The value of gold against the dollar has been a hot topic for many decades. It’s kind of hard to believe that there was a time when they priced gold at $35 an ounce. The following is from an article that tried to explain what was going on in the world financial markets that was effecting the price of gold back in 1968.

Gold is the only money completely acceptable everywhere. When people doubt the value of paper money they traditionally flock to gold. With gold in hand, no matter what happens, they feel, they have wealth.

Grave doubts about paper money are occurring now, especially among Europeans. Always a bit timid of paper, some are frightened now. Their fear is that the dollar night not be worth as much as is claimed for it. And, exercising their rights, they are converting what dollars they hold —and they hold billions of them —into gold.

Hope and greed play roles as well, especially for speculators. If the United States concedes that the dollar is not worth what is now claimed for it, this admission could be reflected in a higher price for gold. That price is now $35 an ounce. If the United States, with its gold stocks dwindling, decides to discourage dollar redemption, it could do so by raising the price of gold to $70 an ounce. This would make gold hoarders very wealthy.

Such an increase is a possibility, for the United States has this prerogative under the 1944 Bretton Woods, N.H. agreement among many of the major trading nations. This agreement permits the United States to set the price of gold. Under the existing monetary setup, therefore, the United States pledges to redeem in gold any dollars held by other governments. This assurance is meant to provide a rigid keystone for international currency ratios.

If the United States guarantees to redeem dollars for gold at $35 an ounce, then the dollar supposedly is as good as gold. And, because this price is stable, other currency ratios could be established in relation to the dollar. These ratios currently are: British pound sterling $2.40, French franc a bit more than 20 cents, the German mark about 25 cents.

With these ratios of convertibility established, international traders could be fairly certain of the value of the paper handed them—with a big exception. If a nation permitted its currency to run down, through economic weakness or inflation, then these ratios would become suspect. The suspect nation’s paper would be less acceptable.

In fact, many foreign nations would turn in the suspect nation’s currency for another, stronger currency, or perhaps for gold. This puts stress on the suspect nation’s ability to prove the value of its currency. It becomes a test of its strength. When this test takes place, as it is now, a nation must buy its own currency to support the price. If it fails, if the pressure is too great, then it must acknowledge its weakness. Britain did this.

But Britain’s economy had run down. Certainly the U.S. economy is enormously large and strong. Why, then, is the dollar being questioned? Though big and strong, the United States perhaps has over-committed itself. For close to two decades now the United States has spent heavily abroad on foreign aid, military bases, business investments, travel and purchases. A lot of dollars have been left overseas.

If other nations, especially the European countries, had spent more money in the United States the balance of payments problem wouldn’t be so bad. The dollars now left abroad represent a potential demand on U.S. gold, a demand that far exceeds the supply. For years there was little danger in this situation; the dollar was sound as far as the world was concerned. Now, however, the situation has become critical. Inflation has gripped the United States. Maybe those dollars left in the hands of foreigners won’t buy as much as they once did.

As a result, foreigners have been turning their dollars into the Bank of England, which acts as the U.S. agent. Until March 15, 1968 when the bank closed at the request of the United  States, redemption had been at an unprecedented rate. Being tested now is the U.S. pledge to convert dollars into gold at $35 an ounce. If this country cannot keep its pledge —and it is heavily committed to keeping it—then many critics fear the existing monetary system is endangered.

What action can be taken?

—Deflate the American economy. Cut spending. Raise taxes and interest rates. In other words, show the world that the United States is going to cut inflation, stop diluting its dollars.

—Restrict American spending abroad, keeping dollars out of foreign hands.

—Cut the ties to gold. Let gold go its own way and good riddance. This would mean that the dollar’s value would “float” in relation to other currencies. It would be worth whatever the demand for it dictated.

—Refuse to buy gold. This, in effect, would be a declaration that the dollar was strong and that it instead of gold, should be used as the keystone.

—Permit a split price for gold. This would mean a free market for speculators and another
market for monetary gold. Gold that backs currencies would be sold only to central banks. It would continue to be pegged at $35 an ounce.

—Raise the price of gold. If the price were doubled, for example, this would in effect place twice as much gold in the hands of the United States, reducing the chance of the nation running out of gold.

Adherents of the present monetary structure, based on $35-an-ounce gold, feel that any tampering with the system now — especially while the pressure is on—could create a chaotic loss of confidence in paper.

A lot of that sounds familiar to me. The market for gold bullion is closely tied to the market for currencies. And that takes a little thought in itself. The price of pure gold bounces around by small amounts on an almost continuous basis. In times of relatively high economic uncertainty, buying and owning gold is widely thought of as a way to preserve whatever wealth you possess.