One Nation Under Gold

by James Ledbetter

  The second tie between gold and national security was that, assuming the views of American officials could be taken at face value, America was remarkably defenseless in the face of even modest fluctuations in the gold market. The 1960 spike in gold prices represented a genuine crisis for the American and global economies, albeit one in which only a handful of officials knew the full extent of the problem. Yet by all credible accounts, the crisis came about spontaneously. It was therefore not hard to imagine one or more foreign governments threatening the global economic order simply by manipulating the price of gold or demanding all at once that dollars held in reserve be converted. The Soviet Union (a significant gold producer, though in amounts that were secret and much debated) would have been an obvious such adversary. Although the threat remained largely theoretical, it was not far-fetched. Barr, who became treasury secretary in 1968, later recalled: “The only time we could see much interference from Moscow was perhaps in the gold operations. It did look to us as though they were playing the gold markets. . . . I can’t say that we did take into account much what the bloc countries were doing.”10 But the threat could also come from a strategic ally, perhaps one that elected a left-wing government or had come to resent America’s dominance of the world economy. After all, through the mid-1960s Japan and most European governments deliberately held the bulk of their reserves in dollars, rather than cash them in for gold at the US Treasury window. This was done in deference to the United States and its protective nuclear umbrella. One Treasury official in 1969 defined America’s genuine dollar-gold convertibility policy: “We do not formally turn anyone down when he asks for gold, but we make very clear we are unhappy if he asks.”11 And thus there was little to prevent governments from changing their minds.

  Indeed, a rush to convert dollar holdings to gold might occur even in reaction to an event beyond the control of the United States itself, such as a sudden drawing on the IMF’s reserves or a jolting revaluation of the British pound or other major currency. Take, for example, Germany, a long-standing source of balance-of-payments concerns for the United States. The cost of maintaining hundreds of thousands of American troops in Germany became harder and harder to justify with every year. Getting Germany to pay its postwar debts, and to agree to make payments to “offset” the US military presence, helped. But when pushed too far, such measures could force the Germans to revalue the deutschmark, which they did in 1961, creating turmoil in both markets and diplomacy. The United States’ need to steer Germany’s economy to ease America’s balance of payments very explicitly clashed throughout the 1960s with the need to keep Germany as a NATO ally and check against expansion of Soviet influence.

  More straightforwardly, countries might simply demand gold from the US Treasury. For years the White House worried about how seemingly arbitrary gold withdrawals could upset the global balance of power. In a 1960 National Security Council discussion about the difficulty of getting NATO countries to share the burden of military spending, for example, Treasury Secretary Robert Anderson groused that two years earlier, the Italian Parliament had ordered its central bank to remove $2.5 billion in gold from the United States, making a significant dent in the country’s reserves.12 And in early 1965, Charles de Gaulle’s government formalized a long-standing French preference for a return to a genuine international gold standard; France announced that it would redeem $300 million in dollar holdings from the United States into gold, and make further gold purchases from Treasury every month. The risk that other countries would follow France’s lead on gold was very real, and could have easily dissolved the transatlantic alliance at a time when the US military was particularly exposed; the gold–national security link was strong enough that some executive discussions about gold and balance of payments remain classified even more than half a century later.

  That the US economy was so vulnerable to a gold-currency crisis in the 1960s was deeply ironic. The military and economic aid programs that the United States undertook starting in the immediate postwar period had been so successful in lifting up its allies that they threatened America’s position at the system’s center. The rules of the international monetary game imposed by Bretton Woods had been instituted largely at the United States’ urging; now many in the United States saw those rules as handcuffs keeping the United States from being able to act. The most far-seeing critic of these limitations was the economist Robert Triffin, who had been an outsider in the late 1950s when he wrote his seminal critique Gold and the Dollar Crisis but whom the Kennedy administration brought in as an adviser. “The Triffin dilemma” pointed to the instability of the world’s monetary system; as the global economy grew, there were more and more US dollars and interest-paying US Treasury bills held outside the United States. All of these were theoretically redeemable for gold, but even with the United States owning the lion’s share of the world’s monetary gold, the time would come, as Kennedy put it, when “there is not enough gold to go around.” Only a few outcomes were possible: global growth would need to slow; a global devaluation would need to occur; some kind of gold-dollar convertibility crisis would erupt; or the rules would need to change (which might involve its own crisis).

