Roosa assigned the job of helping him protect the gold stock to Paul Volcker when he arrived at the Treasury in 1962. At times the task bordered on the mundane. The 1934 prohibition against U.S. citizens investing in gold lasted forty years, until 1974, and Volcker had to prevent gold coins from entering the country without a proper visa.23 He responded to numerous requests for exemptions from regular people like Mary Meeker of thirty years earlier, efforts that tested his diplomatic skills.
Volcker felt bad about being unable to make exceptions for sentiment, including the letter he had to write to a Mr. Schubert in Oklahoma City:
I understand and sympathize with your feelings in connection with the fact that the Collector of Customs in Kansas City detained gold coins which you [received as a] bequest from your deceased brother. Unfortunately they cannot be allowed under present regulations governing the importation of gold coins … only genuine and lawfully issued gold coins of exceptional numismatic value may be acquired abroad and imported to the United States. The determination as to exceptional value is made with reference to the coin itself and not the individual wishing to import it.24
Volcker could not single out Schubert (or his brother) for special treatment, because the gold coin restriction did not play favorites. JFK’s brother-in-law Sargent Shriver had been honored in Germany for his work as director of the Peace Corps. When he returned to the United States with a solid-gold medallion presented by the German government, it was promptly seized by the Customs Bureau. Shriver appealed to Treasury Secretary Douglas Dillon (Roosa’s boss) for help, and Dillon turned the matter over to Volcker. Shriver made his case to Volcker like the good lawyer he was.25
“What if I had won an Olympic gold medal?”
“We make an exception for Olympic medals.”
“What about a 1729 King George Gold Guinea?”
“It gets the okay as a collector’s coin.”
“So what’s wrong with my medallion?”
“It doesn’t fit either category.”
“That’s ridiculous.”
“You’re probably right. Do you want me to ask Secretary Dillon to instruct the Customs Bureau to make an exception?”
“I’ll think about it.”
According to Volcker, “Shriver was sore as a boil at being denied his gold medallion, an award he had been given for exceptional public service. But Shriver knew it would have looked bad to fight the law, so he waited until after resigning as director of the Peace Corps before successfully reclaiming his medal.”
Roosa responded to President Kennedy’s challenge to protect America’s commitment to redeem dollars in gold with a blizzard of innovations. His first initiative was to organize an international consortium, called the “Gold Pool,” to help defend the fixed price.26 Germany, the United Kingdom, Italy, France, Switzerland, the Netherlands, and Belgium agreed to help the United States fix the thirty-five-dollar price of gold by jointly selling gold in the London market if excess demand pushed up the price and buying gold if excess supply pushed it down. This was good for the entire world, since it maintained international financial stability under the Bretton Woods System, but it was a bonanza for the United States, like living in the Magic Kingdom, since it solidified the dollar as the world’s reserve currency.
A reserve currency serves like a checking account, a vehicle for exchanging payments, for central banks and financial institutions. The Bank of Japan, for example, would use dollars to settle obligations with the Bank of France. Business firms with extensive exports and imports would do the same, making dollars the international medium of exchange. Not everyone understood the benefits to America of having a reserve currency, not even JFK, who had pledged allegiance to gold to help sustain the dollar’s supremacy as international money.
