One Nation Under Gold

by James Ledbetter

  The standoff with several dozen members of Congress on one side, and the administration and Federal Reserve on the other, might never have been resolved without Watergate, a defining event that hung over the capital like a black-funnel tornado for more than two years. Had the Watergate scandal somehow evaporated in late 1973 or early 1974, it is far from clear that the Nixon administration would have accepted gold legalization on anything resembling an imminent timetable, if ever. After all, Fed chair Burns never changed his position and held out hope that some version of a pre-1971 gold standard could be restored. Yes, pressure for gold legalization was building in Congress, but the Nixon White House was ever-resourceful in finding ways to thwart legislative intent. Nixon himself never showed any interest in the question of gold ownership and, without someone making a forceful counterargument, would likely have been persuaded that such a step needlessly risked the progress he thought for a time he’d made with the economy, to say nothing of international relations.

  What changed was the position of treasury secretary. By early 1974, Shultz was limping along in his job, clearly adrift and miserable. He told friends that he had tried to resign twice, including once in a handwritten letter to the president, only to be rebuffed by the men cautiously running the besieged White House, who said that the timing was unacceptable.10 When he finally was allowed to leave, he chose his deputy William Simon to replace him—not Nixon’s first choice, but others had declined to accept the position, and there were not a lot of prominent volunteers to join a doomed administration. Simon was the first treasury secretary since the early ’60s to have a Wall Street background, having worked in the government bonds division of Salomon Brothers. Unlike the pragmatists Connally and Shultz, Simon was a fervent believer in a free market; his memoir published in 1978 featured a preface from Milton Friedman and a foreword by F. A. Hayek.

  In Simon’s view, the combination of individual demand to invest in gold and growing congressional pressure meant that it was time for Treasury to drop its long-standing objection to gold ownership. That spring, Simon declared that restrictions on American gold ownership “are repugnant to me.” He asked that Congress have “sufficient faith” to leave the timing of its removal to the president, rather than legislate a specific date, and also hinted that such a decision was mere months away.11

  Congress, in the meantime, was finding its own way to gold ownership, albeit in a remarkably roundabout manner. Crane’s and McClure’s bills on gold legalization would likely have languished in obscurity if not for an unforeseen glitch in a policy area most people would not associate with gold ownership—foreign aid. The World Bank was one of the leading global institutions created by the Bretton Woods agreement, designed to provide loans to underdeveloped nations. A few years into the Bank’s existence, it became clear, particularly to several of the world’s poorest countries, that some otherwise desirable loans created balance-of-payments issues for the receiving nations. In response, the Bank created in 1960 the International Development Association (IDA), widely known as the Bank’s “soft-loan window.” The IDA made loans similar to the Bank’s—for projects in transportation, electric power plants, dams, and education—but they were specifically aimed at the very poorest nations and charged only nominal interest.

  For more than a decade the IDA enjoyed reliable, if lukewarm, support on Capitol Hill. But by early 1974, the landscape had shifted considerably. Several big changes included the worldwide oil crisis, notably the OPEC embargo that had begun in 1973, and the war between India and Pakistan in 1971; at the time, IDA assistance amounted to some 30 percent of all aid that India received annually. On top of the seemingly endless Vietnam War and rampant inflation in the United States, these developments left many Americans and their representatives feeling that the country would do better to spend its development dollars on its own weak economy. (Real household income sank about 5 percent between mid-1973 and early 1974, one of the fastest drops in modern US history.)12 An influential Texan congressman summarized the view of many peers: “I am not going to vote to increase our commitments at a time when we cannot take care of folks at home, when the dollar has been under heavy pressure, when the national debt has increased by about one-fifth in the last four years and when we are going in debt this year by another $15 billion.”13