  The perception of a government gold shortage was heightened by an international gold system that was taking on a shape in the mid-1960s never before seen. While the world continued to produce more gold every year, the amount available for monetary use by the world’s largest economies was not growing by much. Instead, the 1960s witnessed a rapid increase in the amount of gold used for purposes other than propping up currencies and central banks. As governments in Canada and elsewhere relaxed their wartime-era prohibitions against ownership, more and more gold found its way into private hands. By 1967, the South African Chamber of Mines had already begun minting the Krugerrand, an easily tradable one-ounce gold coin that, within a few years, would propel private gold ownership to previously unknown levels.

  Industrial and artistic uses of gold also rose.13 With the price of gold held artificially at $35 an ounce, the metal was especially attractive for industrial applications that were already defining the second half of the twentieth century. The first transistor had been created in 1947 at AT&T Bell Labs, using two pieces of gold foil wedged into a block of germanium; by the mid-1960s tens of millions of transistors were being produced every year and the number would continue to explode for decades. Another Bell Labs innovation was the laser, first developed in 1960 using gold-coated mirrors. Most iconic of all was the space program; rocket engines were coated in gold to act as a heat shield, while the visors worn by the first American astronauts were covered with a thin film of gold to block out the sun’s rays. By the end of the decade many tons of gold were being used annually in the space, military, and electronics fields, far surpassing the amount used in gold fillings for teeth. Gold jewelry, coins, and medallions too became increasingly popular. With incomes rising in most of the developed world in the 1950s and 1960s, capping gold at $35 an ounce had the effect of making gold items look comparatively cheap. One institution estimated in 1966 that internationally, such personal gold consumption had tripled in the previous ten years.14

  Collectively these uses of gold were gaining ground against global monetary gold. The International Monetary Fund estimated that in 1965 alone, gold “absorption” by private holders, industrial use, and artistic use amounted to $1.6 billion, approximately $500 million more than the year before.15 The next year, 1966, for the first time since the end of World War II, the world did not add any gold to its monetary stock; on the contrary, the world’s monetary stock lost $40 million worth of gold. Not coincidentally, the silver market went through similar changes in the mid-1960s, prompting the Johnson administration to eliminate all silver from quarters and dimes, and reduce the silver content of half-dollars.16

  Inextricably connected to the gold and balance-of-payments issue were the domestic budget deficit (in 1964 it hit a worrisome $2.8 billion) and the fact that the dollar was overvalued; Johnson’s
economists could see no simple way to unwind these knots. Most in the administration favored a tax increase, which would curb consumption and send a signal of fiscal discipline to central banks abroad, increasing the likelihood that they would not trade their dollar reserves for gold. However, at least through 1967, a tax hike was considered politically impractical. A onetime devaluation of the dollar would be effective, but seemed bound to provoke other countries to respond in kind, in addition to roiling global capital markets and harming consumers. Johnson had created a cabinet committee on balance of payments that identified many issues—curbing US banks’ loans abroad, speeding up payment of debts from foreign countries, stimulating exports—that were theoretically manageable through policy shifts, though often slowly.

