Gold

by Matthew Hart

  The administration’s frontline challenge was inflation. Rising prices were eroding the living standards of Americans. One radical solution would be to cap price increases by law, and tie wage increases to the same restraints. Nixon’s traditional Republican advisers were shy of such draconian interference with the free play of the economy. Connally had no such fear, and his department included technocrats who favored controls. It was natural in a man of Connally’s emphatic nature to seek to establish his department in the forefront of the great issue of the day. In Stein’s insider view, Nixon, who had tended to sample among the opinions of his circle, now formed with Connally a policy cartel of two. One of Nixon’s closest aides, H. R. “Bob” Haldeman, the White House chief of staff, thought the president was in awe of Connally. The two met one-on-one. Stein concluded that Nixon isolated himself from more conservative advice, and probably wanted Connally to help him take a step he could not have taken by himself, or with the counsel of his usual advisers. The measures Connally and Nixon contemplated were political dynamite. They used the gold crisis to push the plunger.

  In the spring of 1971, as overseas dollar deposits kept growing and the tension increased in foreign capitals whose central banks had more dollars than they wanted, Nixon and Connally made their decision. If any foreign dollar holder appeared at the gold window to convert, the Americans would close it. From that moment the dollar would cease to be convertible. At the same time, and most importantly from the point of view of the American voter, the government would impose wage and price controls. The policies would be linked, and sold to the public as a structural intervention on behalf of ordinary Americans, protecting them from both the crushing burden of rising prices and the predatory practices of foreign speculators. They would sell this so boldly, Nixon believed, that it would demolish the slightest chance of opponents saying he had not gone far enough.

  Crucial to the success of the two-step plan was secrecy. If word leaked out, merchants and manufacturers would rush to raise prices in advance of controls. Foreign dollar owners would stampede the gold window. Instead of a decisive, forward-looking strike, the plan would crumble into a rearguard action fought to prevent the rout of a beleaguered economy. To preclude a leak, Nixon admitted only two of his most trusted advisers to the plan that he and Connally had formed. For months, only four people in the innermost circle of the White House knew that the United States planned to annihilate the system underpinning the world’s finances. All Nixon needed was a pretext.

  As the summer of 1971 went by, Americans focused on rising prices, and the rest of the world on the American dollar. In mid-August, in a week of heavy dollar selling that pushed the value of the currency ever lower, Britain’s Guardian newspaper reported that “whispers about the dollar’s uncertain future have now turned into open forecasts of devaluation.” The article went on to discuss the solution to the falling dollar favored by those who owned so many of them, particularly the French central bank: redeem them for gold. Then the writer stated what the whole banking world already knew: “There is not enough gold now in Fort Knox to meet more than a fraction of the total possible claims which could be made by foreign holders of dollars.”

  Two days later the New York Times, reporting “speculative attacks” on the dollar in Europe, revealed that, according to the Federal Reserve, “the nation’s monetary gold stock had declined $200 million during the week [to] the lowest level since December 31, 1935.” Adding to the systemic tension already in place (nervous foreign governments wanting to cash in their swollen dollar holdings but afraid of sparking a refusal to pay out) was the lethal reality of a two-tier price.

  By mid-1971 the price paid on the open bullion market was $3 higher than the official rate of $35 an ounce set at Bretton Woods. There were, then, two prices for gold—one on the private London market and the “official” rate paid at the gold window in Washington. This discrepancy presented an irresistible opportunity to people with access to the window. They could buy an ounce of gold for $35 in Washington, and resell it on the private market for $38—an instant profit of 8.5 percent. The relatively slow traffic at the window was the result of the informal agreement among foreign government dollar holders not to menace the system by attempting to cash out of their massive positions. This détente slowed the flow of dollars into gold, but did not stop it. The United States continued to lose gold. The easy profits harvested from the public-private price spread cycled back to the window to be traded in for yet more cheap gold.

  For Connally and Nixon, the time to cut the country free from its golden shackles had arrived. The cumulative pressure was intolerable. International money markets accepted as inevitable that the Treasury would devalue the dollar. “Not only has the recent payments deficit of the United States been very large,” the New York Times continued in the piece cited above, “but it comes as the culmination of an outpouring of dollars that stretches back, almost unbroken, to the 1950s.” Obviously this imbalance had to be made good, and the world guessed that it would be. For the president’s men, the chambers were fully loaded; they were just waiting for the right moment to pull the trigger. That moment arrived in the week of August 9. An envoy from the Bank of England came to the Treasury and asked for the redemption of $3 billion into gold. Nixon had planned exactly what to do. On Thursday, August 12, Connally cut short a Texas vacation and rushed back to Washington. The next day the president and his advisers helicoptered to Camp David to write the script that would topple gold from its place in the monetary system. Gold’s final days as money had arrived.

