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Aggregate Demand Dominance: The Arc Lights and the Ides of March

The Utter Failure and Stupidity of the Gold and Silver Standards: Part 7

In the previous installment recounting the train wreck that was the gold and silver standards, I didn’t mention silver or gold at all. There was a reason for that:

Stagflation became an untamable wild animal after the second Arab Oil Embargo sent the American inflation rate flying:

Historical Data Chart

…and the Canadian rate:Historical Data Chart

…and the French rate:Historical Data Chart

…and the German rate:

Historical Data Chart

…and the Japanese rate:

Historical Data Chart

…and the South Korean rate:

Historical Data Chart

…and the Australian rate:

Historical Data Chart

…and the New Zealand rate:

Historical Data Chart

…and the Argentinian rate:

Historical Data Chart

…and the Colombian rate:

Historical Data Chart

…and the South African rate:

Historical Data Chart

…and the Egyptian rate:

Historical Data Chart

…and the Israeli rate:

Historical Data Chart

…and the Syrian rate:

Historical Data Chart

In the United States, prices for essentially everything rose precipitously in 1973. So did the rest of the world, including the primary belligerents in the Yom Kippur War. This begs the question: why?

Transition to Black Gold from…Gold

Oil prices diverged significantly from their long-term trend starting in 1973:

…five years after another commodity diverged from its long-term trend:

No, this isn’t a goldbug posting, advocating a return to the horrendously stupid gold standard. Gold is a commodity just like every other commodity; only considerably less important than crude oil, iron ore, bauxite, and bottled water. Hell, even diamonds have industrial uses…

To tell the story of the utter failure of the gold standard, at some point one must point out when the gold standard utterly failed. The date is specific—15 March 1968:

The balance-of-payments deficit grew ever faster, and the United States lost more gold reserves to dollar-laden foreign central banks exercising convertibility and through gold-pool sales in London. US gold reserves resumed their downward trajectory, declining by 9% in 1965. At the same time, speculators were buying gold in record numbers in London, forcing price up to $35.20, the London pool’s line in the sand.

Things only got worse with the exit of the French from the gold pool in early 1967, tensions in the Middle East, and the collapse of the British pound in November 1967. The Tet offensive of early 1968 indicated the US commitment to Vietnam would only grow. Speculators bought en masse in London through the remainder of 1967 and into March 1968. By March 14, the members of the gold pool, having sold about $2.75 billion worth of gold to protect the $35.20 ceiling, or about 10% of the member’s total reserves since the pound’s devaluation, had had enough.[4] They asked the Queen of England to close the London market the next day and dissolved the once-feared gold pool. When London reopened two weeks later, without suppression, prices immediately vaulted up to $38 and would soon rise to $42.

Koning’s account also includes the birth of the gold pool in the wake of price spikes in London during 1958, 1960 and 1961:

Fearing another gold rush in October 1961, Western central banks formalized a plan by which they pooled together several hundred million dollars worth of gold, this stock to be mobilized to control the London gold price. Thus was born the famous London gold pool. The pool became an active buyer of gold when the London price fell below $35.08 an ounce and a seller at $35.20.[3] In its first test — the week of the Cuban Missile Crisis in October 1962 — the pool effectively supplied the London market despite demand for the metal being greater than the 1960 gold rush. Prices could not penetrate $35.20. The pool’s reputation strengthened: gold would stay benign and near $35.08 for the next few years.

