America's Money Machine

248 PART III/DEBACLE OF AN IDEA
The gold panic of 1960 had led the U. S. and six major European
countries to form a "gold pool" to subdue any speculative tendencies
born of distrust in the dollar, by funneling all gold sales to the public
through one agency managed by the Bank of England, with the U. S.
Treasury providing 59 per cent of the gold.
Extraordinary measures were also taken to shore up European currencies,
all of them weak from the double fault of inflationary domestic
policies and of reliance upon U. S. dollar claims as good-as-gold equivalents.
In 1961, and again in 1965, massive loans were made to Great
Britain to support the pound sterling-a currency that was once, but no
longer, the standard of the world-while reeds leaned upon reeds in the
"swap" arrangements whereby the fragile dollar was propped up by a
fund of borrowed European currencies equally fragile, or more so.
An added peril to the monetary system developed from the U. S.
military involvement in Southeast Asia-an involvement that began as a
"police action" but grew into a full-scale war lasting nearly fifteen years.
As the conflict expanded, under the administration of President Lyndon
B. Johnson, concern and opposition spread, marked by reversals at the
polls at home and by a demand for gold from abroad. Further political
settlement occurred in March, 1968, when a "dove," Senator EugeneJ.
McCarthy, won 40 per cent of the vote in the New Hampshire primary
against the "hawk"Johnson. The London gold pool was now losing $100
million a day, with a hemorrhage of nearly $400 million on March 14.
"That night," reported the New York Times, "Queen Elizabeth was
awakened by her ministers for her to sign a proclamation closing the gold
markets."
"The central bankers and finance ministers," the Times continued, now
"hurried off to another huddle, this time in Washington. On Sunday,
March 17, they announced a two-tier system. Speculators would trade
among themselves at free market prices and governments would deal
with each other at $35 an ounce. In London, thousands ofBritish youths
stormed the American Embassy in further protest over Vietnam."
With access to gold increasingly difficult the American public turned
to the feeble barricade of paper money as a defense against the threats
ofanother bank closing. The circulation, that had been rising at the rate
of some $300 million annually, now began to increase at the rate of $2
billion. Since by law the note issue required a gold backing of 25 per cent,
the closing of the London gold market in March was followed almost at
once by an act of Congress (March 18, 1968) ending the gold reserve