  But much of the problem seemed beyond the administration’s control. Everywhere Johnson’s advisers looked, they saw balance-of-payments demons—even in seemingly trivial places. For example, more and more Americans were vacationing and doing business abroad, where they spent US dollars. Not only were Americans wealthier, but technology improved—the transatlantic jet had debuted in 1958, making it far easier for millions of Americans to travel to Europe and the Mediterranean with their dollars every year (the Caribbean and Central America were the second-favorite destinations). One Johnson White House official asserted that travel abroad by Americans was increasing by a hefty 10 percent every year; in the years 1964–1966 that estimate was probably low. In 1960, US tourists spent about $2.3 billion abroad, and by 1967 the figure was over $4 billion. The situation was mitigated by travel in the opposite direction—that is, tourism to the United States—but even so, in 1967, what the White House called the “tourist gap” was over $2 billion. For years the Johnson administration debated whether to increase passport fees, reduce customs exemptions, or even impose an outright travel tax. Officials knew, however, that such measures would be opposed by the State Department, the travel industry, and the general public.

  And, of course, there was the war in Vietnam, which was growing, not shrinking, and contributing to the balance-of-payments problem in multiple ways. Most of the money spent on the war, aside from the cost of domestically made munitions, was a direct expenditure on supplies and services—literally shipping US dollars to Southeast Asia. The war also required importing raw materials and other goods needed to create military products and services, with no corresponding exports. And the indirect economic impact of the war—supply and manpower shortages, lengthened delivery time, reduced competitiveness—also hit the balance of payments. In 1968, two economists estimated that the Vietnam War contributed $3.5 to $4 billion annually to the current accounts deficit, and that without the war, the country would probably have had a current accounts surplus. A Defense Department official disputed the figure, but acknowledged that “the Vietnam War has had a serious adverse effect on the United States trade balance.”17

  One decisive action that presented itself was to find some way to remove the Bretton Woods linchpin, to delink the dollar from gold. Both the Kennedy and Johnson administrations sought innovative ways to reduce the need for non-US central banks to hold dollars as reserve currency. “Roosa bonds,” named after Kennedy’s Treasury Undersecretary Robert Roosa, were sold in dollars but denominated in foreign currencies, thereby encouraging foreign governments to hold them instead of exchanging them for gold. And many years were spent negotiating and creating “special drawing rights” with the International Monetary Fund, a kind of nation-neutral currency designed for central banks. But these modest steps would slow the gold bleeding, not stop it. A full-scale delinking of gold and the dollar would involve, at a minimum, some kind of drastic controls or moratorium on gold sales between the United States and the world’s largest central banks. What had been an uneasy but mostly friendly (except for France) system in which Western European nations and Japan tacitly agreed not to undermine the dollar’s central role could quickly spill over into a damaging currency war. Johnson’s economic advisers split between those who believed that delinking gold from the dollar was impossible, and those who thought it desirable but couldn’t bring themselves to advocate it. To Johnson adviser Francis Bator, the prospect of international revolt was a poker bluff that the United States could nonetheless stare down and defeat. Bator wrote to the president: “The truth is that the present rules of the international money game are stacked against us. If the Europeans force a crisis, our economic strength and real bargaining leverage would soon become very clear to all concerned.”18 But the possible ramifications were too ominous to contemplate; Bator noted in a later essay that one of his colleagues called this the “nuclear war” option.19

  How preferable, then, to pursue an option that promised cheap and plentiful gold? At precisely the same time that many of Johnson’s advisers were contemplating a metaphorical nuclear option for monetary gold, his Treasury Department was confidentially working with congressional leaders to tap the latest technology—some of it literally nuclear—to revolutionize the way that gold was produced. The starry-eyed briefings from the administration’s scientists made Joe Barr’s 1966 trips to Capitol Hill much cheerier than they’d been the year before. Not only did he have something that made the western congressmen happy, but he bonded with them over forging a secret. Barr knew which members were most likely to support the initiative, and which could be trusted to keep quiet. While the Johnson administration sparred with Congress over seemingly basic issues like passing a tax bill, there was nonetheless consensus between executive and legislative branches to disguise Operation Goldfinger as a broad-based metal-mining program. As Barr wrote to his boss, Treasury Secretary Henry Fowler: “There is general agreement among those I talked to—Mahon, the Interior Subcommittee on Appropriations of the House, and Scoop Jackson—that this program should be wrapped up in a search for all minerals. They advised us (the Treasury and the Administration) to deny or refuse to comment on any leaks that might originate and to stick with the cover story of a search for minerals in short supply in the United States.”20 A push for secrecy also came from Federal Reserve chairman William McChesney Martin, who was concerned that “we simply do not know how foreign central banks would interpret this move.”21