  Those who flew the sixty miles north to the presidential retreat on Maryland’s Catoctin Mountain knew that they were making history. The participants included George Shultz, a future secretary of state, who then ran the Office of Management and Budget, and Paul Volcker, Connally’s undersecretary for monetary affairs and a future chairman of the Federal Reserve. At the first meeting of the weekend, Nixon reminded everyone of the importance of secrecy. They were forbidden even to tell their wives where they were. Then Connally took over the meeting.

  The drama of what they planned cloaked the proceedings in an air of high excitement. To Americans, the headline subject would be wage and price controls. But to people abroad, it was Nixon’s other step that would stun them. It would change how the world worked.

  The United States, although financially pressed, was still the economic master of the universe. The European Union was still only a six-country customs union. China’s warp-speed rise as a business power lay far in the future. Russia’s economy gasped along in a state of hypoxia. In that world, the United States could act as it liked in the monetary sphere. It did not have to cajole allies or build coalitions. It was prey, like other nations, to the costs of war and the price of oil and the penalties of liking what other people made more than what it made itself. But its economy dwarfed all others and its leader was always called, at least at home, the world’s most powerful man. For those around the president that weekend at Camp David, the sense of this power, at a moment of great consequence, charged the days with an exhilaration that seems to have had, as Stein recorded, as much to do with the participants’ sense of privilege as with the momentous acts afoot.

  The retreat had had a storied place in American affairs since President Franklin D. Roosevelt started using it in 1942, calling it Shangri-La and modeling the main lodge on the Roosevelt family winter home at Warm Springs, Georgia. In 1953, President Dwight D. Eisenhower renamed the hideaway Camp David, for his grandson. Idyllic cottages named after trees are tucked into a forest of oak, poplar, ash, locust, hickory, and maple. A high-security fence keeps trespassers away from the 125-acre sanctuary. Administered by the White House Military Office and staffed by Navy personnel, the retreat gave its guests a sense of privilege and power. Although the accommodations were simple rather than luxurious, “every provision was made for the wishes of the participants,” Stein recalled, including “any choice of food and drink, tennis, swimming, skeet shooting,
bicycle riding, horseback riding.” The Navy staff that ran Camp David “were unfailingly helpful and courteous, treating everyone as if he were a full admiral.”

  Coddled, guarded, and cut off from communications below, the president’s men settled down to the task at hand—drafting the bombshell that Nixon would explode on live TV.

  The news played into the administration’s hands. As the president’s men had choppered out of the capital to their retreat, the New York Times was warning its readers that international financial arrangements were unraveling fast. Calling the situation a “ferment,” the paper pointed out that “three major currencies, the German mark, the Canadian dollar, and the Dutch guilder [were] all ‘floating’ without reference to a fixed par value—strongly suggest[ing] that the system of fixed foreign exchange rates that the non-Communist world has used since World War II may be close to its end.”

  Word of the top-level meeting at Camp David leaked out, and heaped more logs onto the fire of speculation crackling through foreign capitals. Britain’s Observer reported that Nixon had closeted himself with his advisers to deal with a crisis that was “becoming deeper day by day” and that had caused a “wage-price spiral which is affecting every American family.” More to the point for British readers, whose country had large dollar holdings and whose representative was in Washington at that moment trying to cash them in for gold, the newspaper quoted the U.S. Treasury as stating: “We are dedicated to preserving the integrity of the dollar. We are not going to devalue it or change the price of gold. Our position on this is unwavering.”

  This was strictly true. They were not going to devalue the dollar or change the gold price. They were going to unhook them.

  Most of the Camp David planners were exhilarated by the weekend, but Nixon fretted about timing. On the brink of dismantling the global financial system, he worried about interrupting the hit TV western Bonanza. Millions of Americans sat glued to their televisions every Sunday night, addicted to the fictional Cartwright family, whose adventures played out on the Ponderosa ranch. Nixon was not the only president to respect the devotion of Bonanza viewers. President Lyndon Johnson had made it policy never to let the affairs of state disrupt proceedings at the Ponderosa. But Nixon’s advisers convinced him that he had to speak before the markets opened Monday morning.

  Bob Haldeman, visited the president in his private cabin at Camp David on the Saturday night, one day before his epochal address. “The P. was down in his study with the lights off and the fire going in the fireplace, even though it was a hot night out,” Haldeman recorded in his diary. “He was in one of his sort of mystic moods.” Nixon told Haldeman that “we need to raise the spirit of the country; that will be the thrust of the rhetoric of the speech. . . . We’ve got to change the spirit, and then the economy could take off like hell.”

  On Sunday, as the president’s political and technical advisers worked to finalize the announcement, the news must have stiffened their resolve. In a piece from Brussels datelined that day, the Times described a scene in which the European market was shunning dollar bonds. One dealer characterized the trading as more like a flea market than a money market. The price of dollar bonds was dropping faster than computers could track. The number of dealers ready to trade dollar instruments at all had dwindled to a handful. Ready for their moment, even exhilarated, the presidential party returned to the capital, and that night, on television, the president made the announcement that rippled out through an astonished world and was known ever after as the “Nixon Shock.”

