Second, the agency asserted that PCCE was lying about what it offered. PCCE, the agency said, almost never actually sold physical coins to its investors. PCCE’s advertisements listed depositories (“in California, Florida, New York, Texas, Utah & Canada”) in which investors’ silver coins were supposedly stored. In fact, the SEC claimed, PCCE owned no depositories and in most cases never purchased the silver coins it touted to investors. In this manner, PCCE was able to sell more “coins” to investors than were likely to have been available anywhere. “I believe that more silver coins have been sold than were ever produced,” a money market executive told the New York Times in 1974, when the New York State attorney general obtained an injunction against PCCE for committing what he called “colossal fraud” against New York residents.40 Instead of selling coins, PCCE, the SEC charged, commingled investor funds with its own funds used for general operations and investments. PCCE may have made futures and options purchases in the silver market, but its investors had no rights or title to those investments.
Most PCCE investors had bought their fictional coins on margin—that is, they paid a percentage of the coins’ face value (plus commission and fees) and would either pay the rest over time, or through profits that their investment made. According to the SEC, the latter scenario effectively never occurred. If customers asked to sell their own coins, they would typically be forced to sell at a price dictated only by PCCE; at times, the complaint said, PCCE “refuses to accept sell orders.” Moreover, the SEC charged that the managers used investor funds to make questionable purchases that were never disclosed—including a private jet, a gold mine, and a cattle business—and that company officers took personal loans from investors’ funds. The SEC stopped short of calling PCCE a Ponzi scheme, but one legal scholar concluded that “a between-the-lines reading of the allegations indicates that a Ponzi probably existed.”41 Carabini settled the case with the SEC without admitting wrongdoing and pledged to avoid future violations of securities law (a pledge he would have difficulty fulfilling).
If any of this unscrupulous behavior slowed down the enthusiasm or momentum of the goldbugs, however, it was hard to see. If PCCE was shelling out tens of thousands of dollars to Browne for referrals, it was because Browne dominated bookstores throughout 1974 with his follow-up book, You Can Profit From a Monetary Crisis. In it Browne hit his familiar themes, although with a slightly less apocalyptic tone. He noted that, even though the calamitous prophecies of his 1970 book had not come to pass, investors who took his advice would still have fared far better than those who put their money into blue-chip stocks. He touted PCCE as a place to buy gold and silver coins, saying, “I’ve had numerous dealings with it and have never had reason to complain.”
Not that Browne promised easy times ahead. He continued to predict “a more difficult depression than that of the 1930s.” He also still advocated a well-stocked retreat in case life in much of America became untenable, although he acknowledged that such ideas “have an air of paranoia and cultism about them.” But he also offered practical instructions and price charts for those who wished to purchase gold coins legally—which was clearly a growing population—by declaring their investments to have “numismatic purposes.”42 Americans, whether responding to Browne’s grim scenarios or his investment advice, devoured the message. The book entered the New York Times best-seller list in February 1974, hit number 1 in April after ten weeks, and stayed on the list until November—a total of thirty-nine weeks, putting Browne at or near the top of a rarefied camp of personal finance authors (including Sylvia Porter and “Adam Smith” and very few others) whose reach could rival the nation’s best-known novelists and personalities. It was remarkable that Browne could marshal such a vast audience at a time when most Americans could not legally purchase gold for investments. But of course Browne, PCCE, and everyone around them were anticipating the payoff when, at long last, Americans could.
CHAPTER 10
Legal at Last
Just days after Richard Nixon resigned in 1974, newly installed president Gerald Ford signed a bill allowing Americans once again to buy and sell gold as an investment. His action was little noticed at the time, but would eventually create a robust domestic market in gold as an investment. Courtesy Gerald R. Ford Presidential Library
THE RITUAL IS as long-standing as it is typically fruitless: on the first day of the session, a member of Congress proposes a slew of bills that set out a fresh legislative agenda. The actual chances of the bills becoming law, particularly if the legislator’s party is in the minority, are on that optimistic and delicate day beside the point. In this tradition, on January 3, 1973, Representative Philip Crane, Republican of Illinois, introduced HR 435, a two-sentence bill designed “to permit American citizens to hold gold.”1 With equal hope and enthusiasm, on the same day of bill-packing, Crane also threw in bills to provide tax deductions for private school payments and to increase penalties for certain narcotics crimes.
By all rights, Crane’s gold bill should have met the quiet fate of its many predecessors. On multiple occasions since gold prohibition began in 1933, various members of Congress had proposed legislation—more or less symbolically—designed to restore the legal right of Americans to own gold. Harold Johnson, for example, who was elected to Congress in 1958 from the northern California district that included the historic Sutter’s Mill site, introduced a gold legalization bill on the first day he served in the House. Howard Buffett’s quixotic bills dated to the 1940s, though he was focused more on restoring a gold standard than in restoring gold ownership as an investment. Crane himself had introduced a similar bill in 1970, shortly after he arrived in Congress, but he had been unable to persuade Banking Committee chairman Wright Patman to schedule hearings, and so the bill died.