  In January, with the Nixon White House stymied by Watergate, the House rejected an IDA funding bill by a significant margin: 248–155. Nearly all Republicans voted against it, despite the White House’s support—but they were joined by many liberal Democrats, who had tired of spending money on countries like India that, however needy, seemed to have enough money to fund wars. Robert McNamara, president of the World Bank, decried the House vote as “an unmitigated disaster for hundreds of millions of people in the poorest nations of the world.”14

  The Nixon administration was unpleasantly surprised by the vote. Foreign aid was part of the international chess game, and the White House was not happy to lose a battle unexpectedly, especially because the House’s rejection scuttled a multinational agreement the administration had completed months before. Shultz and Kissinger issued a statement calling the vote “a major setback to our efforts of cooperation and to the ability of the United States to provide leadership in a world where there is an increasingly serious tendency for nations to believe that their best interest lies in going it alone.” They scrambled to find a way to boost support for the IDA bill, and were willing to work with House and Senate Democratic leaders to find it. The answer was to win over some of the Republican opponents of the IDA bill by merging it with Crane and McClure’s measure to reverse gold prohibition.

  In the Senate, then, McClure’s amendment for gold legalization was tacked onto the IDA bill—with White House support—in hopes of getting senators who were otherwise skeptical of foreign aid to support the bill. The floor debate, which took place over two sessions before and after Congress’s Memorial Day recess, veered widely. In the period since the House had rejected the IDA bill, India had exploded a nuclear weapon, which made IDA aid to that country even harder to accept. Senator Harry Byrd argued that foreign aid would simply “permit countries like India to use her own resources to develop a weapon that could plunge this country into chaos.”

  On the other side were senators who were clearly attracted to the idea of restoring gold ownership to Americans. Pete Dominick, Republican of Colorado, called the United States “the only country whose citizens are not entitled to own gold.” (This was not accurate, although restrictions against gold ownership dating from the Depression/World War II era were easing.) “When we do not have any gold convertibility in our dollar, it makes no sense to treat gold any differently than we would treat any other raw material.”

  The bill passed by a roll call vote 55–27. That strong margin gave Treasury Secretary Simon plenty of leverage with which to pressure Burns. “I continue to feel that it is imperative that a comprehensive decision be reached this week on the U.S. position regarding gold,” he wrote to Burns the following day.15 Burns had expressed a fear that, with the Europeans still trying to maneuver to find a way to restore an official price of gold, opening up the private market to US citizens could damage the US position. Simon cautioned Burns that sentiment in the House made it “most unlikely” that gold ownership could be postponed beyond year’s end, and urged him to find a way to make peace with what was coming.

  Cynical observers might have perceived some tactical brilliance in pairing a bill that many would reluctantly support but few actively wanted—IDA authorization—with a bill that many actively wanted: gold ownership. There was also a hint of hypocrisy in linking foreign aid expenditures—arguably the very type of big government spending that gold advocates opposed—to a bill that relegalized gold ownership. On the floor of Congress, few bothered to actually examine the economic impact of gold ownership. One exception was California’s Thomas Rees: “What worries me about the ownership of gold is that a lot of innocent people will be buying gold,
and I think they are going to lose their shirt. The speculators will eat them up.” More common were those who decried the way the issues had been awkwardly molded together. Henry Gonzalez of Texas, who had introduced the original IDA authorization bill that the House rejected, now cried foul: “The authors of this bill hope that everyone will have his eyes blinded by gold, and that gold will be the subject of debate, and that nobody will pause and ask about that other little thing, the billion and a half for IDA.” He continued: “These issues are wholly unrelated, and there is not one reason on the Earth or in heaven that they should be joined.”16

  Some conservative Republicans, too, had trouble accepting the improbable merger of issues. Those who had opposed the IDA authorization back in January were no happier with foreign aid in July. Maryland’s Robert Bauman, a founder of the conservative campus group Young Americans for Freedom, addressed his ideological allies directly: “You are trading off your principles totally without any gain. You are making a great mistake. If this bill and other bills like it pass, we all will need our gold because our money will be worthless.”17 Bill Ketchum of California asked Crane bluntly: “Would it not occur to the gentleman that in this field perhaps a little bribery is at stake here?” Crane replied: “I would not call it bribery. I would call it exactly what politics is all about, frankly, the art of compromise.”