Kennedy knew that “if everybody wants gold, we’re all going to be ruined because there isn’t enough gold to go around,” and he believed that “gold really should be used for international payments.”27 But JFK also worried about the political repercussions, and invited Undersecretary of State George Ball to balance the views of his financial brain trust. Ball thought that the Treasury’s monetary objectives might compromise national security. “Should [we] become more heavily involved in Southeast Asia … there is a fair chance that our European friends would walk away from us … [and] it would be a real temptation to exploit our own balance of payments difficulties … for political purposes.” Ball then added, “We’re not persuaded that it is at all vital to the United States that we … be the principal reserve currency.”28
Kennedy interrupted and turned to his Treasury team: “What is the advantage to the United States of our being a reserve currency?”29
Volcker knew that if JFK had posed that question while working for Roosa at the Federal Reserve Bank of New York he would have been dispatched to the sub-basement, fifty feet below sea level, right next to the gold vault, for indoctrination under the care and guidance of Tomás de Torquemada. Roosa believed with the faith of a zealot that America had an obligation to “provide the principal reserve currency for the monetary system of the world—a duty which involves special responsibilities as well as conveying special opportunities.”30
In answering the president, however, Roosa skipped the responsibilities and focused on the opportunities, something tangible that JFK could take to the bank. “[A reserve currency] makes it possible for us … year in and year out … to finance any [balance-of-payments] deficit we may run very readily, because you have the world accustomed to holding dollars. When you run behind for a year you don’t have to negotiate a credit, they just hold dollars … This is a situation similar to that of any commercial bank. If it controls the rate at which it creates credit, it can go on creating credit and perform a general service as well and make a profit.”31
Roosa told the president that the dollar’s status as a reserve currency allowed America to import more goods and services than it exported, and to enjoy a higher standard of living than otherwise. The advantage did not go unnoticed, and would eventually destroy the Gold Pool.
Roosa asked Volcker to craft a second initiative to defend America’s commitment to redeem dollars in gold. He wanted a plan to remove the “gold cover” that immobilized the bulk of America’s gold stock. Recall that the Federal Reserve had been required to maintain a reserve of 40 percent in gold against its liabilities, such as the dollar bills Americans use as currency. In 1945, Congress lowered the required “gold cover” to 25 percent, but that still isolated $11 billion of America’s $17 billion hoard in solitary confinement in Fort Knox.32
Volcker responded with a ten-page memorandum for the president’s signature. He proposed creating a commission to examine the question of whether the gold cover should be abolished and suggested Allan Sproul as chairman of the committee.33 He knew Sproul’s view on gold.
Sproul had retired as president of the Federal Reserve Bank of New York in 1956, while Volcker toiled on the Fed’s trading desk. He had used his influential position to disparage the role of gold in promoting monetary restraint: “The integrity of our money does not depend on domestic gold convertibility. It depends upon the great productive power of the American economy and the competence with which we manage our fiscal and monetary affairs … Discipline is necessary in these matters but it should be the discipline of competent and responsible men; not the automatic discipline of [gold], a harsh and perverse mechanism.”34
Sproul denounced the inflexibility of gold, a rigidity that had hampered the Federal Reserve’s response to the Great Depression. His argument echoed British economist John Maynard Keynes’s famous denunciation of gold as a “barbarous relic,” and confirmed the Federal Reserve as watchdog over U.S. monetary affairs. He would have recommended abolishing the gold cover. Nevertheless, Roosa dispatched to cold storage Volcker’s recommendation for a presidential commission.
Roosa’s change of heart came from circumstance rather than substance. He wrote to Volcker that “After extensive consid
eration … all of us felt uneasy over calling attention to the [gold] reserve ratio matter at a time when our balance of payments figures about to be released were … showing so large a deficit … It also became clear that the appointment of such a commission in conjunction with … other measures would likely stir up unrest.”35 Roosa emphasized the delicacy of the topic by concluding with “I do not know how many people were involved with you in the preparation of this memorandum. I think the best procedure for you would be to tell each of them orally that the matter is dropped for the time being. You might also check with Mr. Daane [Volcker’s immediate boss] … so that he will know that the matter is being quietly put to one side for the time being.”
Roosa’s detailed instructions to sequester the topic surprised Volcker, as though he were a child who could not keep a secret. A simple CONFIDENTIAL stamp would have been sufficient. But Volcker also knew that the link between money and gold evoked deep feelings, like the emotions in a crime of passion. Treasury Secretary Douglas Dillon had told the president of the sharp “division in the banking fraternity, with people who know something about foreign markets, like [the] New York banks, generally in favor of removing [the gold cover] and the people from the Middle West violently opposed because they think it means we’re going to have printing press money.”36
Volcker fully expected these emotions to surface again when the Treasury revisited the gold cover, but he was surprised by who led the charge.
