Review: One Nation Under Gold, part 4

The United States kept its gold exchange standard through the 1960s, though it faced increasing pressure from national economies that had grown faster than the supply of gold. The federal government often resorted to desperate strategies to fix its balance-of-payments problems, but in the end it had to make a decision what was most important.

• Chapter 7: Operation Goldfinger. In the 1930s, the U.S. instituted a monopsony on gold. The federal government would be the only buyer of all gold mined in the U.S., and the price was fixed at $35/oz. This lasted into the 1960s, with the effect of destroying the gold mining industry, despite international private demand. South Africa produced 75% of the world's gold; Canada was #2, and the U.S. was #3. (The U.S.S.R. didn't publish its numbers.)
  
  America's balance-of-payments problems caused it to look for unconventional sources of gold. This led to "Operation Goldfinger." It tested nuclear explosions as a way to tap deep underground sources of gold, particle accelerators which would literally create gold from other elements, and various substances (seawater, meteorites, and plants) as new sources.
  
  It was the logical culmination of Kennedy's near obsession with the balance-of-payments issue. To manage the Bretton Woods system, the London Gold Pool managed gold trades among developed countries, but this became more difficult as time passed.
  
  Ironically, "the post-war military and economic programs that the U.S. undertook had been so successful in lifting up its allies that they threatened America's position at the system's center."
  
  Robert Triffin, in his 1950s book Gold and the Dollar Crisis, identified the three ways the situation would end. Because of all the dollars and Treasury bills held outside the U.S. (and redeemable for gold), either:
  1. A global devaluation would happen (and given human nature, it would come courtesy of some other crisis), which would make a bad economic situation even worse,
  2. Some kind of dollar-gold convertibility crisis would erupt, or
  3. the rules would need to change (currency controls).
  
  Private gold ownership and requests for artistic use of gold continued to rise, and the South African Krugerrand (a one-ounce gold coin) put upward pressure on the Bretton Woods system. The price of silver was also rising, which led to the Johnson administration to eliminate silver from quarters and dimes.
  
  The 1964 budget deficit hit $2.8 billion (in part, courtesy of the Vietnam War), which didn't help the situation. While the U.S. could use its position as leader of the free world and "nuclear umbrella" holder to keep foreign countries from cashing in their dollar reserves, it could not stop foreign countries from devaluing their currencies relative to the U.S. dollar. And in 1967, the British pound did just that.
  
  
• Chapter 8: Dueling Apocalypses. In 1967, three shocks hit the British economy: Britain joined the European Common Market (which would likely exacerbate its own balance-of-payments issues), Egypt seized the Suez Canal, and dock strikes created export delays. The cumulative effect precipitated a devaluation of the pound from $2.80 to $2.40 in November.
  
  To balance out the price of gold, countries -- essentially -- had to throw their money away to artificially prop up the dollar. Having seen the need for this regularly in the past decade, though, allied nations' patience was wearing thin. Johnson tried to the limit the number of dollars bleeding overseas by instituting a currency control -- limiting private investment overseas and discouraging Americans from international travel.
  
  Yet these were penny-pinching, temporary solutions. They didn't address the budget deficit, overseas military spending, inflation, or foreign aid to friendly governments. At stake was the international monetary system that had existed for more than a generation, but the longer the U.S. put off the decision to end dollar-gold convertibility, the less gold it would have in the end.
  
  From 1965 to 1968, the ratio of gold backing for existing dollar dropped from 40 percent to 25 percent. In March 1968, President Johnson got Congress to approve lifting the gold cover for all Federal Reserve notes, freeing up $10 billion in gold. Yet even so, these solutions were (again) only temporary. Lifting the gold cover did not fix the balance-of-payments problem -- it only opened up more gold to foreign claimants rather than being stored to back up the dollar.
  
  The London Gold Pool that had managed the international trade of gold collapsed, and in its place the West put together an unstable, two-tiered system of controls to limit gold's rising global price. Governments would refrain from buying from or selling to private markets, and would exchange stocks at the $35/oz rate, while the private markets freely trade any quantities. The whole thing was a gimmick, and only put off the next crisis for a few short years.
  
  Conflict between the president and Congress escalated over the Vietnam War, poisoning the conversation about monetary policy. Plus, South Africa -- having been left out of the two-tier arrangement -- felt no compulsion to abide by its terms. And the higher the private price of gold rose, the more it tempted central banks to use Eurodollars to pull gold from the U.S. to sell on private markets.
  
  During this time, libertarians and "hard money" advocates predicted dire consequences for the dollar, as it was essentially unhinged from its peg to gold. Alan Greenspan, future Federal Reserve chairman, wrote in Ayn Rand's The Objectivist, "Deficit spending is a scheme for the confiscation of wealth. Gold stands in the way of this insidious process."
  
  The idea that a gold standard would help control government spending is a recurring theme for hard money enthusiasts, but timing is always an issue. Realistically, would the U.S. ever commit to a deflationary system when it is already in a time of economic hardship? No, but a crisis seems to be the only time monetary policy commands the public's attention.
  
  
• Chapter 9: This Time for Real. Balance-of-payments issues lasted in the Nixon administration. Although Johnson had abolished the requirement to keep enough gold to back up Federal Reserve notes, this did not end gold's role in inter-governmental transactions. In other words, Johnson broke the dollar's peg to gold, but not gold's peg to the dollar.
  
  There was much speculation how "closing the gold window" would affect the economy. There was no consensus among experts, but something had to give. The U.S. could raise taxes to fix the deficit, raise interest rates to fight inflation, or sacrifice the dollar-gold relationship. In 1971, Nixon chose the third option.