  In the past seven years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.

  In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy—and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

  I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

  The first market with a chance to react was Tokyo, opening for business as the president’s words flew across the Pacific and detonated on the trading floor. In a single hour, Japan’s commercial banks unloaded $300 million in U.S. cash. At the same time Japanese investors started dumping the stock of companies with big American export markets, for Nixon had done much more than slash the mooring line between the dollar and gold. He had announced a package that included an import duty on foreign manufacturers. As dismay spread around the globe, the White House awaited the American response. They needn’t have worried. It was jubilant.

  And why not? Prices would stop rising. The tax on imports was sugarcoated by the cancellation of a federal tax on buying an American car. Money straight into the voters’ pockets, and good for the country too! Everything announced that night was bathed in a patriotic light. Nixon had worried that closing the gold window would signal Americans that their government was bankrupt, so he played it as a defense of the home currency against foreign speculators. When the TV lights clicked off in the Oval Office at the end of the address, the United States dollar had changed from a drawing right on gold to a paper note whose value would thereafter be a matter of opinion. But what had gold become?

  Gold metamorphosed. It shape-changed in the human mind. No longer hard currency, or even its relation, gold became the phantom money of the imagination—shadow money. The shapes projected were the shapes of our emotions. “When you wake up in the morning, do you care about the price of gold?” the Texas gold bug Ron Paul asked Ben Bernanke, chairman of the Federal Reserve, four decades after the Nixon Shock.

  “I pay attention to the price of gold,” Bernanke said, “but I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as a protection against what we call tail risk—really, really bad outcomes.”

  One of the greatest goldfields in the world, Nevada’s Carlin Trend, was discovered when gold was still $35 an ounce, and then rediscovered when the price had been cut loose. The story of those discoveries in the low mountains of northern Nevada describes the transition from the old gold world to the new. On the Carlin Trend a great tycoon built the biggest gold mining company in the world. Yet the story didn’t start with him. It started in another age, when time moved at a more dignified pace. It unfolded among the piñon groves and the empty hills with a kind of purity of purpose, moved less by material reward than by the desire for scientific truth. It uncovered an ocean of gold.

  5

  THE DISCOVERY OF INVISIBLE GOLD

  While I was working in the field, cresting the ridge was always important to me, for then I could take a breather, and look ahead across the valley.

  —Ralph Roberts, A Passion for Gold

  RALPH ROBERTS FOUND THE RABBIT hole into Wonderland. The greatest goldfield in America lay hidden under a thick cap of rock, and Roberts found a place where a hole in the cap allowed him to look through. By the time he made his discovery, he knew the mountains well. He had wandered for years through the Tuscarora and Shoshone, the Sonoma and the Diamond and the Antler ranges. They kindled his excitement. To a geologist, the features of a landscape are like jumbled parts of speech, to be construed into the sentences of geologic time. It is all just heaped-up rocks and sand until it is fitted into a comprehensive theory, the story of what put it there.

  The reader finds in Roberts’s account of his life the deep pleasure of inquiry, and also of freedom. “On those trips into the mountains I was accompanied only by a few sparrows, meadowlarks, and shrikes, who actua
lly flew alongside me when I was near their nest.” He saw mule deer and antelope and golden eagles. “Marmots announced my approach with piercing whistles, and voles darted from underfoot. I seldom saw another person, except at ranches in the foothills, and that was good because I didn’t want company while learning the secrets of the rocks.”

  To walk into the hills that Roberts explored is to enter an enormous, sealike silence of mauve and ocher slopes. The ground is speckled with the tough little plants of the western desert. In the spare hills, the planetary history opens to inspection.

  ROBERTS WAS A TWENTY-EIGHT-YEAR-OLD DOCTORAL candidate at Yale University when he joined a United States Geological Survey exploration team in north-central Nevada in 1939. He stepped off the bus in Winnemucca into the furnace of July, and within days was puzzling over the events of half a billion years ago. The expedition’s task was to untangle the geology of the Sonoma range. As he tackled the exploration, Roberts caught a lucky break. There was a working gold mine in the heart of Willow Creek, where he was based. The mine would provide him with a window into the structure he was trying to unravel.

  Mining in Nevada had a long pedigree. About 13,000 years ago, Indians of the Clovis culture mined deposits of obsidian, opalite, chalcedony, agate, jasper, and quartz. They made spear points and arrowheads and tools for scraping hides. From about AD 300 to 1200 the Anasazi people mined turquoise near present-day Boulder City. Spanish explorers may have crossed the southern tip of the state in 1776 looking for gold, silver, and turquoise. Native Americans probably knew about gold in the Sierra. There are reports that they showed whites where to look.