Charles de Gaulle pursued gold the way Henry VIII did wives. On February 4, 1965, he called a news conference to denounce the dollar as the world’s reserve currency, pleading for the resurrection of gold as king of international finance. Instead, he sparked a revolution that turned the yellow metal into just another speculative asset.
President de Gaulle gathered seven hundred journalists in the Grand Ballroom in the Elysée Palace, built for French royalty in the eighteenth century and now serving as home to the president of the Fifth Republic, no less regal to most of France than Louis XVI. Le General began with an ode to gold that qualifies as great financial poetry (there is almost no competition): “International trade should rest … on an undisputable monetary basis bearing the mark of no particular country … on no other standard than gold—gold that never changes, that can be shaped into ingots, bars, coins, that has no nationality and that is eternally and universally accepted as the inalterable fiduciary value par excellence.”37
Charles de Gaulle had an obsession with gold, but his proposal reflected a deep resentment of America’s favored status under the Bretton Woods System. He noted that the rationale for American dominance, rooted in the devastation of World War II, had passed. “Western European states have been restored to such an extent that the total of their gold reserves equals that of the Americans … [and therefore the] transcending value attributed to the dollar has lost its initial foundation.”38 The French president felt that the dollar’s role as a reserve currency gave the United States an “exorbitant privilege” that permitted America to finance an “invasion” of French industry.39
De Gaulle was only partly right. Americans did not want to invade France—that is what Germans did—but he was right about the “exorbitant privilege,” the same privilege that Roosa had explained to President Kennedy in the Oval Office. The dollar’s role as international money allows America to import French champagne without having to export anything tangible in return—other than greenbacks. Of course, De Gaulle ignored that the world uses dollars as a universal medium of exchange because the United States is a free and open economy, providing a safe haven currency that transcends international borders.
The president of France backed his dollar bashing with action. De Gaulle moved $400 million in French gold, consisting of 25,900 bars weighing a total of 350 tons, from the basement vault of the Federal Reserve Bank of New York in Lower Manhattan, where most countries of the world store their precious metal, to the Banque de France in Paris.40 The high density of gold creates a logistical nightmare, taxing the most experienced shipping executive. Bars are packed four to a wooden box, in a bed of sawdust to avoid damage to the soft metal. Each box is tied with steel strapping and distributed throughout an aircraft to balance the weight. De Gaulle thought the transfer made sense. He wanted the gold in Paris when the world returned to the gold standard. De Gaulle also withdrew French forces from NATO, the North Atlantic Treaty Organization, to complete his divorce from America’s influence.41
De Gaulle’s performance benefited from perfect timing. Four days before the French president’s tirade, on February 1, 1965, the U. S. Congress took up a bill to loosen the gold cover requirement in an effort to bolster America’s defense of the dollar.42 According to the New York Times, the Treasury’s free gold had declined to about $2 billion, which amounted to less than 15 percent of America’s obligations to foreign central banks.43 A Times editorial emphasized American vulnerability by linking the gold cover to “France’s reported decision to exchange … dollars for gold.”44
Congress took the easy way out. It removed the gold cover against Federal Reserve liabilities to commercial banks but left intact the required backing against Federal Reserve notes, the currency used for day-to-day transactions.45 The compromise bought time, postponing a confrontation with conservatives who wanted gold to remain the permanent bulwark of American finance. A speculative frenzy would soon provide midwestern zealots the opportunity to do battle.
