The balance of payments deficit persisted into 1960. Rumors began to spread in October that the United States might devalue the dollar (by raising the price of gold) to slow the gold drain. The first sharp gold panic swept the world’s monetary trading centers. Under pressure from a sudden and widespread demand for gold, the market price jumped in London from $35 to $42 an ounce.
The crisis was eased temporarily as the U.S. Treasury transferred $135 million in gold to the London market, and as the Bank of England intervened as a substantial seller. This flood of gold forced the price down to $35 by the spring of 1961.
Relief was short-lived. The supply of new gold coming into the London market began to fall in midsummer of 1961 as the two largest producers of gold, Canada and South Africa, began to add their newly mined gold to their monetary reserves. Demand for U.S. gold continued to rise, though, as the U.S. balance of payments deficit continued. The price of gold began to creep upward again.
In the autumn of 1961, the United States proposed that other nations join it to maintain the price of gold at a reasonable level. This was the birth of the London gold pool, a group formed to try to stabilize the gold market and avoid excessive swings in the price of gold that would lead to a loss of confidence in many foreign currencies.
The central banks of eight nations joined the gold pool — Belgium, France, Italy, Switzerland, the Netherlands, West Germany, the United Kingdom and the United States. Each contributed a quota to the pool, with the United States matching their combined payment. The Bank of England acted as agent for the group, given the right to draw on the pool and to sell gold if the price rose too high.
In November 1961, the first sales were made. The price of gold fell and the sales by the pool were recovered in later purchases. By February 1962, all the members of the gold pool had been repaid.
The price was temporarily under control, but the U.S. gold drain continued. To defend the dollar on foreign markets, President Lyndon Johnson signed legislation in early 1965 to drop the 25 percent requirement for gold backing of commercial banks’ deposits at Federal Reserve banks. This bill freed about $5 billion of the country’s remaining $15 billion gold stock for additional sale to dollar-holding foreign governments. The requirement that paper currency in circulation be backed 25 percent by gold remained.
Despite United States efforts, in 1966 and 1967 private demand began to exceed the supply of gold available at $35 an ounce. During this time, massive losses from official stocks occurred. The rate of expansion of gold production in South Africa, which had been increasing for 15 years, came to a halt in 1966. With rising production costs, the outlook for a greatly increased supply of gold did not look favorable, especially at a fixed price of $35 an ounce. Greatly aggravating this drop in free world gold production in 1966 was the Soviet Union’s decision to discontinue its by-then-customary gold sales.
As production of gold decreased, demand climbed, particularly from gold speculators who had entered the market in significant numbers with the gold crisis of 1960. These speculators tried to take advantage of the worsening U.S. balance of payments deficit by purchasing large amounts of gold, which they expected would increase in price.
The above is an excerpt from the eighth edition of the Coin World Almanac, published by Amos Media Company in 2011.