One Nation Under Gold

by James Ledbetter

  The decades-long effort to open the world’s gold market to American citizens had finally succeeded. Accompanying it, though, came the world’s complicated, often hostile politics; Krugerrands would end up illegal again in a few short years. And what did not occur, in the years immediately following gold legalization, is economic prosperity. Whatever it might accomplish, the right to buy and sell gold did not restore the dollar, or bring about the reductions in inflation that Nixon and Ford both promised, or create jobs; in 1975, the unemployment rate soared above 8 percent for the first time since the Depression. By the late 1970s, Philip Crane, Jesse Helms, Ronald Reagan, and legions of brokers and dealers would try to sell Americans on the idea that gold could cure those ills—if only we made it the basis of our money again.

  CHAPTER 11

  Goldbugs in Power

  Encouraged by the brisk sales of South African Krugerrands, the United States began minting and selling its own gold coins in 1986. They quickly became the best-selling gold coin in the country and added to the strong comeback of the US gold-mining industry.

  IT WAS THE FINAL DAY of the Senate’s session of the 94th Congress—Friday, October 1, 1976. It being a presidential election year, President Ford that day was soon heading off on a six-day campaign tour, after meeting with the French foreign minister as well as several high-ranking Soviet officials. The House had already wrapped up its business and many members had already left town.

  And the Senate was hoping to do the same, but there was at least one bill that seemed stuck, if not outright doomed, keeping the senators and staff there until after midnight. Ever since the world’s largest economies had adopted a system of floating currencies, the International Monetary Fund had been operating under an outdated set of rules, particularly regarding its use of gold in international transactions. The bill before the Senate would update the rules, in line with an agreement that had been hammered out among the IMF’s largest members in a Jamaica meeting earlier in the year.1 This seemed like a straightforward and sufficiently popular plan; the Ford administration was pushing the bill hard, and the House had passed its version back in July by a better than 2-to-1 margin.

  But in the Senate, the IMF bill nearly died. Senators on both the right and left were intent on holding up the bill to make broader political points. Banking Committee chair William Proxmire, a liberal Wisconsin Democrat, wanted to add provisions that would have made it illegal for American companies to participate in the Arab boycott of Israel. And Jesse Helms, a North Carolina Republican, wanted to put additional constraints on the IMF’s use of gold, as well as to restore that relic that nearly derailed FDR’s gold plan more than forty years before: the gold clause in contracts. During the long period of gold prohibition, contracts that pegged the value of payments to gold—once common—were not practical and were effectively outlawed. But with gold now legal for Americans to own and decoupled from the dollar, Helms and many others argued that there was no longer any valid reason to keep people from drawing up “gold clause” contracts (including in bond issues or rental/loan agreements). Such contracts had potential appeal to creditors, who could be assured that they would not be paid back over time with dollars worth far less than when the contract was signed. In the mid- and late 1970s, with inflation rates sometimes crossing into double digits, that was far from a theoretical concern.

  Howard Segermark, who worked for Helms as an economic counsel, was standing on the Senate floor when a page approached him. There was a phone call in the cloakroom from the Treasury Department, from someone wanting to speak to Senator Helms. Did Segermark want to take the call? Segermark had only been working for Helms for a few months and was unsure of procedure, but decided he should. When he picked up the phone, on the other end was an irate Treasury Secretary William Simon. “His language was very coarse,” Segermark recalled.2 “Every other word was ‘shit’ and ‘fuck,’ ” Simon was in a bind. He was scheduled to travel to Manila in a few days for the annual meeting of the IMF and World Bank board of directors, and he did not relish the idea of showing up empty-handed. Simon tried to apply pressure: he said he was being personally embarrassed, and moreover the United States was being embarrassed, by the Senate holdup of the IMF bill. Segermark listed Helms’s conditions for support. “He said ‘Explain to me what the gold clause is.’ ” Segermark did, and Simon said he wouldn’t stand in the way of restoring the gold clause. This was a victory for Helms, but an empty one: it was too late to amend the House bill to include a gold clause because the session had closed; any gold-clause legislation would have to wait for the 95th Congress. In addition, there was a reasonable chance that Ford would lose the election in a month, in which case Simon would no longer be Treasury Secretary, and the theoretical victory would evaporate. Thinking quickly, Segermark told Simon that if the election went to Jimmy Carter, Simon should include in his instructions to his successor that Treasury should support the restoration of gold clauses in contracts. Simon said that he would and remarkably, according to Segermark, “he kept his word.”

  It is a trademark tale of Jesse Helms politics. To most of the public, Helms, the Republican senator from North Carolina for thirty years, was and is known as a “righteous warrior” for causes championed by social conservatives: opposition to abortion, affirmative action, women’s rights, and gay rights, and support for prayer in public schools. He also fought tirelessly for anti-Communist regimes abroad. His legislative maneuvers—threats of filibusters; holding up seemingly routine judicial and diplomatic appointments to make a political point—gave headaches to several presidents, especially Jimmy Carter and Bill Clinton, and earned him the nickname “Senator No.” Helms’s uncompromising politics could at times be awkward even for those who broadly agreed with him, such as his efforts to prevent the federal government from creating a holiday honoring Martin Luther King Jr., whom Helms labeled a Communist.

