by Matthew Hart
THE GOLD STANDARD WAS THROTTLED to death on live TV on a Sunday night in Washington. Its crime: hamstringing the government into whose care it had been placed, that of the United States. In some ways the situation that led to the system’s demise was a replay of the 1890s—a lousy American balance of payments and the sucking sound of large amounts of bullion leaving the Treasury. Yet in the intervening years the condition of the United States had changed almost beyond belief. It was the world’s titan. Five years after the end of World War II, two thirds of all the monetary gold reserves in the world belonged to the American government. It had 20,000 tons of bullion in its deep-storage vaults, such as the one at Fort Knox, Kentucky. Why would Americans, with such a gold position, sideline the power that the metal represented?
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CAMP DAVID COUP
I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.
—Richard Nixon, address to the nation, August 15, 1971
AS WITH ANY SATISFYING MURDER story, we must set the stage for gold’s last moment at the center of monetary life. We begin the story where so many really first-rate crimes have taken place—London. It is the Great Depression. Gold is surging out of the Bank of England as foreigners, uneasy at Britain’s prospects, take the cash and run. Things are so bad that King George V takes a £50,000 pay cut. When the government reduces naval pay, sailors at a base in Scotland go on strike. To foreign depositors, the word “mutiny” signals that a revolution is at hand. Forty million pounds in gold flies out of the central bank in a week. The Bank of England begs the government to allow it to stop redeeming notes in gold. Parliament passes the necessary legislation. Britain is off the gold standard!
Within days, forty-seven countries followed suit. A year later, only five countries were still on the gold standard: France, Switzerland, the Netherlands, Belgium, and the United States. In the mood of panic, redemptions into gold began to churn through the system. In a single day the Belgian central bank took $106 million in gold from the U.S. Treasury and France took $50 million. A few weeks later the French came back for $70 million more. President Herbert Hoover warned that all the bullion “dashing hither and yon from one nation to another, seeking maximum safety, has acted like a cannon loose on the deck of the world in a storm.”
The man who would stop the rout of America’s reserves trounced Hoover in the election of November 1932. In the practice of the time, Franklin D. Roosevelt, the victor, would not be inaugurated until the following March. In the lame-duck interregnum, much could happen . . . and did. The cannon that Hoover had identified kept smashing around on the deck. When one of the men tipped for Roosevelt’s cabinet let drop that it might be smart to quit the gold standard, a run on the dollar took $320 million out of the Treasury in less than two months. Worse, some of those fleeing were Americans. Distrustful of Roosevelt, who refused to say what he planned to do, they cashed in their currency for gold. It wouldn’t do them any good.
Roosevelt took office March 4, 1933. On March 9 he rushed through the Emergency Banking Act. The act gave the president the power to regulate ownership of bullion. On April 5 he signed Executive Order 6102 “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States.” The order made it a crime for any individual, partnership, association or corporation to possess gold. The law exempted “customary uses” such as gold fillings for teeth, and rare coins in collections. All other gold was the government’s, and owners had to deliver it by May 1, twenty-five days after the signing of the order, when they would be paid the official government price of $20.67 an ounce.
A challenger immediately tested the law. Frederick Barber Campbell, a sixty-seven-year-old New York insurance lawyer, marched into the Chase National Bank and asked for the twenty-seven gold bars that he had there on deposit. The bullion was worth $200,000, a large sum. In accordance with the presidential order, the bank refused to surrender the gold, and Campbell sued them. He also asked the court to restrain the bank from delivering the gold to the federal government. Campbell maintained that the order, and the law cited by the president as his authority for it, were both unconstitutional. The government responded by indicting Campbell for failing to report his holdings to the Treasury, and then indicting him again for hoarding. If convicted on both counts, Campbell faced a maximum term of twenty years. In the end he did not go to prison, but his lawsuit failed. Campbell died three years later of a heart attack, in the Metropolitan Club on East 60th Street, where he lived. The Treasury got the gold.
As private gold shifted to the government, the public coffers swelled. In 1930 the United States had about 7,000 tons of gold. In 1935, two years after the confiscations started, the stock reached almost 10,000 tons. Not all of this increase came from private gold. As Europeans grew fearful of approaching war, some shifted wealth across the ocean to the safe haven of the United States. This increased the bullion flow into the Treasury. When war broke out in 1939 the United States, with its industries intact and still two years away from war, became an important supplier of arms and other goods to combatants. Gold imports soared. In 1940 the Treasury had 21,000 tons, a five-year increase of more than a hundred percent. Nor was the size of the reserve all that had changed. The cost of an ounce of gold had climbed from $20.67 to $35, a hike of almost 70 percent. It had happened very fast, and for one reason—the United States had been cooking the price.
As soon as he had issued the gold confiscation order, Roosevelt obtained the authority to reduce the amount of gold a dollar represented by as much as 60 percent. It would take more dollars to buy an ounce of gold. The dollar would be worth less than it had been, but there would be more of them, and that’s what Roosevelt wanted—more currency in circulation to stimulate the economy out of the Depression.
Raising the gold price was easy: the Treasury just bid it up. Henry Morgenthau, Jr., Roosevelt’s treasury secretary, recorded in his diaries how he and the president rigged the price.
