One such dissident was Howard Buffett, a three-term congressman from Nebraska, whose district bordered the one that was represented a half-century before by William Jennings Bryan. In the tradition of isolationist prairie populists long skeptical of European money masters and wars, Buffett (the father of billionaire Berkshire Hathaway chairman Warren Buffett) viewed the Bretton Woods agreements as an encroachment on American autonomy. In opposing the 1945 legislation, he and a colleague wrote of the IMF and World Bank: “This world-embracing corporate body would usurp the social and private function of carrying on international trade and commerce and substitute therefor authoritarian domination over such pursuits.” Among other objections, Buffett and Ohio’s Frederick Smith maintained that the United States under Bretton Woods would be handing over to other countries “the power to manipulate the price of gold.” This, they insisted, “seems to be a clear violation of the Constitution.”34 These were, to be sure, minority views, but they resonated with millions of Americans and they also conspicuously matched the perspective of the financial community—much of which fought Bretton Woods and wished to return to a domestic version of a gold standard.
Buffett expressed the frustration many felt that gold was no longer something American citizens could hold in their hands and spend as money—the huge supply of metal seemed to exist merely to make foreign countries happy. In a 1948 magazine article that is still often cited in the twenty-first century, Buffett wrote: “Even though there is a lot of gold buried down at Fort Knox, that gold is not subject to demand by American citizens. It could all be shipped out of this country without the people having any chance to prevent it.” Pat McCarran, an influential Democratic senator from Nevada who was also a Communist-chasing ally of Joe McCarthy, echoed Buffett’s sense of mistrust about the nation’s gold hoard: “We do not know what the treasury proposes to do with this enormous mass of precious metal. It has never stated its intentions and, so far as I know, no policy with respect to this gold has ever been formulated.”35
Just as earlier expressions of gold populism invoked the values and fears of their eras—the belief that paper money represents the Devil, say, or that inflation is bound to be ruinous—Buffett and his allies in the late 1940s framed their arguments for the new and terrifying Cold War. Unless the United States restored economic order and returned to a gold standard, Buffett argued, it would be engulfed by its enemies. “The surest way to bring communism is to get printing press money started,” Buffett said in 1949.36 Paper money, Buffett declared on another occasion, “is an enemy much more to be feared than Soviet military power, real or fancied.”
These were not simply words: Buffett believed in practical solutions. In 1948, Buffett introduced a bill into Congress to put the United States back on a gold standard. It sought to “restore the right of American citizens to freely own gold and gold coins; to return control over the public purse to the people; to restrain further deterioration of our currency.”37 Daniel A. Reed of New York and Robert Hale of Maine also introduced related bills around the same time. Buffett also lent his support to a nonlegislative effort to return to a gold currency. When Congress passed the Gold Reserve Act in 1934, it left open some obscure loopholes. One of these involved gold in its “natural state”—that is, gold recovered from natural sources that “has not been melted, smelted, or refined or otherwise treated by heating or by a chemical or electrical process.” When Treasury issued regulations to enforce the act, it allowed this natural gold to be acquired and transported.38 Not only was it legal to possess gold in this form, but also Treasury was barred from purchasing gold in this state, as the African American author and activist W. E. B. DuBois learned when he unsuccessfully tried to sell a West African gold nugget to Treasury in 1934.39 This also meant that the $35 an ounce statutory gold price did not apply; natural gold could trade for whatever price a buyer and seller could agree upon.
In the late 1940s, a Reno-based company called Gold Corporation of America announced a novel, ostensibly legal system to create money around this type of gold. The company took out advertisements in major newspapers offering to sell such gold at a price of $51 an ounce; after several such sales the price was lowered to $42 an ounce. But the business of shipping gold nuggets proved cumbersome; one Pennsylvania buyer who purchased 1,000 ounces of gold had to travel across the country to take personal possession of the metal. The company’s founder, E. L. Cleveland, then devised a plan through which sellers would place the gold in a warehouse, which in turn would issue a receipt for the gold. That paper could then function as money effectively backed by gold, though not convertible to it. “The receipt may not be legal tender,” Cleveland told a reporter. “But any groceryman who refused it would be a darn fool.”
Buffett—the son, after all, of an Omaha grocer who had vocally opposed a third term for FDR40—agreed. He praised the company for discovering a “twilight zone” in which a gold-backed paper currency could legally function. Moreover, Buffett thought the experiment with gold pricing was also valuable, because inflation of the dollar would inevitably make the fixed $35 an ounce price obsolete. “There is a large body of expert opinion that inflation has gone too far to permit operation on the $35 an ounce price,” Buffett said in 1948. “I think there is a 50–50 chance that we can still operate at that price, and that’s why I put such a provision in the bill. But that point may have to be changed, and the gold content of the dollar lowered.”41
The Gold Corporation of America and other companies seem to have had some modest success in the late ’40s. Treasury undertook a special canvas of gold sellers in 1948 and 1949 to determine how much gold was being sold in this form at a premium price. Estimates were between 25,000 and 30,000 ounces a year, out of the typical 2 million or so ounces mined in the United States every year; most of the natural gold came from Alaska.42 Although Cleveland seemed primarily motivated by profit—he collected a $1 per ounce broker’s fee on every sale—he also wanted to restore a gold market in the United States (a common position among gold-mining executives). He hoped that if a Republican was elected president in 1948, his warehouse receipt plan might be used to springboard a return to a day-to-day, gold-based monetary system.
