Suddenly There Is Enough Gold

The place that caused all the confusion beginning in 1936, in 1971.

Bettmann Archive

Recently the value of all gold in the world has risen to about $25 trillion. Not so long ago—under the Federal Reserve chairmanship of Janet Yellen, even—this stash carried a value only three-eighths as much. Total world gold was worth less than $10 trillion not ten years ago.

Now at last we can go back to having a gold standard—since suddenly there is so much of it. After all, the argument for going off the gold standard, back in the late 1960s and early 1970s, the deed done in 1971—was there was not enough of it. If a country like the United States was on the gold standard, it could “run out” of it, if really pressed for redemptions at the fixed price, which happened to be $35 per ounce. And if a gold standard country ran out, the gold standard would have faltered, not worked, failed.

Now you might ask, given that the gold market is about the deepest and most liquid of any market, is it possible for a currency issuer to “run out” of gold? Cannot that issuer buy gold on the open market like anyone else?

Of course—so it made no sense to say that the United States could run out of gold. Yet this appears why we got rid of the gold standard in 1971. There were fears that the United States would run out as it was pressed for redemptions.

How did that go, going off gold? The establishment press, scholarly community, and policy world said it went great. It is amazing to behold the play-along rhetoric of how things went after the gold standard. A Federal Reserve study (see page 3) a few years in: “As it turned out, these new arrangements performed reasonably well.” The consensus as of the mid-1970s was that there may be the worst recession since the Great Depression going on (1974 was a year of absolutely collapsing growth), and inflation is crazy (double digits in peacetime), but monetary officials monitoring the transition out of a gold standard had generally succeeded at their task.

The world monetary system was working in the mid-1970s. The real economy was horrible, and inflation backbreaking, so it could have been worse, one must suppose, outside the efforts of those monetary officials.

And there was so much more gold. There was at least five times as much in 1975 as in the late 1960s. The market price had gone from $35 in 1967 to $175 by 1975 (a five-fold increase), and South Africa and the Soviets among others were mining away. To think that everyone had been worried about someone running out of gold just a few years before.

A fact we intuitively grasped in the nineteenth century, when our economy was great, is that nobody wants hard final money very much when 1) business opportunities in the economy are great and 2) a holder of currency can at any time redeem the stuff for precious metal, gold in a word. Because of 1) people love to use easily transactable money (not gold), and because of 2), when they use the easily transactable stuff they find assurance that it and the returns it finances will be worth something nice.

Not having 1) increases the demand for gold. Example: the Great Depression. Not having 2) increases the demand for gold. Example: the 1970s. The point is to hammer down, through natural forces, soft power, and the like, the demand for gold. Why would anyone ever want it if the business environment is great, taxes are low to nonexistent on success, and if you want gold, the currency you have never changes in market value against it?

Episodes in all this history abound in our new book Free Money.

A major reason the United States took the world off the gold standard in 1971 was the poor quality of the intellectual rhetoric about that gold standard. A major entry in this rhetoric was that there was not enough gold to base a big world economy. The crucial question, of course, was not how much gold there was, but how much people wanted it.

When tax rates get cut and currencies are confirmed as convertible, it turns out that people do not really want gold so much. If you can make more money with currency, and rest assured that when you do the currency will be worth the same in classical final money (gold), your preference for that currency over gold leaps.

We contend in Free Money that it was the very building of the Fort Knox, of the bullion depository there in 1936, that encouraged and protected all the sloppy thinking that created the slippery slope to no gold standard. If, for example, Lyndon Johnson had understood in 1968 that you save the gold standard by increasing the after-tax return to dollar-denominated investments, he would not have put on a ten percent income-tax surcharge as he did. He would have cut tax rates. The price of gold would have fallen, the gold crisis would have lifted, and we would have had a grand 1970s—all reasonable scenarios.

But the spending for Vietnam, the social programs? Robert Mundell was great at fulminating against the 1969-70 recession, the first of doozies in the upcoming decade. Your tax increase caused a recession that led to lost output equivalent to that of major countries. But you say it balanced the budget? Lost output is a total loss to the society, people!

Growth after 1973 was something like a quarter of that in the go-go 1960s, when Kennedy had had a policy mix of tax-rate cuts and keeping gold. There were more occasional balanced budgets, like in 1974, the year in which every month was spent in recession. For what, for the demise of the American Dream?

Permanent, decisive tax-rate cuts—better yet, tax eliminations—shrivel up the demand for gold unceremoniously in the currency where the tax reforms are operative. Commitments to going back on gold while doing the tax-rate cutting are even better. Jude Wanniski (who originated Bretton Woods Research which treats these issues today) made this point over and over again from the 1970s through the early 2000s. When policy followed, in the 1980s and 1990s, the American Dream was on again.