Franklin Roosevelt would lie comfortably on his old-fashioned three-quarter mahogany bed. . . . The actual price [of gold] on any given day made little difference. Our object was simply to keep the trend gradually upward. . . . One day, when I must have come in more than usually worried about the state of the world, we were planning an increase of from 19 to 22 cents. Roosevelt took one look at me and suggested a rise of 21. “It’s a lucky number,” the president said with a laugh, “because it’s three times seven.”
Preserved throughout the war, the huge gold reserve of the United States gave it a uniquely powerful hand to shape the world that followed, and in a feat of statecraft pulled off in the mountains of New England, to obtain for the dollar a status that has guaranteed the U.S. Treasury a cheap supply of money ever since.
IN JULY OF 1944, ONLY weeks after D-Day, as Allied armies battled out of Normandy in the invasion that would defeat Germany, the representatives of forty-four countries arrived at a meeting thousands of miles away to plan for the victory. At the town of Bretton Woods in the New Hampshire forest, sleek black cars swept up the drive to the regal Mount Washington Hotel. Within days, 730 delegates were rewriting the rules of international finance. An American participant sounded a rousing theme. “We fight together on sodden battlefields,” said Fred M. Vinson, later chief justice of the United States. “We sail together on the majestic blue. We fly together in the ethereal sky. The test of this conference is whether we can walk together, solve our economic problems, down the road to peace as we today march to victory.”
They would go down the road to peace, all right, guided along it every step of the way by the United States. America and Britain seemed to share the decisive power at Bretton Woods—the United States because it was rich and militarily preeminent; Britain, because its empire was so vast. But the British power was illusory. A newly discovered transcript of the Bretton Woods meetings shows the empire “disintegrating before your eyes,” one expert who
read it said. Britain, shattered by war and in debt, followed the course the Americans wanted, and although they often objected, so did everyone else. “Now the advantage is ours here,” Morgenthau said to a member of his team, “and I personally think we should take it.”
They did take it. There was no question of a return to the old gold standard system, because the United States had 75 percent of the world’s monetary gold. At Bretton Woods the participants agreed to peg their currencies instead to the U.S. dollar, and the dollar would be convertible to gold. The system enshrined the dollar as the world’s reserve currency, giving it advantages it still enjoys. Most commodity prices are denominated in dollars, and Americans buying such commodities escape the transaction cost that other countries’ citizens must pay to get the dollars they need to make their purchases. The international community’s need for dollars also means that the Treasury has a ready market for its debt, and generally can pay a lower interest on it.
The United States was a cornucopia of what the world needed as it recovered from war, especially capital. America wanted open markets and free trade. Two of the institutions created at Bretton Woods, the International Monetary Fund and the World Bank, helped the United States achieve those ends. Dollars flowed into the war-torn countries, and their economies began to recover. As Americans imagined it, the flow of money out of the United States would in time be matched by money flowing back in, as the reconstructed national economies gained the ability to buy American products.
For a while, that’s how it did work, with Japan and Europe “eager for dollars they could spend on American cars, steel and machinery.” But beginning in 1950, the U.S. share of world output dropped from 35 percent to 27 percent. Also, American spending, especially on the Vietnam War, deluged the world with dollars. In one indicator of this trend, foreign-owned dollar deposits in U.S. banks and foreign-owned purchases of U.S. government debt more than doubled between 1950 and 1960, from $8 billion to $20 billion, and that was before the Vietnam spending took off. Other countries’ citizens were not spending the money as fast as they were banking it. Americans bought the goods produced in the new factories of other countries, factories often built with American capital, but those countries did not buy as much from the United States. Surplus dollar holdings built up in the central banks of foreign countries. In the gold-standard regime, that would signal the balancing of books. Bullion would leave American ports for European and Asian destinations. And that’s what happened.
At the center of the Bretton Woods system lay that old serpent, gold. While the main financial action ran on dollars, gold convertibility still backed those dollars. In the first postwar years, because the currency was what everybody wanted, dollar convertibility was essentially a technicality. This technicality changed to practice with crushing speed. In a span of only thirteen years, the combined effect of international largesse and foreign war, a global military establishment and trade deficits, drained the Treasury of the United States of half its gold. Moreover, the number of foreigners holding U.S. government debt had doubled. If foreign creditors had all at once cashed in their dollars for gold, the U.S. gold stock would have vanished. Only the fear of provoking a run on the dollar and undermining their own dollar holdings prevented foreign owners of U.S. banknotes from cashing them in. But the world was getting edgy. At a point when the United States owed $60 billion and its gold stock was $12 billion, a French economist pointed out that asking America to pay its debts in gold was pointless: “It’s like telling a bald man to comb his hair,” he said. “It isn’t there.”
In early 1965 the French president, Charles de Gaulle, fuming at America, told a press conference at the Elysée Palace that the dollar had lost the right to be the world’s money, and the international community should return to the only standard that made sense. “Gold!” he intoned, the standard that “has no nationality” and “is eternally and universally accepted.”
