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By Julian D. W. Phillips
By the beginning of the 1960s, the U.S.$ 35 = 1 oz. Gold price 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
U.S.$ 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. One
wonders why they were so cooperative with the U.S. Granted the gold that left
these nations ahead of the war was still in the U.S. and slowly but surely
they felt it necessary to get it back.What happened in occupied Europe was
that U.S. dollars became more abundant there and a market in Eurodollars
sprang up derived in part from U.S. soldiers still in Europe. But the volumes
grew more and more as the U.S. established a perpetual Trade deficit feeding
the rest of the world with them.
The Pool came apart as Europe, under Charles de Gaulle, decided enough
was enough and began to send the Dollars earned by Europe back to the U.S.
back and exchanged these for their gold.Then they were unwilling to continue
accepting U.S. Treasury Bills & Bonds in return. Under the terms of the Bretton
Woods Agreement signed in 1944, Europe was legally entitled to do this. It
would appear that by the time the gold sent to the U.S. before the war had
returned to Europe, the U.S. pulled the plug on exchanging gold for dollars
letting the London Gold Pool fold in April 1968. But the demand for gold from
Europe did not abate.
By the end of the 1960s, the U.S. once again, [see 1935 dollar devaluation
against gold] 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, President Nixon closed the "Gold Window".
In other words the U.S. defaulted on its agreement with Europe and once
again Europe tolerated it. We have to ask why? How could a currency with,
what was to become perpetually undermined by being printed and exported,
continue to stand and become the worlds sole reserve currency and not
collapse?
Military might, might add some pressure, but not among the allies.No, the
key lay in the then established fact that you could only buy oil with U.S.
dollars. Nearly everything modern needed oil to work. Most nations import
bills comprised 25%+ of oil. The U.S. controlled O.P.E.C. and provided
their political and military security. In turn the U.S. had a firm grip on
all their allies and secured their financial empire.
The last link between Gold and the Dollar was gone. The result was
inevitable. One of the prices paid by the U.S. was to permit the oil
producers to nationalize their oilfield, production and the U.S. and
British companies that ran them, the seven sisters. The oil price began
to run up from $8 a barrel to $35 a barrel vastly increasing the demand for
dollars and U.S. dollar liquidity. The U.S. in turn permitted this provided
the oil producers reinvested the capital they earned into the U.S. Treasury
market and U.S. equities and U.S. products [including military hardware].
They were allowed to keep the interest income in their own hands under these
conditions. This prevented the oil producers posing any financial challenge
to the U.S.
 The Persian Gulf was defined as part of the
U.S. vital interests, as a result. So if the allies in Europe wanted
their economies to function properly they had to accept this fact. Quietly
they accepted more and more U.S. dollars into their foreign exchange
reserves.
As the oil price rose the pressure on all currencies climbed too. In
February 1973, the world's currencies were "floated". They were
allowed to move to levels that reflected the state of their Balance of
Payments. The U.S. was excused all such value measurements because it was so
needed by all.
By the end of 1974, Gold had soared from $35 to $195 an ounce in an almost
mathematically neat progression. This did not make the U.S. happy at all, as
it highlighted the real weakening of the U.S. dollar and the sagacious
investor was fully aware of this.
So a war on gold was begun.This was not just manipulation but a
transparent bullying attack on real money. At first the tactics used
underestimated the power of gold and the trust placed in it.
Nevertheless the common theme to this manipulation was to suppress the
gold price.
Legal Notice / Disclaimer
This document is not and should not be construed as an
offer to sell or the solicitation of an offer to purchase or subscribe for
any investment.Julian D. W. Phillips makes no guarantee, representation or
warranty and accepts no responsibility or liability as to its accuracy or
completeness. Expressions of opinion are those of Julian D. W. Phillips only
and are subject to change without notice. Julian D. W. Phillips assumes no
warranty, liability or guarantee for the current relevance, correctness or
completeness of any information provided within this Report and will not be
held liable for the consequence of reliance upon any opinion or statement
contained herein or any omission. Furthermore, we assume no liability for any
direct or indirect loss or damage which you may incur as a result of the use
and existence of the information, provided within this Report.
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