In essence, the London Gold Pool acted as Bretton Woods’ central banker for 6.5 years:

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1960 1.03 % 1.73 % 1.73 % 1.72 % 1.72 % 1.72 % 1.37 % 1.37 % 1.02 % 1.36 % 1.36 % 1.36 % 1.46 %
1961 1.71 % 1.36 % 1.36 % 1.02 % 1.02 % 0.68 % 1.35 % 1.01 % 1.35 % 0.67 % 0.67 % 0.67 % 1.07 %
1962 0.67 % 1.01 % 1.01 % 1.34 % 1.34 % 1.34 % 1.00 % 1.34 % 1.33 % 1.33 % 1.33 % 1.33 % 1.20 %
1963 1.33 % 1.00 % 1.33 % 0.99 % 0.99 % 1.32 % 1.32 % 1.32 % 0.99 % 1.32 % 1.32 % 1.64 % 1.24 %
1964 1.64 % 1.64 % 1.31 % 1.31 % 1.31 % 1.31 % 1.30 % 0.98 % 1.30 % 0.97 % 1.30 % 0.97 % 1.28 %
1965 0.97 % 0.97 % 1.29 % 1.62 % 1.62 % 1.94 % 1.61 % 1.94 % 1.61 % 1.93 % 1.60 % 1.92 % 1.59 %
1966 1.92 % 2.56 % 2.56 % 2.87 % 2.87 % 2.53 % 2.85 % 3.48 % 3.48 % 3.79 % 3.79 % 3.46 % 3.01 %
1967 3.46 % 2.81 % 2.80 % 2.48 % 2.79 % 2.78 % 2.77 % 2.45 % 2.75 % 2.43 % 2.74 % 3.04 % 2.78 %
1968 3.65 % 3.95 % 3.94 % 3.93 % 3.92 % 4.20 % 4.49 % 4.48 % 4.46 % 4.75 % 4.73 % 4.72 % 4.27 %

Nevertheless, the gold standard was doomed to fail from the outset, simply due to the fact that pricing gold at £4.25 or $35 an ounce with no accommodation for future increases in supply or demand severely undervalued the underlying commodity over time. This misguided policy would have been bad enough, but the gold standard went further and locked all commodities into a narrow band of prices, such as ~$3/barrel crude oil. Instead of just gold, the price of every commodity was due to see a massive correction when the price controls inevitably failed.

What caused these failures? This:



Oops, not actual arc lights. Google ‘arc light’ and this will also pop up:


One of the “Big Belly” B-52Ds releasing its 60,000-pound bomb load of bombs on enemy targets in Vietnam. It could carry up to 84 500-pound bombs or 42 750-pound bombs internally and 24 750-pound bombs externally on racks under the wings. (U.S. Air Force photo)

Over Southeast Asia B-52 carpet-bombing strikes were codenamed Operation Arc Light. In the three years leading up to the end of the gold pool, U.S. air strikes spearheaded by Strategic Air Command B-52Ds unleashed a hellish amount of firepower against Vietnam:

From 1965 to 1968, about 643,000 tons of bombs were dropped on North Vietnam.

Operation Rolling Thunder’s bombing tonnage also served as a dubious yet astonishing milestone:

The U.S. Air Force consumed 2,150,000 tons of munitions in World War II – 1,613,000 tons in the European Theater and 537,000 tons in the Pacific Theater – and 454,000 tons in the Korean War.

Rolling Thunder out-bombed the strategic bombing campaign against Japan, even if one includes the 13 kiloton Hiroshima and 21 kiloton Nagasaki atomic attacks. The economic effects are also startling. The much smaller Korean campaign had a nasty side effect:

Historical Data Chart

Not to mention the buildup to war in and of itself is a prime source of inflation…

Historical Data Chart

***Note: the U.S. did not declare war until April 1917***

Historical Data Chart

***Note: the U.S. did not declare war until December 1941***

Warfare—the harbinger of inflation. The first three major American wars of the twentieth century spiked inflation powerfully, a trigger economic history seems to ignore thanks to twin OPA/WPB and ESA/DPA success stories during the Second World War and Korea respectively (price controls utterly failed during the First World War). But the warfare/inflation disconnect in all likelihood stems from the unfolding of the wars around Vietnam.

