How an Economy Grows and Why It Crashes

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dollars, and it owned 80 percent of the world’s gold, the 
arrangement was widely accepted. 
However, 40 years of monetary infl ation brought about by 
Keynesian money managers at the Federal Reserve caused 
the pegged price of gold to be severely undervalued. This 
mismatch led to what became known as the “gold drain,” 
a mass run by foreign governments, led by France in 1965, 
to redeem U.S. Federal Reserve Notes for gold. Given 
the opportunity to buy gold at the old 1932 price, foreign 
governments were quickly depleting U.S. reserves.
In 1968, President Lyndon Johnson’s economic advisors 
argued that the gold drain resulted not from the attraction of 
bargain basement prices, but because foreign governments 
feared that U.S. gold reserves were insuffi cient to provide 
backing for domestically held notes and to redeem foreign 
notes. To dispel this anxiety, the president’s monetary 
experts advised him to remove the required 25 percent 
gold backing from domestic dollars so that these reserves 
would be available for foreign dollar holders. Presumably 
this added protection would assuage the concerns of foreign 
governments and would stop the gold hemorrhage. Irwin, 
then a young business owner in New Haven, Connecticut, 
thought their reasoning was absurd. 
Irwin sent a letter to Texas Senator John Tower, who was 
then a member of the committee reviewing the gold issue, 
explaining that the United States faced two choices: force 
down the general price structure to bring it in line with the 
1932 price of gold, or raise gold to bring it in line with 1968 
prices. In other words, to adjust for 40 years of Keynesian