These efforts had always been extreme long shots, the monetary equivalent of betting on a 50–1 filly at the Kentucky Derby, particularly when the Bretton Woods system was intact. The Treasury Department fought fiercely through the 1950s and 1960s to maintain the prohibition against individual gold ownership, and was never going to approve a law that, from its perspective, would unnecessarily damage the US economy and international monetary system. Indeed, in a global economy where national borders mattered less every day, gold ownership was incompatible with a stable dollar exchangeable for a fixed amount of gold. Had Americans been able to participate freely in the private gold market run-up in the fall of 1960 detailed in chapter 6, for example, the US government would almost certainly have exhausted the gold that was legally required to shore up the dollar. American investors would have snapped up gold in London and other private markets, thereby raising the price and creating more panicked sales, all the while sending dollars outside the United States that would be redeemable for the shrinking volume of gold held in US reserves. (Presumably, the US government could simply have opened its “gold window” to American individuals and organizations and achieved the same calamitous result more quickly.)
After August 1971, however, some members of Congress like Crane could see an opening. Creating a private US market for gold was never a stated part of the Nixon White House’s intentions when the gold window closed. Nonetheless, some kind of market was a logical and relatively straightforward consequence of that 1971 policy. With a dollar no longer automatically redeemable anywhere in the world for a fixed amount of gold, the private gold market’s fluctuations would—within reasonable limits—not obviously harm the US economy. Not surprisingly, the end of gold-dollar convertibility caused the price of gold to shoot far higher than had been the case when the Bretton Woods regime was in place. Shortly after Nixon made his announcement, the price of gold on the private market went up to $43.40 an ounce; in 1972, a year later, it had soared to $70 an ounce.
Prices like that ripened conditions for a return to gold ownership. In the beginning of 1973, at least five bills in addition to Crane’s were introduced into Congress with a goal of allowing Americans to buy, hold, and sell gold as an investmen
t, and several others would aid the domestic gold-mining industry. Principally these came from Republicans, although some were sponsored by Democrats, like Harold Johnson, whose states had strong mining interests.
And yet, despite an apparent groundswell toward gold legalization, Congress on the whole tried to sidestep the issue, addressing it directly only when forced. The House scheduled no hearings on gold legalization per se; the Senate took the lead on gold inadvertently; and the White House paid so little attention to the legislation’s signing that it almost seemed it was trying to keep a secret. As a result, the press shrugged, and a good portion of Washington’s institutions seemed to think they might be able to kill the gold initiative before citizens actually began buying and selling bullion and coins.
Crane was a figure from the far right of the Republican Party. He had worked on Barry Goldwater’s quixotic 1964 presidential campaign, and before the 1970s came to an end he would launch his own presidential bid. Like many free-market conservatives in the 1970s, Crane viewed gold ownership as a simple case of individual liberty—the difference was that he believed he could change the laws. Crane had for years been chipping away at the House leadership’s—and the Nixon administration’s—opposition to gold ownership laws, by slipping small text packets into official law.2 In the spring of 1972, after the gold window had closed, Congress passed the Par Value Modification Act, which officially devalued the dollar by about 8.5 percent. Although the dollar could no longer be exchanged for gold, the act redefined the value of the dollar from 1/35 an ounce of gold to 1/38, as had been agreed among the world’s largest economies in the December 1971 “Smithsonian Agreement.” Through his persistence, Crane had managed to get some language allowing eventual gold ownership tacked on to the bill, even though it was later stripped off by Banking Committee chair Wright Patman. Another legislative opportunity arose in the spring of 1973, when the dollar was being devalued yet again (to $42.22 for an ounce of gold). For this Par Value bill, Crane coordinated his effort with Idaho’s newly elected senator James McClure, and actually managed to get into the final law some clauses that reversed forty years of gold prohibition—but which would take effect only when the president determined that the “elimination of regulations on private ownership of gold will not adversely affect the United States’ international monetary position.” This was a legislative victory for Crane and his allies, but almost entirely a theoretical one. Still, it gave a slice of confidence that there was sufficient congressional will to legalize gold at a date that Congress could fix, instead of waiting on the executive branch to decide.