Volcker left the Treasury in December 1965 and returned to Chase Manhattan Bank as director of forward planning. During the last year in Washington, he began to have impure thoughts: that De Gaulle had a point. Productivity in Western Europe had caught up with American ingenuity, leaving the dollar overvalued. The German currency, in particular, was too cheap, encouraging American citizens to import anything with a price tag in deutsche marks. This meant that America’s balance-of-payments deficit would persist and the gold outflow would not disappear by anyone’s tinkering with the gold cover. “I could not help thinking that a more fundamental revaluation of currencies was required. Back then, such ideas were considered heresy at the Treasury, worthy of a Siberian exile. And besides, I had a family to support. It was time to leave.”46
Paul Volcker never did anything just for the money, but the jump in annual salary to $35,000 at Chase, compared with $18,000 at the Treasury, made a difference. He and Barbara had two children, ten-year-old Janice and seven-year-old Jimmy, and they had lived comfortably enough while he worked in Washington. But Jimmy had been born with cerebral palsy, and according to Paul, “Barbara insisted we treat him like an able-bodied person. The additional income at Chase would certainly help.”47
Jimmy had gone to a Catholic school, Mater Dei, in Bethesda, Maryland, simply because it was the only mainstream school that would accept him—after Barbara begged. Paul did what fathers do. He introduced his son to baseball at age five by tossing him balls to hit in the front yard of their home in Chevy Chase, Maryland, often until nightfall, using a four-legged homemade contraption to help Jimmy stand. After they moved to the New York bedroom community of Montclair, New Jersey, Paul turned Jimmy into a full-fledged baseball fan, unfortunately rooting for the New York Mets, now that the Dodgers had deserted to the West Coast. “The Mets were the laughingstock of the major leagues,” Jimmy says, “but I was hooked after my dad took me to more games than I was prepared for. I know he did it on purpose. It was good therapy. He would shuffle along beside me while I maneuvered with canes and on leg braces, except after my operations, when he pushed me in a wheelchair.”48
According to Paul, Jimmy’s progress exceeded expectations.
I remember how difficult it was getting him to walk … so much so that I worried about his entire future, whether he would be able to hold a job or get married. When Jimmy turned four, I did something that pained me more than anything I’ve ever done. He desperately wanted a Superman outfit, and I said, “I’ll get it for you after you walk.” Well, he tried and tried, falling down more
times than I could count. And when he finally took two steps he looked at me and said, “See, I can do it. Now I want to look like Superman.” He brought tears to my eyes as I mumbled, “I knew you could do it.” And then I ran out to buy the outfit, cape and all … It’s hard to believe that in Montclair he walked to elementary school with Janice. Barbara and I were so proud.49
Paul swallows hard and then forces a smile. “Jimmy did much better than the Mets and far better than the American dollar … which barely survived 1968.”50
Volcker watched speculators attack the golden underpinnings of international finance in March 1968 from his office at Chase, the same vantage point he had during the October 1960 confrontation. But unlike the earlier flare-up, which fizzled like a shooting star, this one crippled the system.
The U.S. Treasury’s gold stock stood at $12 billion at the start of 1968, but only $1 billion of that total was available to meet America’s obligation to foreigners.51 The bulk of America’s gold still served as required backing for currency issued by the Federal Reserve, the “gold cover” against the tens and twenties Americans use for day-to-day transactions. Currency in circulation had expanded with growth in the economy, raising the gold requirement.
Foreign central banks held more than $15 billion in official dollar reserves at the beginning of 1968 and could exchange those dollars for gold at the U.S. Treasury at the rate of $35 per ounce under the Bretton Woods System.52 In addition, more than $25 billion in dollar-denominated deposits appeared on the books of European commercial banks.53 Every self-respecting Swiss schoolchild knew that these foreign holdings of dollars could overwhelm the Treasury’s $1 billion of free gold in the blink of a speculator’s eye. In case Americans failed to notice, however, a front-page headline in the Wall Street Journal spelled out the details: “Paper-Money … Tying Up Additional Gold … Cuts Supply Available to Meet Foreign Claims.”54
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