banks went to New York for the metal. At the same time it was becoming evident that presidential challenger John F. Kennedy would win that fall's election. Kennedy's promises to lower interest rates and increase government spending convinced many that gold outflows would only increase. The Dow Jones Industrial Average plunged 12% from the end of August to October 25, hitting its lowest point since 1958.
More from Part Two:
For instance, in 1959 Eisenhower made it illegal for Americans to buy gold overseas — extending Roosevelt's 1933 ban on American domestic holdings of gold. In 1964 a new tax was imposed by President Kennedy on foreign currency deposits to prevent Americans from investing overseas — the Interest Equalization Tax. In August 1970 President Nixon was given discretionary authority to impose wage and price controls on citizens.
Soft nanny state campaigns by the state to discourage tourism and therefore dollar outflows, including Lyndon B Johnson's comments that "We may have to forego the pleasures of Europe for a while," and "I am asking the American people to defer for the next two years all non-essential travel outside the western hemisphere," became common. In 1968 Johnson would also forbid all American investment in Europe and impose limits on investments elsewhere.
All this is terribly ironic as Kennedy, Johnson, and Nixon were clamping down on American economic freedoms at the same time that they were waging a war of aggression in Vietnam. By forcing the American public to spend less overseas, Kennedy and Johnson realized they would free up more room for their own overseas campaigns.
There are umpteen examples of forceful means being used to reduce the freedom of individuals in order to save the $35 peg from that era. One by one they failed, including the London Gold Pool, only to be replaced by even stronger forms of coercion. The last and probably the most overtly aggressive of these was the South Africa embargo.
David in Qatar