The Early Gold Wars

The Congress shall have power ...to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."
1787 - The Constitution of the United States - Section 8
That is precisely what the Congress did. In 1792, the Dollar was fixed by law at 24.75 grains or 0.05156 troy oz. of Gold. In 1837, the coinage was reworked and the Dollar was defined at 25.8 grains of Gold "nine-tenths fine". That gives 20.67 Dollars to one troy oz. of Gold. That was the Dollar's "fixed value" (see the quote above) for 96 years from 1837 to 1933.

War Declared - 1933-34

(The reference for this material is: Economics And The Public Welfare - A Financial and Economic History of the United States, 1914-1946   by Benjamin M. Anderson)
March 4, 1933
Not quite 20 years after the establishment of the Fed, President Franklin D. Roosevelt was inaugurated for his first term in office.
March 6, 1933
Using a wartime statute passed in 1917, Mr Roosevelt issued a proclamation closing every bank in the U.S. for four days. The banks were closed from March 6 to March 9.
March 9, 1933
Day One of "The Hundred Days". The President called a Special Session of the newly-elected Democratic Congress for the purpose of debating an act prepared in advance by the President's advisors. In a few hours, with minimal if any debate, Congress passed the act: "to provide relief in the existing national emergency in banking, and for other purposes".
April 5, 1933
President Roosevelt, acting under the sweeping authority passed to him by Congress on March 9, signed Presidential Executive Order 6102 which invoked his authority to make it unlawful to own or hold gold coins, gold bullion, or gold certificates. The export of Gold for purposes of payment was also outlawed, except under license from the Treasury.
June 5, 1933
A joint resolution signed by the President was introduced into Congress. This resolution abrogated the gold clause on all existing government and private contracts. Needless to say, the resolution passed.
October 1933
The Roosevelt Administration decided to implement a policy suggested by Professor George F. Warren of Cornell University. This policy advocated controlling "inflation" (firmly defined by this time as "rising prices") by raising and lowering the "gold content" of the Dollar. This policy was implemented, amongst many others, under the first big measure of the New Deal, the "National Recovery Act" (NRA). By January of 1934, the "adjustable Dollar policy" was an obvious and perceived failure, and it was dropped. The NRA itself was declared Unconstitutional on May 27, 1935.
January 30, 1934
The "Gold Reserve Act" became law. It had passed through Congress in five days, with minimal debate. Under this act, the Federal Government took away title to all "Gold Certificates" and gold held by the Federal Reserve Bank (the independent Fed?) and vested sole title with the U.S. Treasury. The Fed banks were to be provided with "Gold Certificates" in return for their Gold, but these certificates had no specific value in Gold assigned to them. When one witness testifying before the Senate Committee protested, he was taken aside by an Administration Senator and the situation explained to him:
"Doctor, you don't understand about these gold certificates. These are not certificates that you can get gold. These are certificates that gold has been taken away from you."
January 31, 1934
The day after the passage of the Act, President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold "nine-tenths fine". The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold - or by 69.3 percent. The Treasury, which had become the possessors of all the nation's Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now "owned" the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.
The new ratio of $US 35 was adopted at Bretton Woods in July 1944. The U.S. Dollar was made the world's Reserve Currency and the IMF and World Bank established in 1947. The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.

The End Of the "Fixed" Dollar

Gold War I - The "London Gold Pool" - 1961 to 1968

By the beginning of the 1960s, the $US 35 = 1 oz. Gold ratio was becoming more and more difficult to sustain. Gold demand was rising and U.S. Gold reserves were falling, both as a result of the ever increasing trade deficits which the U.S. continued to run with the rest of the world. Shortly after President Kennedy was Inaugurated in January 1961, and to combat this situation, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price for Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the "London Gold Pool" in early 1961.
The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in April 1968. But the demand for U.S. Gold did not abate.
By the end of the 1960s, the U.S. faced the stark choice of eliminating their trade deficits or revaluing the Dollar downwards against Gold to reflect the actual situation. President Nixon decided to do neither. Instead, he repudiated the international obligation of the U.S. to redeem its Dollar in Gold just as President Roosevelt had repudiated the domestic obligation in 1933. On August 15, 1971, Mr Nixon closed the "Gold Window". The last link between Gold and the Dollar was gone. The result was inevitable. In February 1973, the world's currencies "floated". By the end of 1974, Gold had soared from $35 to $195 an ounce.

Gold War II - The IMF/U.S. Treasury Gold Auctions - 1975 to 1979

On January 1, 1975, after 42 years, it again became "legal" for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process. This had two results. It depressed the price of Gold, which fell to $US 103 in eighteen months. More important by far, it "burned" large numbers of small individual investors.
But this "pre-emptive strike" against the Gold price did not solve the imbalances inherent in the floating currency regime. As the Gold price began to recover from its August 1976 low, the (US-controlled) IMF along with the Treasury itself, began a series of Gold auctions in an attempt to hold down the price through official means. But the problem of yet another free fall in the international value of the Dollar got in the way. Between January and October of 1978, the Dollar lost fully 25% of its value against a basket of the currencies of its major trading partners. By early 1979, due to this precipitous fall, the demand for Gold was overwhelming the amount that the IMF/Treasury dared supply, and the Gold auctions came to an end.
Gold regained its ($195) December 1974 level by July 1978. It then pressed on to new highs, hitting $250 in February 1979 and $300 in July. Also in July, Paul Volcker was appointed as Fed Chairman by a desperate Jimmy Carter. Gold continued to surge, hitting $400 in October. While this was happening, Mr Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was swiching its policy from controlling interest rates to controlling the money supply.
This new Fed policy took some time to have effect. In the meantime, Gold soared from $381 on Nov. 1, 1979 to $850 on Jan. 21, 1980. The public, who had been burned in 1975, were late on the scene. The great burst of public Gold buying came in the four weeks between Christmas 1979 and the Jan 21, 1980 high. As in 1975, they were "burned" again.

The Paper Era Begins

In early 1980, Mr Volcker's new Fed policy began to bite. U.S. interest rates began to skyrocket. As they rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates - and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.
Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off - rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold started earlier and took off even harder - rising from $296 in late June 1982 to $510 at the end of January 1983.
That's where the similarity to the 1970s ended. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.
Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $US 400 Billion. By late 1982, U.S. funded debt had tripled to about $US 1.25 TRILLION. But the "permanent" debt ceiling still stood at $US 400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary(!?)". In late 1982, realising that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.
The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency", the way was in fact cleared for a debt explosion right around the world. It was also cleared for five of the biggest bull markets in history.
The global stock market boom of 1982-87
The Japanese stock market/real estate boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000
The great global real estate boom of 2002-06
The global stock market revival of 2006-07
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©2001 The Privateer Market Letter