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Decimal Digest
25 Jul 2011


Learning from History: Events of 15th March 1968

The modern day market traders and analysts are well aware of the events of 15th Sept 2008, leading to the collapse of Lehman Brothers. In this article, we wish to bring out an equally fascinating 15th day, this time in March of 1968, exactly forty years and six months before the collapse of Lehman.

First, an extract from the Times of London of that day: “H.M. Treasury Press Statement on the London Gold Market. The London Gold Market will be closed today, Friday, March 15. This is at the request of the United States Government. At a meeting of the Privy Council held this morning at Buckingham Palace, Her Majesty, the Queen, approved a proclamation appointing Friday, 15th March, to be observed as a Bank Holiday throughout the United Kingdom.”

Michael D. Bordo, Ronald MacDonald and Michael J. Oliver have beautifully traced the origins of this event, when they state: “The backdrop to the gold crisis stemmed from doubts about the primary reserve currency, the dollar. From 1958 there was a constant fear that the ratio of dollar liabilities to gold would increase to a level that could cause a loss of confidence in the dollar and lead to a run on gold. Following a spike in the market price of gold to more than $40 a fine ounce in October 1960, the US instigated the creation of a „gold pool‟ in London where the Bank of England would act as the controller of an international reserve stock of gold, fed by the central banks of the US, France, Belgium, Germany, Italy, Britain, Switzerland and the Netherlands. The function of this reserve fund was to stabilise the price of gold in the London market…There was a scramble for gold in June 1967 at the time of the Six Day War and holders of sterling moved into gold after the devaluation of sterling in November. Further unease was caused on 21st November, when Le Monde leaked the news that the French had withdrawn from the gold pool in June. Between November 1967 and March 1968, $3 billion of gold was sold by the pool. Further selling was undertaken after the publication of the US balance of payments figures for 1967 in March 1968, which revealed a deficit of $3.6 billion. On 13th March it was rumoured that Italy had withdrawn from the pool and by the week ending 14th March, $792 million had been sold in the market. The gold market was subsequently closed on 14th March.”

Should smart readers draw a parallel between the then “Gold Pool” and the current ECB?

The Gold market did reopen after a long two week gap on 1st April 1968. However, in spite of the “pledge” of the US Government to exchange Gold at USD 35 per ounce with any other Government wishing to do so, the price of Gold jumped to an average of USD 41.142 per ounce by June 1968 (Source: Bundesbank). In other words, the market did not believe that the US had any credibility to support its own pledge. Can we say that the Fourteenth Amendment was violated from 15th March 1968 till 15th August 1971 when Nixon formally ended the convertibility of the Dollar into Gold?

It is also interesting to note that, since nobody really lost any nominal money in this event - in the way accountants draw P&L - the DJIA moved down from a closing of 905 in December 1967 to closing level of 616 in December 1974. The readers are advised to draw their own lessons from this data point, even as the ECB tries very hard to ensure that nobody books any losses due to current crisis, China enters into a barter arrangement with Iran for Oil imports and the Middle East continues to remain volatile. We do live in interesting times!

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