Two years later, de Gaulle again displayed his pique with the status quo, pulling France out of a system called the London Gold Pool. The pool was a price-fixing cartel of eight governments: the United States, Britain, Germany, France, Italy, Switzerland, Belgium, and the Netherlands. It maintained the official gold price of the Bretton Woods arrangement: $35 an ounce. To stop speculators bidding up the price, the pool would dump gold into the market to satisfy any demand, always ready to sell at $35. But speculators, betting that this support could not last, amassed large holdings. They believed that the $35 price would crumble, and that it would have to rise as faith in the dollar fell. Not long after de Gaulle took France and its gold out of the pool, the United States had to transfer almost $1 billion in gold to London to sell at $35 to buyers who would otherwise have paid more, destroying the official price. The speculators saw the $35 price as a bargain. Gold, in this view, was on sale, and eventually that sale would end.
The pool members struggled against the inevitable. On March 11, 1968, only days after the huge bullion transfer from the United States, the pool vowed to hold the line at $35. Three days later, in a market that usually traded five tons a day, buyers in London snapped up a hundred tons of gold. A week later the pool folded. One year after that, the price of gold on the open market was $43 an ounce—a 20 percent premium on the official price. Something had to give.
WHEN RICHARD NIXON CAME TO office in 1970, money was pouring out of the country to pay for the Vietnam War and for the import of foreign goods that Americans increasingly preferred to their own, such as Japanese and German cars and electronics. Yet the main problem in the minds of American voters was the inflation that was driving higher prices. That was the problem Nixon had promised to solve. At the same time the administration had to face the other, potentially humiliating problem—what to do about the mountain of U.S. banknotes piling up in central banks around the world, each one of them an IOU for American gold. If rising prices caused by inflation disturbed most Americans, the worry of the banking world was the growth of dollar deposits outside the United States. For foreign governments, that was the pressing issue of the day. They knew they could not all show up at once to cash in dollars, because the gold demand would empty Fort Knox. The prospect of such an ignominy would probably cause the United States to head it off by closing the “gold window,” and refusing to convert.
Moreover, the dollar anchored the global financial system. A run on the dollar would mean chaos everywhere. For these reasons the foreign governments held off. The tension grew. Anyone with large dollar holdings would necessarily worry about other countries with equally large dollar holdings. What if someone broke the tacit agreement keeping back the rush? What if one country reached a secret accord with Washington, and surreptitiously unloaded dollars while everyone else sat on theirs?
The solution to the American dilemma seems simple: Do just what the foreign dollar holders feared. Shut the window. Let the dollar float and find its value against other currencies according to what the market thought it was worth. Some of Nixon’s advisers favored this course. But ending gold convertibility and letting the dollar float presented problems too. The dollar would drop in value. A lower dollar would mean that the imported products that Americans craved would be more expensive. It would look as if the administration had abandoned the struggle against inflation. In full view, Nixon would have failed in his pledge.
In the country at large, and to the world, the president would take the blame. In official Washington, though, attention fixed on the Treasury. The secretary was an outsized, dashing player whose appointment had raised eyebrows: a Democrat in a Republican administration. He was Nixon’s antithesis—a bold, smooth-talking, swashbuckling lawyer who towered above the physically unimpressive president. He had been secretary of the navy and governor of Texas. His official portrait at the Treasury shows a man at the summit of his powers, sitting against a desk in a yellow room flooded with light, a commanding, confident, silver-haired man in a pin-striped suit, with one fist resting on his hip. This was John B. Connally. Nixo
n was besotted with him.
NIXON SURPRISED MANY WHEN HE appointed Connally to the Treasury in December 1970. Connally had been in President John F. Kennedy’s cabinet, and Kennedy—attractive, privileged, and socially adroit—had inflicted a humiliating defeat on the awkward and uncomfortable Nixon in their televised debate in the 1960 presidential campaign. Connally had a particularly vivid association with the Kennedy mystique: as governor of Texas at the time, he had been riding in the open presidential limousine when Kennedy was shot, and had taken the same bullet that killed Kennedy.
The bullet that struck the president passed through him and hit Connally in the back. The images of Connally and the Kennedys, spattered in blood as Secret Service agents rushed to protect them, were seared into the world’s collective memory. Connally’s biographer believed that the assassination enhanced Connally’s reputation. In a chapter called “The Bullet-Made Man,” he said that when Kennedy died, Connally “was reborn. The same bullet that passed through Kennedy made Connally a minor martyr, a role he was to exploit to such an extent that four years after the assassination the Baltimore Sun and other newspapers suggested with editorial sarcasm that ‘the black arm sling that Governor Connally is so fond of wearing is getting frayed.’ ”
Connally was the perfect partner for Nixon. The president wanted an audacious solution to the crisis; Connally did not care what that solution was. Herbert Stein, who knew Connally and saw him in operation, and who wrote an account of the drama played out in Nixon’s inner circle at the time, says Connally was “forceful, colorful, charming, an excellent speaker in small and large groups and political to his eyeballs.” He brought no policy of his own to the Treasury. His talent was a knack for selling whatever policy the president might choose. “I can play it round or I can play it flat,” he liked to say, “just tell me how to play it.”