Inflation & the Free Market for Gold

CaptainDan

CaptainDan

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The 1960s were a tough time for governmental borrowing and gold prices. When the Vietnam War rolled around, there was no more asking by government officials for the public to make concessions. War bonds were a thing of the past as were economies that were based around a war. Granted, the Vietnam War was much smaller and more focused than World War One and Two, but still, there was much less involvement in it than had been previously, even on a scale by scale basis.

If there wasn't much asked of the public, even by way of increased taxes, then how did the United States government pay for this venture? You got it - debt. They borrowed and borrowed and eventually all that borrowing earned itself a name that's been entrenched in the national vocabulary since. It's called deficit spending. And because there was less linkage than ever between the dollar and gold, borrowing was allowed to run rampant.

Because there was so much money printing going on in Washington, our allies abroad began asking for gold in return for dollars. Charles de Gaulle of France converted hundreds of millions of dollars into gold in just the span of a few months. Things got so bad by one point that a run on gold was created, causing an outflow of over 1,000 tons of gold from the U.S. by the end of 1967. It seems as though the more the United States devalued the dollar and Britain devalued the pound, the more gold both nations lost from their vaults. People with financial intelligence around the world saw what was going on and made the trade from fiat currency to hard currency, namely gold.

In 1943, the monetary base of the United States was on par with the amount of gold reserves we had. Within five years, the monetary base had jumped by over 50%, while the gold reserves reduced slightly. Up until 1958, the monetary base grew slowly and the gold reserves shrunk slowly. By the time the late 60s and early 70s rolled around, the monetary base had exploded in growth and the gold reserves had been reduced to such a point that the monetary base was multiple 100s of percent more than what we had stored as gold. What this means is that the United States had a dwindling reserve of real money and an ever growing supply of fiat money. Paper, if you will.

At this point, the London Gold Pool had stopped operation and the open market began setting the price of gold. The central banks attempted to keep the price of $35 per ounce tethered between gold and the dollar, but it was getting difficult to fight the market off. It seemed as though there was only one possible result of all this fiscal recklessness that could take place. Can you guess what it was? What could happen to the price of gold when it no longer remains pegged to a fixed price set by a bank? What could happen to the price of gold in dollars when the amount of dollars that was injected into the economic system was exponential when compared to what had been printed ever before? Please share your thoughts down below.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
Inflation & the Free Market for Gold was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.

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