  Bribery or compromise, the resolution passed the House by a vote of 225–140. The roll call vote was about as topsy-turvy as a House vote gets. Liberal Democrats who normally would have supported foreign aid voted against the bill—but so did Jack Kemp, a conservative Republican who would soon become synonymous with gold politics. The whole effort nearly came to a halt over a tiny but significant difference in language between the House and Senate versions. On July 25, the Senate appeared to clear the bill, through a voice vote and with no discussion about differences with the House bill. There was, arguably, some ambiguity over whether the House version of the bill might have left loopholes that a president could use to reinstate a ban on gold ownership. McClure then maneuvered to invalidate the earlier Senate vote and add an amendment. Senator Hubert Humphrey then tried to hold the bill up in late July. The details were hammered out, and the final bill cleared both houses. But the drama had yet to end: The bill still needed to be signed by the president—and where was the president?

  On August 2, the chief executive clerk at the White House received S 2665 for the president’s approval, and asked the Office of Management and Budget for “reports and recommendations” from various departments about whether or not the president should sign or veto the bill. (Presumably the OMB director Roy Ash was not involved; he had recused himself from gold policy, apparently because he was an investor in gold stocks.)18 These reports dribbled in over the next several days. In his typical go-slow manner, Federal Reserve chairman Burns was fearful of moving ahead. “There are significant risks—unsettlement in financial markets, pressure on the dollar in exchange markets—associated with allowing private ownership of gold at this time,” Burns warned. “I therefore believe that the portion of the bill referring to gold regulation is unfortunate,” Burns wrote, and recommended monitoring market reaction closely and possibly repealing this part of the bill.19 Treasury Secretary Simon expressed the idiosyncratic and rather dire view that the language in the statute might “be interpreted as prohibiting all regulation of gold transactions, even when such regulation is applicable to other commodities and does not single out gold.” Simon insisted that “the President must have the same authority to regulate gold as he has to regulate other commodities—and that this might be especially important in an emergency situation.” Nonetheless, Simon did not formally oppose signing the bill.

  The griping within the administration was not limited to those whose views had been officially sought. Herb Stein from the Council of Economic Advisers admonished a Treasury official for not having set up a meeting to discuss the pending gold legislation. He was aghast that the president was not being presented with more pessimistic views. For one, he said, “There are people who will think that the sale of gold is the dissipation of our last patrimony.”20 He also pointed out that “we don’t have the foggiest idea of the amount of additional gold American citizens will want.”

  All of this was wasted verbiage, as it is doubtful that President Nixon ever laid eyes on any of these comments. On August 8, Nixon announced to the world what he had been discussing with confidants for days: that he would resign the presidency, effective the next day. This threw supporters and critics of the IDA/gold bill into confusion—had Nixon signed the bill into law before announcing he was stepping down? In the chaos and secrecy surrounding the White House, for a time no one in Congress knew; “eventually, it was determined that he had not.”21