  After all, Goldfinger’s anticipated impact was immense. If the predictions made in 1966 were to come true, the initial investment of a few million dollars would, in just a few years, look like the bargain of the century. A sunny Hornig wrote to LBJ in February 1966: “It appears by spending from $10 million to $20 million per year we stand a good chance of adding several billion dollars to our gold reserves at the present price. With luck it might be much more.” Treasury’s general counsel asserted that “The President’s scientific advisers are confident of the success of the program [and] estimate that new gold reserves valued at up to $10 billion could be expected within five years.”22 That amount—$10 billion—was more than twice the volume of gold then produced annually worldwide. Goldfinger, therefore, wasn’t like discovering some new gold mine—it was like discovering a new planet. Barr’s almost-giddy optimism led him to think that if Goldfinger yielded genuinely revolutionary scientific gold-mining discoveries, they ought to be shared globally to bolster the world’s gold supply—as if the United States could once more be the red-hot center of an international gold rush. “If this program is working out by [1967] we plan to call in geologists from South America, Africa, and Australia (the principal ore-producing areas) and give them the results of what we have learned,” he wrote to President Johnson.

  Thanks to Barr’s lobbying and coordination by Interior Secretary Stewart Udall and Treasury Secretary Fowler, funding for Operation Goldfinger was discreetly secured. Sticking to the cover story, Udall submitted in April a request to add $10.3 million to his fiscal year 1967 budget “to accelerate programs of the Geological Survey and the Bureau of Mines directed to the discovery, exploration and production technologies of heavy metals in short supply.” Shortly thereafter, the Interior Subcommittee of the Senate Appropria
tions Committee approved the funds, with no hearings involved. To wait until fiscal year 1967, however, would mean largely wasting a year; much of the field work was best done in the summer because of weather and the availability of university personnel. Understandably, the administration wanted to start immediately. But Congress, of course, had appropriated no 1966 funds for Goldfinger’s bold adventures. Seeking immediate extra money for Interior risked congressional scrutiny for a project that was supposed to be secret, and at any rate was politically contentious, given strained relations between Congress and the Johnson White House on budget matters.

  To jump-start the project, White House officials turned to a curious source of funds: the US Treasury’s Exchange Stabilization Fund (ESF). The ESF had been created as part of the Gold Reserve Act of 1934 and was designed to allow the government to intervene in markets to stabilize the value of the dollar. To use the ESF as a path to hunt for obscure gold was a stretch, and Johnson administration officials knew it. Treasury’s general counsel Fred B. Smith noted: “A program designed to increase U.S. gold production is, of course, somewhat outside the traditional scope of activities financed from the Fund.” All the more reason, then, to keep Operation Goldfinger secret. While Smith declared himself “sure we can legally justify a transfer of funds to Interior for gold research,” he acknowledged that “it is possible that the GAO [General Accounting Office] and other critics of the ESF might question the propriety as well as the legality of the transfer.” This was not an idle concern. Treasury had drawn fire from the GAO after it had used ESF money in 1964 to purchase a $150,000 house in Tokyo for an American diplomat,23 leading Smith to note drily, “this is not an especially good time to use the Fund in new and untried areas.” Smith proposed a clever bureaucratic fix, by which Treasury would request interdepartmental services—that is, ask the Bureau of Mines and the Geological Survey to “increase our resources to maintain the stability of the dollar”—and reimburse them for their work. And thus did the federal budget allow nearly a million dollars of Treasury money to be used to sniff out gold, with almost no one inside or outside government aware of the details.