  Far less well known is that in the 1970s, Helms proved himself highly effective in garnering support for laws to increase gold’s influence in America’s economic life. To this day, even Helms’s biographers and official champions almost always overlook his gold advocacy.3 Such omissions are striking, because the economically tumultuous late 1970s and early 1980s represent a kind of high-water mark for the gold-standard movement in post-FDR America, at least in terms of its actual viability to change monetary policy (as opposed, say, to political popularity). As inflation and unemployment ravaged the nation, and as annual budget deficits began to routinely top $100 billion, many politicians on the right wing of the Republican Party continued to push gold as an economic fix. Tens of thousands of Americans now owned gold, and much of the political rhetoric extolling gold ownership as a form of freedom transferred over to a gold-based monetary system (even if, in theory and in practice, these were very different animals). And the politicians preaching the power of gold were no longer on the margins. Ronald Reagan’s rise to power in 1980 corresponded with a wave of West Coast, mostly Republican politicians—such as Golden Rooster defense lawyer turned Nevada statesman Paul Laxalt—who deliberately mixed gold advocacy with a broader lower-tax, smaller-government agenda. In some cases, these legislators had close ties to mining interests, such as Steven Symms of Idaho. Symms bought silver futures while serving on a House subcommittee overseeing the Commodity Futures Trading Commission, which many saw as a conflict of interest (which he denied), and would later serve on the board of directors of a gold mining company.

  The Gold Commission that Helms was able to pass through Congress was the most protracted and serious public effort the federal government has undertaken since the Roosevelt administration to assess gold’s monetary role. And by the late ’80s, Alan Greenspan—a disciple of Ayn Rand—was chairman of the Federal Reserve Board. At no point in postwar America have so many highly placed officials been so well disposed to restoring a gold monetary system as in the 1980s.

  And Helms certainly laid the groundwork. Although his attachment to gold was largely an extension of hi
s deeply held beliefs in a free-market economy, Helms had grown up in Monroe, North Carolina, the epicenter of the nineteenth century Carolina Gold Rush. As a teenager during the Depression, he’d seen desperate men return to the Carolina mines in hopes of prying a living out of the ground. Helms took office in 1973 and quickly began working on gold advocacy, albeit in some unlikely-seeming areas. The gold-clause legislation was something he inherited from congressional allies. It began life with a law professor’s 1975 opinion article in the Wall Street Journal which made the case to restore gold clauses.4 The article cast the argument in terms of ultimate freedom for individuals. “If the dominant political philosophy holds that government is omnipotent—that it can grant, withhold or withdraw its citizens’ rights whenever it wishes, for any reason or for no reason at all; that it can exterminate its unwilling young men in declared or undeclared wars or force the productive to support the indigent—then it has the power to outlaw Gold Clauses. On the other hand, if the dominant political philosophy holds that government power is limited, that its citizens’ rights are inalienable, that its proper function is to protect life, liberty, and property, then, but only then, will Gold Clauses be secure.”

  Within a few weeks, Representative Phil Crane, who had hit legislative pay dirt the year before with gold ownership, introduced a bill “to remove all obstacles to the use of gold clauses.” As with so many such sweeping bills, it was referred to the House Banking Committee and ignored. In early 1976, Helms—guided by Segermark—wrote to Fed chair Arthur Burns and Treasury Secretary William Simon to inquire about their views on gold clauses. Simon’s opposition was reflexive and absolute; Treasury in general objected to any move that would increase the monetary role of gold. Burns said that he might personally have no objection to gold clauses but that the Federal Reserve board would likely be “split” on the matter.

  Helms was characteristically undaunted. On June 14, 1976, he introduced a Senate resolution similar to Crane’s. His rationale was straightforward: “When Congress restored the freedom of Americans to own gold, it neglected to restore the freedom to enter into contracts which require payment in gold or dollars measured in gold. It is time this oversight is rectified.”

  Despite the seeming simplicity, Helms’s proposed law raised at least two practical questions. The first was: Did anyone really want to use gold-clause contracts? The wheels of commerce had not exactly ground to a halt after Congress negated gold-clause contracts, or when the Court upheld their abrogation; businesses both inside and outside the United States found ways to adapt. And yet, for some American businesses trying to cope with a continually weakening dollar, gold-clause contracts could appear attractive. Chief among these were shipping and grain companies who exported their items abroad; between the changing value of commodities and the fluctuating exchange values of currencies, they could be hammered even by a contract that was fulfilled on its terms. Another possible application of the bill would be for companies to issue investment bonds indexed to gold; in industries that are especially sensitive to changes in interest rates, such as utilities, this was potentially useful. Even so, there wasn’t exactly a clamor from the American business community to restore gold-clause contracts; demand for them was “mostly anecdotal,” according to Segermark. Instead, Helms viewed the gold-clause bill as one of several steps that America could take on the way to returning to a gold standard.