Bombers Versus Bretton Woods

Rolling Thunder barely managed to trigger 4% inflation despite Johnson failing to impose price controls. The pressure had been transferred onto Bretton Woods’ central banker, the London gold pool, which in 1967 was also beset with the first Arab oil embargo and the devaluation of the GBP on 18 November.

The London gold pool threw up its hands and went home 15 March 1968, transferring the inflationary pressure back onto the United States:

The Embargo of 1968-69

Leaving off from the last article, central banks asked for the London gold market to be closed and dismantled the gold pool on March 15, 1968. Without price suppression from pool sales, the market price of gold immediately vaulted to $39 upon the market’s reopening. That same day, in what became to be called the Washington accord, western central banks led by US Treasury Secretary Robert Fowler announced that the world’s monetary reserves were “sufficient” and no subsequent purchases or sales by central banks in any market would be necessary.

This last seemingly innocuous statement had large repercussions. If central banks ceased buying gold, monetary demand for the metal would dry-up. South Africa, producer of some 75% of the world’s gold, would suddenly find no outlet for a bulk of its new gold. After all, the lion’s share of world gold demand was by central banks.

Fowler hoped that the boycott would force South Africa to funnel gold sales into the relatively small London market, dominated by jewellers, speculators, and other private parties, depressing the market price from $39 back to the official one at $35. This amounted to substituting the London gold pool, active from 1961-68, and its dampening influence on the gold price, with South African sales, the latter without South Africa’s permission. Letters were sent to 95 central banks asking them to desist from all gold purchases.[2] The boycott had started.

The 1967 oil embargo was followed by a gold embargo the following year.  Which also failed the first time around:

From the beginning the boycott was a failure. Rather than falling the gold price steadily rose from $38 to $42. The 20% price differential between the official price of $35 and the market price put a mockery to the whole managed Bretton Woods system. In essence, the market was saying it didn’t believe that the US dollar was worth the gold value that the authorities claimed. Rather than a dollar being convertible into 0.81 grams, the market was betting that, once the chips were down, the dollar was likely only convertible into just 0.67 grams.

No, the market was indicating gold was worth far more than the $35/oz set in 1933 and ratified in a 1944 conference at Bretton Woods, NH. The same sequence played out when £4.25/oz broke down during the Great Depression:

Year British Official Price
(British pounds per fine ounce
end of year)
U.S. Official Price
(U.S. dollars per fine ounce
end of year)
New York Market Price
(U.S. dollars per fine ounce)
London Market Price
(British £ [1718-1949] or
U.S. $ [1950-Present] per fine ounce)
1929 4.25 20.67 20.67 £ 4.25
1930 4.25 20.67 20.67 £ 4.25
1931 4.25 20.67 20.67 £ 4.63
1932 4.25 20.67 20.67 £ 5.90
1933 4.25 20.67 24.44 £ 6.24
1934 4.25 35.00 34.94 £ 6.88
1935 4.25 35.00 35.00 £ 7.11
1936 4.25 35.00 35.00 £ 7.01
1937 4.25 35.00 35.00 £ 7.04
1938 4.25 35.00 35.00 £ 7.13
1939 4.25 35.00 35.00 £ 7.72
1940 4.25 35.00 35.00 £ 8.40
1941 4.25 35.00 35.00 £ 8.40
1942 4.25 35.00 35.00 £ 8.40
1943 4.25 35.00 35.00 £ 8.40
1944 4.25 35.00 35.00 £ 8.40
1945 4.25 35.00 35.00 £ 8.40

 I hesitate to use quotations from the Ludwig von Mises Institute, especially when Koning writes statements like this…

The US authority’s fight to keep gold pegged at $35 had by no means ended with the Pool’s demise. Instead it shifted to a new front. That same month a massive gold embargo against South Africa, the world’s largest gold producer, was initiated by the US, a battle that would last till early 1970.

The US led embargo against South Africa, backed implicitly by the largest military in the world, highlights the gradual but steady tendency for authorities to back the failing $35 peg by forceful means.