The late ’40s cluster of gold-standard activity, however, had little sympathy in the White House. In July 1948, a reporter at a press conference asked President Truman about legislative efforts to return the United States to a gold standard “as a means of combating inflation.” Truman replied, inaccurately, that the country “has been on the gold standard all the time.” He continued, “We own more gold than any other government in the history of the world.” The reporter persisted, “I can’t turn in a dollar for it, though, sir.” Truman responded, “No, you can’t; but then your dollar is backed by that gold backing. That’s what makes it good.”43
In 1949, a gold legalization bill introduced by Senator McCarran got as far as the hearings stage. The gold-mining industry, battered by the wartime shutdown and slow to recover, made its position clear. To them, the newly active “natural gold” market represented an opening that ought to be expanded. Fred Searls Jr., the president of Newmont Mining Corporation, pointed out in testimony the contradiction between a natural gold market in which any agreed-upon price could be paid, versus the official market in which gold could only be sold to the US government at the increasingly hard-to-maintain price of $35 an ounce.44 To illustrate his point, he brought to the committee table “100 ounces of fine gold in its natural state,” for which he said he had paid $4,100. He estimated that he had sold perhaps 10,000 ounces of gold in this form, but was unable to sell more because “the buyers—and there are a good many of them—are afraid that the Treasury will change the rules again.”45
Searls and his buyers were absolutely right. In June 1950, Treasury clarified its regulations: natural gold could only be sold by someone who had physically mined it. Any secondary transactions were illegal. This effectively put Gold Corporation of America and related companies out of that bus
iness.
Clearly, any efforts to restore legal gold would require support from the executive branch, and there were efforts to make gold an issue in presidential campaigns. Buffett’s disdain for big government and militarism was not confined to Democrats. In 1952 he called Dwight Eisenhower “the most militaristic man who has ever been suggested for President” and said that Eisenhower’s nomination “would mean the destruction of the Republican Party.” Specifically, Buffett charged Eisenhower with enabling Soviet concentration camps. “Eisenhower, months after the war ended approved and signed an order that sent uncounted hundreds of thousands of German civilians into Russia for slave labor,” Buffett wrote in the spring of 1952.46 “This one ruthless action alone, duly exposed, would lose enough normal Republican votes to insure Republican defeat in November. This is only one of the hidden blots on the Eisenhower record.”
Buffett worked on the campaign of Eisenhower’s rival Robert Taft, whose defeat that year represented to many in the party’s conservative wing that “Eisenhower and Dewey were traitorous liberals who had compromised the party’s values simply to win elections.” The Taft-Eisenhower battle and its fallout, one recent historian has argued, “set the stage for the conservative takeover of the GOP that begin in earnest in 1964 and continued in fits and starts through the end of the twentieth century.”47
And yet gold was not yet the dividing line between the two camps that it would later become. Curiously, the most outspoken advocate of a gold standard in the 1952 presidential race was a relative liberal—Harold Stassen, the onetime governor of Minnesota who became a perpetual presidential candidate in the middle of the twentieth century. His 1952 platform called for “A Modern Gold Standard for a Solid American Dollar,” and he argued in speeches that a gold standard would serve as a check on excessive government spending and inflation. “If the people insist that they should have the right, whenever they want to, to change their paper money to gold coins, and change gold coins back to paper money, they thereby make their government keep their paper money in sound shape,” Stassen said. But Stassen’s following was never large enough to force this as an issue.
Eisenhower, as will be shown in the next chapter, had little use for gold in economics. For his part, Taft was sympathetic to a gold-backed dollar and would have found some support for it among his voters. However, his political sense was that the issue was too risky for whatever it might gain. Taft had, for example, declined requests—even from Wall Street—to insert a gold-standard plank in the 1944 Republican Party platform. His economic reasoning was that “there are several different forms of the Gold Standard and we could not very well stop to explain which one we meant or at what figure we would fix the value of the dollar.” And his political conclusion was, “it is not of much importance because very few people understand anything about the subject.”48
It was tempting and none too difficult in the late 1940s and 1950s to dismiss Buffett and those with similar views as gadflies and cranks. Buffett was not well liked in official Washington circles; when he lost his seat in 1948, the Washington columnist Drew Pearson called him “a bedrock reactionary who shot off his mouth once too often.” Buffett knew that his gold crusade was lonely. “I’m like a man selling lawn mowers in Omaha in January,” he often said. And to the extent that a return to a gold-coin standard was promised as a solution to any economic ills, such dismissal could have been warranted. But Buffett and other critics were right about at least one thing: the Bretton Woods framework was, in the medium to long term, unstable, and when it began to topple, all the gold in Fort Knox wouldn’t be able to prop it up.
