144 THE BiG DROP
case in the late 1960s and early 1970s. The Fed began to ex-
pand the money supply to pay for Lyndon Johnson’s “guns and
butter” policy in 1965. The first sign of trouble was when infla-
tion increased from 3.1% in 1967 to 5.5% in 1969.
But there was worse to come. Inflation rose further to 11%
in 1974 and then topped off at 11.3% in 1979, 13.5% in 1980
and 10.3% in 1981, an astounding 35% cumulative inflation
in three years. During this time period, gold rose from $35 per
ounce to over $800 per ounce, a 2,300% increase.
The point is that neither the inflation nor the gold price spike
happened overnight. It took 15 years to play out from start to
finish. The Fed’s current experiments in extreme money printing
only began in 2008. Given the lags in monetary policy and the off-
setting deflationary forces, we should not be surprised if it takes
another year or two for serious inflation to appear on the scene.
Another instructive episode is the Great Depression. The
problem then was not inflation but deflation. It first appeared
in 1927 but really took hold in 1930. From 1930–1933, cumula-
tive deflation was 26%. The U.S. became desperate for inflation.
It could not cheapen its currency because other countries were
cheapening their currencies even faster in the “beggar-thy-neigh-
bor” currency wars of the time.
Finally, the U.S. decided to devalue the dollar against gold.
In 1933, the price of gold in dollars was increased from $20 per
ounce to $35 dollar per ounce, a 75% increase at a time when
all other prices were decreasing. This shock therapy for the dol-
lar worked, and by 1934 inflation was back at 3.1%, a massive
turnaround from the 5.1% deflation of 1933. In short, when
all other methods fail to defeat deflation, devaluing the dollar
against gold works without fail because gold can’t fight back.
It is unclear if the world will tip into inflation or deflation,
but one or the other is almost certain. The good news for gold
investors is that gold goes up in either case as shown in the
1930s and 1970s. Yet patience is required.