  The second, more arcane question was: Could the law be applied retroactively? That is, if legal obstacles to gold-clause contracts were formally removed, would the parties to gold-clause contracts signed before 1934, which had been voided by Congress and the Supreme Court, now have a case that the contract was enforceable? This was a multibillion-dollar can of worms that even some goldbugs, let alone members of Congress, were not eager to open. As noted in chapter 5, the value of bonds with gold clauses in the United States—including security bonds, state and municipal bonds, and corporate and real estate bonds—at the time of the congressional ban was estimated at more than $100 billion, of which $40 billion was ostensibly wiped out by dollar depreciation. Although few were actually debating the Helms proposal, it raised in principle the same dilemma that the Roosevelt administration and the Supreme Court had faced, except in reverse. Helms, hoping to pass his resolution but not wanting to alienate goldbug absolutists, added a fudging amendment to his resolution two months after its introduction, to the effect that it “intended to stand neutral with regard to the enforceability of gold clause obligations issued in the past.”

  Helms worked hard to secure support for a bill that was on almost no one else’s agenda. He sought and received support from no less an economic authority than Milton Friedman, the renowned free-market theorist who won the Nobel Prize in economics that year. The economist expressed “strong support for your measure and the hope that you are successful in achieving its passage this year.” Friedman continued: “I believe the prohibition on the use of gold clauses in contracts was never justified, should not have been adopted in 1934 and certainly has no place whatsoever today now that gold no longer has any significant relation to our monetary system.”5 For his part, Helms saw a grander agenda, a clarion call for restraining government spending and a weapon to help slay the big government spending that many conservatives complained about in the 1970s but often found it impossible to stem. “In my mind, use of gold-clause contracts will be a clear warning that people are tired of irresponsible Government monetary and fiscal policies,” Helms said. “If gold clauses begin to be widely used, it will be time for Government to restore integrity to the dollar.”6

  Sweet-sounding arguments, however, would not suffice to push through a bill that most legislators could barely describe if they were aware of it at all—even if Treasury stuck to its bargain not to oppose the bill. And so, just as Crane had done with the gold legalization bill in 1974, Helms found a legislative vehicle on which his proposal could hitch a ride. It was a thoroughly boring bill, little more than a bit of government housekeeping. Going back at least to the days of Andrew Jackson, there has been an American uneasiness with the idea of letting the federal government run banks, or even allowing the government to use the banking system in order to make money. Through 1977, the federal government maintained accounts in the twelve Federal Reserve banks and some 14,000 commercial banks across the country; the latter neither paid interest nor charged fees for maintaining the accounts. This system served a variety of purposes, one of which was to store the withholding tax that employers took from employee paychecks. Treasury had no legal authority to collect interest on these funds—banks could use the money interest-free for up to ten days—and, as a result, was losing $260 million to $300 million a year.

  Closing this loophole in 1977 was one of the least controversial actions that Congress has ever taken; in April, the bill passed the House by a vote of 384–0. The ever-savvy Helms could see that the Senate wanted just as badly to pass its own version, and so he managed to attach some amendments, despite their tangential connection to the main legislation. Two amendments toughened the requirements for US and IMF participation in foreign aid programs—and another made gold-based contracts legal again.7 There was some excitement in financial circles about the return of gold clauses; one commodity market analyst told the New York Times that the bill represented “a sleeping giant that has come to the front so rapidly no one can fully understand the implications.” Alas, the giant mostly kept dozing. Although Treasury stayed true to its promise not to oppose the bill, its regulations kept most people from wanting to use gold contracts at all. Treasury’s interpretation of gold contracts was that if, because of a change in the value of a dollar, a creditor is paid in gold for an amount over the dollar value of the contract, that difference constitutes a capital gain, and is taxed. And so even though Americans could now legally use gold clauses in contracts as of 1977, almost no one did, then or now.

  Helms’s victory for gold contracts was but a prelude to a better-known work: the creation of a G
old Commission, which began deliberations in 1981. While Reagan’s more pragmatic advisers succeeded in preventing him from making too many public statements about a gold standard, they were very effective behind the scenes. With the exception of Barry Goldwater in 1964, it is reasonable to say that the postwar Republican Party platforms reached further and further to the center-left on economic matters. But in 1980 that changed; Reagan’s economic team included a strongly pro-gold team: New York congressman Jack Kemp, Michigan congressman David Stockman, and supply-side economic consultant Jude Wanniski. Just before the New Hampshire Republican primary, Reagan recorded a television ad in which he advocated a return to the gold standard (although he requested that it not be broadcast, apparently on the advice of Milton Friedman). Still, Reagan’s gold team managed to insert a plank into the 1980 Republican Party platform saying that “one of the most urgent tasks in the period ahead will be the restoration of a dependable monetary standard—that is, an end to inflation.”8 The passage read like the monetary reform that dare not speak its name, but those paying attention understood it to mean a gold standard, and it rallied goldbugs to Reagan’s cause. The announcement of the Gold Commission just a few weeks into the Reagan presidency felt like a reward for the goldbug support and a legitimization of their views.