CHAPTER 6
Out of Balance
This 14-pound statue of a rooster was designed by artist Frank Polk and cast in solid gold in 1958 to promote a Nevada casino. The federal government—desperate to enforce gold prohibition in the wake of a balance-of-payments crisis—seized, incarcerated, and eventually released the bird. Courtesy the Coeur d’Alene Art Auction
THROUGH THE EARLY SUMMER of 1960, as Cold War tensions between the United States and the Soviet Union escalated, the London gold market was a place where quite reliably not much happened. In important respects the trading of gold on the London market had not changed significantly since its beginnings in the seventeenth century (World War II forced the shutdown of the London gold market but it began operations again in March 1954). Many markets in developed capitals featured shouting and gesticulating traders, and some had already introduced electronic tickers, but the London gold market still had the aura of a staid private gentleman’s club. The venue was a wood-paneled chamber lined with oil paintings, the “fixing room” in the offices of N. M. Rothschild, on a narrow medieval lane in the City of London, named for a ninth-century Saxon bishop and one building away from the Bank of England itself. Every weekday morning at precisely 10:30 a.m., five men from various banks and mining firms determined that day’s price of gold for most of the world’s legitimate market.
Given that the world’s largest holder of gold—the US government—was known to buy gold at $34.9125 an ounce and sell it at $35.0875, price movement was minimal, with day-to-day fluctuations usually measured in pennies or smaller units: “The chairman suggest[s] a price, in terms of shillings and pence down to a farthing . . . chosen at the level where it is thought that buyers and sellers are likely to be prepared to do business.”1 The five representatives would then announce their intention to buy or sell, and conduct their business for the rest of the day. At the moment of “fixing,” 90 percent of the day’s total transactions might be conducted immediately on some days; on other days, 10 percent. The atmosphere was, in the most British of ways, collegial to a point of collusion; there was not even a required method for dealing with an imbalance of buyers and sellers. If, for example, there was a desire to buy one hundred bars but only fifty were offered up for sale on a given day, the fifty bars might be divvied up equally among the buyers, or the price might be raised—it all depended on what the people sitting in the room wanted. And while orders could be taken over telephone and telex for those inside and outside the country, bars and coins did physically change hands right in the Rothschild offices; the London market prided itself on the fact that two of its five participants actually engaged in the melting and refining of gold.
This orderly, almost sleepy ritual had repeated itself daily since 1954 with little disturbance. The continuity was understandable, since not much money was directly at stake. Most of any given day’s trade involved central banks from various countries or large commercial banks pushing their metal back and forth; the market for privately held gold was growing, but still modest. While the London gold market was larger than any of its counterparts, the actual amount of money changing hands remained very small compared to what went on in any significant stock or bond market. In fact, through the first half of 1960, daily transactions of the London gold market were estimated at a few million dollars.
But that summer, something happened to disrupt a quaint system that had prevailed for centuries: an unusually high number of people wanted to buy gold. The dollar price for gold on the London market hit $35.13 on August 24, and the trading volume was its highest since the market had reopened in 1954. The upward crawl continued, and by mid-September the price hit $35.24. At that price, someone sitting in, say, Zurich might arguably have been better off buying gold from the United States at the statutory $35.0875 price and paying to have it shipped, instead of buying it in London. That threshold of just a few cents was dangerous for the US government and for the world economic order.
What caused the sudden jump in gold’s price? One of the driving ideas behind markets is that they create transparency by giving all players as much information as possible. In the postwar London gold market, however, almost no participants could know for certain everyone who was buying, everyone who was selling, or why. Some of the increased demand was structural and represented increasingly prosperous European governments using part of their growing foreign r
eserve funds to buy gold (often under legal obligation). Recent changes in Swiss banking regulations might also have encouraged some buyers to purchase gold in London to save on commissions. On the supply side, the spike might have been enhanced by the Soviet Union and South Africa, both of which had been selling gold on the market but stopped in the late summer. Yet it was also clear that some gold buyers were making a pessimistic bet on the American economy, which had officially entered a recession that spring, the last full year of Eisenhower’s presidency. While it was illegal for Americans to own gold at home, there had been no such prohibition against buying and owning it abroad. In the worried corridors of Washington, some estimated that as much as 70 percent of the heightened gold market activity came from Americans, whether those living abroad or those living at home and purchasing the gold overseas.2
Closely linked to that observation was the idea that the market movement—especially the murky American component—sprang from politics. In the context of a hotly contested presidential race in the United States, the gold price movement quickly took on an electoral hue. The fear was that a new president, hoping to jolt the sluggish economy, might take the drastic action of revaluing the dollar’s relationship to the price of gold, which could have made an ounce bought in the summer of 1960 more valuable a year or so later. There’s not much to suggest that then-senator John F. Kennedy or his campaign ever intended such a policy, but Democrats had groused about high interest rates and in theory Kennedy’s expansive rhetoric implied greater government spending, which could in turn force a gold repricing. And in the swirling of cause and effect that markets sometimes create, the idea—spurious or not—began to take hold and prices continued to rise. Kennedy, for his part, privately told colleagues he believed that hostile banking forces deliberately planted the gold rumor to harm his campaign.3
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