…but I have been unable to find more neutral scholarship when it comes to the 1968-70 breakdown. Nor is Koning that far off; Nixon was using overwhelming force unreasonably after he entered office:

This sideshow to the war in Vietnam, begun in 1965 under the Johnson administration, had already seen 475,515 tons of ordnance dropped on Cambodia, which had been a neutral kingdom until nine months before the phone call, when pro-US General Lon Nol seized power. The first intense series of bombings, the Menu campaign on targets in Cambodia’s border areas — labelled Breakfast, Lunch, Supper, Dinner, Dessert, and Snack by American commanders — had concluded in May, shortly after the coup.

Operation Menu, in just over a year’s time, had dropped more ordnance on sometimes neutral/sometimes allied Cambodia than the tonnage expended in three years over hotly-contested Korea. Like the Korean War, inflation shot up during the 14 months of Arc Light bombing after Menu commenced in March 1969…

Historical Data Chart

…and marked the beginning of the 1970s stagflation. Nixon wasn’t done blasting Cambodia…

A joint US–South Vietnam ground invasion of Cambodia in May and June of 1970 had failed to root out Vietnamese Communists, and Nixon now wanted to covertly escalate the air attacks, which were aimed at destroying the mobile headquarters of the Viet Cong and the North Vietnamese Army (vc/nva) in the Cambodian jungle. After telling Kissinger that the US Air Force was being unimaginative, Nixon demanded more bombing, deeper into the country:

“They have got to go in there and I mean really go in…I want everything that can fly to go in there and crack the hell out of them. There is no limitation on mileage and there is no limitation on budget. Is that clear?”

Kissinger knew that this order ignored Nixon’s promise to Congress that US planes would remain within thirty kilometres of the Vietnamese border, his own assurances to the public that bombing would not take place within a kilometre of any village, and military assessments stating that air strikes were like poking a beehive with a stick. He responded hesitantly:

“The problem is, Mr. President, the Air Force is designed to fight an air battle against the Soviet Union. They are not designed for this war…in fact, they are not designed for any war we are likely to have to fight.”

Five minutes after his conversation with Nixon ended, Kissinger called General Alexander Haig to relay the new orders from the president:

“He wants a massive bombing campaign in Cambodia. He doesn’t want to hear anything. It’s an order, it’s to be done. Anything that flies, on anything that moves. You got that?”

The response from Haig, barely audible on tape, sounds like laughter.

Cambodia, it should be noted, was a non-combatant. That didn’t prevent Nixon dropping the most explosives in history (not only per capita but in raw tonnage) on the tiny Southeast Asian country:

The still-incomplete database (it has several “dark” periods) reveals that from October 4, 1965, to August 15, 1973, the United States dropped far more ordnance on Cambodia than was previously believed: 2,756,941 tons’ worth, dropped in 230,516 sorties on 113,716 sites. Just over 10 percent of this bombing was indiscriminate, with 3,580 of the sites listed as having “unknown” targets and another 8,238 sites having no target listed at all.

Between 1969 and 1973 Cambodia was struck with more firepower than the U.S. air forces expended during the Second World War and Korea COMBINED. The inappropriately-named Operation Freedom Deal (beware any military operation bearing a term for liberty) finally necessitated price controls, which Nixon instituted on 15 August 1971.


4 thoughts on “Aggregate Demand Dominance: The Arc Lights and the Ides of March

  1. Pingback: Aggregate Demand Dominance: False Foundations | In The Corner, Mumbling and Drooling

  2. Pingback: Aggregate Demand Dominance: BUFF Barrel Rolls on the Ides of August | In The Corner, Mumbling and Drooling

  3. Pingback: Aggregate Demand Dominance: Reaping the Whirlwind | In The Corner, Mumbling and Drooling

  4. Pingback: The Wrong Turn | In The Corner, Mumbling and Drooling

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