  It fell to freshly installed president Gerald Ford—as of this day, the only American president who was never elected by the nation’s voters—to sign the IDA/gold bill into Public Law 93-373 on August 14; it was, in fact, Ford’s first signing of a bill into law. There was next to no pageantry or pomp about the event. A signing statement drafted for Nixon didn’t mention the bill’s gold provision at all. The White House press office—perhaps distracted by the continued whirl of events around Nixon, his aides, and Congress, or perhaps fearful of the delicate politics around the bill—also did not trumpet the newly restored right of Americans to buy and sell gold. In the noon press briefing that day, White House press secretary Jerry terHorst announced that the president had met with his national security team; he had met with the Soviet ambassador; and he had planned meetings later in the day with the Egyptian foreign minister as well as various American mayors and governors. At no point did he mention that Ford had signed into law a bill allowing Americans to own gold for the first time since FDR’s presidency—and neither did any reporter ask about it.22 Accordingly, the news coverage the following day was muted. The New York Times, for example, did not publish a staff-written story the next day about Ford’s approval of the bill, relying instead on a dispatch from the Reuters wire service. Each of the three network news broadcasts devoted a segment to it: ABC’s and NBC’s were ten seconds long, and CBS’s was twenty seconds long. Reactions from various markets were largely ambiguous, and given the turmoil in the world at the time—the chance that Nixon and other top aides would be indicted, the looming oil crisis, American inflation, and a coup d’etat in Cyprus followed by a Turkish invasion—it would have been close to impossible to pinpoint an exact reaction to the end of gold prohibition. One exception was the stock market: on the day that Ford signed the gold legalization bill into law, the Dow Jones Industrial Average, for the fifth consecutive day, declined and hit a four-year low—which made the rally in gold-mining companies stand out even more.

  Throughout Congress’s gyrations, the private American gold market was preparing itself for a bonanza. During the first half of 1974, as gold continued to trade at more than $100 an ounce, US citizens were traveling north to Canada to buy gold wafers as small as 25 grams.23 Each purchaser had to sign an affidavit declaring that the purchase “does not in any way contravene the gold regulations of the U.S. Treasury Department,” but in truth, the government had ceased to enforce the law in any systematic way for small purchases. By early August, even before Ford signed the bill into law, four of the largest commodity-futures exchanges had announced their plans to begin trading gold-futures contracts as soon as the ban was officially lifted. Prior to this, the only gold-futures market in the world was in Winnipeg. At least one Wall Street broker, Samuel Weiss, sought and received permission to trade gold bars in various sizes through the New York Stock Exchange (NYSE), on which he would charge a 6 percent markup over a given day’s spot price—dramatically less than coin dealers charged. “This is a chance for the average person to buy gold in quantities he can afford without having to go into the numismatic market and pay much higher prices,” Weiss told the press.24

  All this preparation assumed, of course, that trading would begi
n on December 31, as the law stipulated. This assumption was not universally shared. As late as November 1974, with the gold legalization start date as authorized by Congress a month away, the Ford White House considered putting on the brakes.25 There were many reluctances, some obscure, but the main one was the fear of “downward pressure on the dollar in the exchange markets, since all the gold for private investment will need to come from imports.”26 This is a remarkable sentiment, implying that allowing Americans to own gold as an investment would effectively undo one of the presumed advantages of Nixon going off the gold standard more than three years before. From this point of view (attributed to Arthur Burns), the ease of international trading created a free market in gold which in turn meant that the value of the dollar was threatened no matter what its relationship to gold—fixed or floating. Whether or not one accepts the idea, it’s also a compelling reminder that, in the mid-1970s, almost any public policy idea—from deficit spending to foreign aid—could be effectively attacked if plausibly presented as fanning the inflation fires.

  The question of the government’s role in the gold market—not addressed in the final version of the law that Congress passed—continued to vex officials. Part of Burns’s objection seemed to arise from a sense of philosophical consistency: “I would be inclined to oppose at this time any effort to maintain an ‘orderly market’ via sales or auctions out of the Treasury gold stock. The primary argument that has been used by proponents of private ownership is that a prohibition on U.S. citizens’ purchases and sales is an infringement of their rights and freedoms. Treasury sales of gold could be viewed as undercutting this philosophy.” Perhaps more troubling was the idea that once Treasury was in the market, it might be hard to get out: “Moreover, once some Treasury sales had been made, it might be difficult to resist pressures for further intervention in the future—either to support the price or to keep it from rising. All in all, it would seem better to let the market find its own level and bear the costs of any speculative excesses that might manifest themselves at the outset.”27