The golden rule about gold reserves

In my father’s youth, gold coins were part of normal circulation. There were real silver coins too, with relatively few paper banknotes and bills. The First World War put an end to gold coins in circulation and increased the use of paper money.

The 1939-45 war killed off the use of Britain’s huge number of silver coins. The 50% silver content was committed to the making of war equipment by borrowing the physical silver from the U.S. early in the war and paying the Americans back by melting down the coins immediately after the war and shipping the silver to the U.S. United Kingdom cupro-nickel alloy coins were substituted in 1947.

Silver had become too expensive for circulating coins. This debasement of the coinage did not happen in Canada and the U.S. at that same time as they appeared immune to that disease, but they did succumb 20 years later. How did this all come about? Well, gold was the catalyst.

The rebuilding of Western Europe’s economies that were partly destroyed in the war was greatly assisted by the U.S. It was, in fact, a truly remarkable success, an “economic miracle,” particularly in Germany, although less so in Britain.

During the 1950s and 1960s, gold played a vital role in the international monetary system. Government central banks were prepared to buy and sell gold at the fixed price set by the U.S. government in 1934 and the exchange rate situation was stable for the settlement of imbalances based on US$35-per- oz. gold.

However, the steadily rising costs of mine production of gold in the ’50s and ’60s meant the supply of new physical gold could not be increased fast enough to provide the international liquidity needed to finance expanding world trade, so the fixed price was, in fact, doomed.

Although this alone was a powerful motive to free the price, it needed another one to clinch it.

Call to mind the golden rule: “He who holds the gold makes the rules.” The U.S. was by no means the world’s largest mine producer of gold but it did have an enormous reserve of gold bullion compared with all other leading countries.

The U.S. government and the others were understandably reluctant to allow a higher gold price because it would mainly benefit the world’s largest mine producers, South Africa and the Soviet Union. It would provoke more hoarding and considerable speculative activity. The underdeveloped countries would mostly come out poorer.

Another desperate argument was that since gold has no intrinsic value other than limited uses in industry and jewelry, it would be a waste of economic resources. Nevertheless, the fixed gold price of 1934 was finally freed in 1968, only 22 years ago, after President Lyndon Johnson had reviewed the U.S. situation.

The U.S. had identified the ultimate political effect of the alarming heavy drain of gold bullion from the U.S. central bank to Western Europe, particularly between 1960 and 1967, as distrust in the U.S. dollar grew and the U.S. gold bullion stock fell from US$19.5 billion to US$12.1 billion, at the US$35-per-oz. price.

The European Economic Community gold reserves rose from US$2 billion in 1950 to US$14 billion in 1968. These gold reserve levels still remain in Europe. In short, the huge U.S. gold reserve was moving relentlessly across the Atlantic to Western Europe. The U.S. heeded the rule about “those who hold the gold.”

It was true then and is still true that all countries would be glad to increase their gold bullion reserves if they could. So, the U.S. freed the price and Canada’s mines have benefited ever since.006 T.P. (Tom) Mohide, a former president of the Winnipeg Commodity Exchange, served as a director of mining resources with the Ontario Ministry of Natural Resources prior to his retirement in 1986.