At the time, the executive branch had higher priorities; and there were, after all, many difficult-to-answer questions about the restoration of an investment gold market in the United States. Would Americans rush to buy the long-forbidden metal? If so, would they flood the market—and what effect would that have, at home and abroad? For his part, Crane downplayed the impact on average investors. “I don’t think it would have that great effect because the majority of persons are not in a position to make major purchases,” he told a newspaper reporter. “And many would not, because of the lack of familiarity with that type of investment.”3 This perspective was interesting because Crane himself was an investor in gold coins, owning both historic American gold coins as well as Austrian krones and Mexican pesos.4
Perhaps Crane was trying to tamp down potential objections to his bill. But Crane and many of his allies, on Capitol Hill and beyond, did not view gold ownership primarily as an issue of choosing one investment over another. It was an assertion of fundamental American individual rights, rights that took precedence over any goal of any government. Crane’s office drew on some of the same ideological sources that had informed Harry Browne’s best-selling books, who treated gold as a literal instrument of human liberty. To make their point, Crane’s staff sought to insert into the Congressional Record the text of Alan Greenspan’s essay “Gold and Economic Freedom” that had been published in Ayn Rand’s newsletter The Objectivist in 1966, which linked a ban on gold ownership to the “shabby secret” of welfare-state spending. Ayn Rand personally gave a Crane staffer, who was also her longtime fan, permission to reproduce Greenspan’s article.5
Creating a new American gold market raised, however, several intriguing and thorny issues that could not be resolved by appeals to abstract libertarian ideals. For one: while the US gold supply had been shrinking since the 1950s, it nonetheless remained the largest owner of gold in the world by far. Was it fair for the US government to participate in the same gold-trading market as, say, a civilian trying to buy a few gold coins as a long-term investment or inflation hedge? While the government couldn’t necessarily control the gold market at all times by buying or selling, it could certainly influence the price of gold, especially if it collaborated with other large gold-holders, such as the central banks of other nations—an advantage clearly not possessed by the average investor. At the same time, if the United States didn’t put some of its gold holdings into the private market, it could easily be perceived as trying to undermine the private market. Crane’s eventual bill was sophisticated enough to include rules for government participation, but of course these provisions were likely moot so long as Treasury opposed a public gold market in its entirety.
Further complicating the idea of a private American gold market was the still volatile world economy, in which gold continued to play a vital role. Just because the administration had declared a temporary separation of dollar-gold convertibility in 1971 did not, after all, guarantee that it would stay unstuck. Forceful players, at home and abroad, often seemed to ache for a return to the seductive stability of the Bretton Woods system or some similar gold-exchange standard. Federal Reserve chairman Arthur Burns, for one, never seemed in the 1970s to truly accept the desirability or permanence of going off the gold standard. In September 1971, he compiled a list of all the retaliatory measures that various countries had taken against the United States since the August 15 announcement. He presented them to Nixon and Treasury Secretary Connally with a warning that “a postponement of serious efforts to rebuild international monetary order would probably lead to a wave of protectionism and restrictions of all kinds, and that [the president] was taking a chance of ushering in an era of growing restrictionism, trade wars, currency wars, and the like.”6 This threat was partially resolved by the “Smithsonian Agreement” at the end of that year, which devalued the dollar and established new exchange rate bands.
Even then, however, the post–Bretton Woods system was far from locked in. After all, the major economies of the world could hardly be faulted for wanting a global monetary order based on something else than the dollar—because the dollar, in the doldrums of the early and mid-1970s, was a disaster. The devaluation by 8.5 percent in late 1971 changed next to nothing, and the Nixon administration was forced to devalue the dollar again, by 10 percent, in early 1973. This led Time magazine to scold: “Once upon a very recent time, only a banana republic would devalue its money twice within 14 months.”7
The terminal weakness of the dollar hindered Washington’s ability to dictate monetary terms to Western Europe, which had its own sets of problems and priorities. While Germany and Britain had adopted an attitude of disappointed resignation to the end of Bretton Woods, France’s president Georges Pompidou remained as committed as his hero Charles de Gaulle to an international gold standard. Through the late summer and fall of 1973, secret talks took place in which European governments discussed trading gold among themselves at a price that approached the private market rate (at the time, close to $100 an ounce). This might well have magically increased the holdings of many European central bankers, who “seem anxious to be able to write up the value of the gold in their reserves from the current official $42.22 price.”8 George Shultz, who by then had become treasury secretary, warned of a major threat from European officials who “see the proposed move as enhancing the probability that gold will work its way back into the center of the
international monetary system, and facilitate a French-European vision of a new monetary policy.” One compromise that Shultz and others in the administration came up with was: let monetary authorities sell gold into private markets at prevailing rates, but allow buying from any other source to take place only at the official rate.
Washington’s leading financial officials continued to see the gold supply as so fraught with risk that they opposed even seemingly innocent introductions of gold into the American market. Throughout the early 1970s, Americans were gearing up for official and unofficial celebrations of the country’s “bicentennial” (the official date being July 4, 1976, the two hundredth anniversary of the signing of the Declaration of Independence). Many members of Congress favored the idea of commemorating the event with specially minted gold coins. The Fed and Treasury got to play the wet blanket role. The frequently grumpy Treasury Undersecretary Paul Volcker argued that even commemorative gold coins would send the wrong signal internationally: “Congressional action requiring the minting of gold coins would be particularly unfortunate,” Volcker wrote to Congress. “The issuance of gold coins by the U.S. Government would be viewed abroad as an attempt to reemphasize the monetary importance of gold.”9 As they did so often on such matters, Volcker and the Fed got their way. The law that passed authorized a special bicentennial design for 1976-dated dollar, half-dollar, and quarter-dollar coins, as well as some special commemorative coins struck in silver—but conspicuously no gold coins.
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