One Nation Under Gold

by James Ledbetter

  Why would a few extra dollars tacked onto the price of a gold bar moving across a table in London matter in a presidential campaign thousands of miles away? The answer is that even though in the late 1950s and early 1960s the US government held far more gold than any other entity in the world, it didn’t, for contemporary purposes, have enough. The higher the price rose, the greater the possibility that the United States would run out of gold it could use. And while the White House had not, prior to the summer of 1960, paid close attention to the ups and downs of London’s gold prices, it was well aware of the high stakes. The Eisenhower administration had identified a “balance-of-payments deficit” at least as far back as 1956. The issue through the middle part of the decade hadn’t been that the United States was physically losing a great deal of gold; the country’s gold stock remained relatively stable through Eisenhower’s first term at between $20 billion and $22 billion. But as the United States imported more goods and services in the postwar boom, governments and companies outside the country rapidly increased their holdings in dollars and US securities, and those holdings represented potential gold redemptions, payable immediately. This category of claims rose from about $8 billion in 1949 to $12.7 billion at the end of 1953, and then to nearly $16.5 billion by the end of 1956. Because federal law required about half of the gold stock to be held in reserve to shore up the dollar, that meant that if all the foreign claims were redeemed at once for gold, the United States would not be able to make all the payments—a scenario that was universally considered an economic doomsday.

  And now, with the market price rising and no one apparently able to stem it, what had been a worrying but manageable trickle of gold outflow from the United States was looking more like a flood. In 1958, actual gold outflows had already topped $2 billion, a number that startled Washington. But the London market explosion made 1958 look benign. In one week in mid-September 1960, America’s monetary gold stock dipped by more than $180 million, the biggest weekly drop since the early days of the Great Depression.4 In November, the outflow of gold would hit just under half a billion dollars for the month; on a single day in early December, the United Kingdom would submit a claim for $50 million.

  American officials watched the upward ratcheting of the price of gold with increasing, and fairly helpless, anxiety. On October 19, only three weeks before the presidential election, trading was so frantic during what one dealer called “a pretty wild market” that no one could say for certain what the top price had been; it was estimated at $35.60. The following day, the volume of London gold transactions swooned to between $20 and $25 million—four or five times the already high volume of the late summer. On that day the price hit an unprecedented $40.60 an ounce, fueling still more speculative buying. By the time the staff showed up that morning in the office of the New York Federal Reserve—where the bulk of America’s monetary gold resided—“all the alarm bells were clanging away.”5 Frantic Wall Street bankers were phoning the treasury secretary and Fed chair, demanding that the strength of the dollar be upheld. The Bank of England, which normally preferred to stay out of the private market, felt the need to intervene. The Bank sold millions of dollars’ worth of gold—both newly mined from South Africa and from its reserves—in hopes of pushing the price down. The US government might have wanted to do the same, but of course even if selling the gold in its coffers stabilized the market price, the loss in metal would make the nation’s situation worse. And at least initially, US officials were unable to obtain even basic information about the Bank of England’s gold sales (the volume of sales, how much South African gold remained for future sales if planned, etc.). The Bank politely informed Fed officials that—just as with its competitors, the famously secretive Swiss banks—it kept such information strictly confidential; Parliament itself was not entitled to know. Even months later, after the United States had formally endorsed the Bank of England’s gold-market interventions, the Federal Reserve received its data about the London gold market from a renegade Bank of England official who leaked the information in daily telephone conversations conducted in secret code.6

  On October 25, with the price of gold still above $37, Treasury Secretary Robert Anderson convened a high-level meeting with the president and the chairman of the Federal Reserve Board. Briefed on the state of the market, Eisenhower suggested that since Germany owed the United States a favor, perhaps it could be persuaded to sell gold in London, and he asked that the matter be taken up when two top Treasury officials made a planned visit that fall (although this proposed solution, too, had messy complications).7 The meeting did not resolve the stated fear that the “psychological effects” of the rising gold price would force the United States to pay out huge quantities of gold.

  Yet even as they wrung their hands, Republicans saw a possibility that the run on gold might help them electorally in what appeared to be a tight race. There were Eisenhower Treasury officials who were involved in both gold strategy meetings and in actively advising Vice President Nixon’s presidential camp,8 and thus the issue bubbled up in the late days of the campaign. On the very day that gold soared above $40 an ounce, Nixon warned an audience of economists that “cheap money dogmatists coming to high public office” could create “a totally stupid and, in my opinion, unnecessary gold crisis . . . which could be disastrous not only for America, but for the entire free world.” In response, Kennedy joked that Nixon “blames me for the increase in the cost of gold on the London market. Mr. Nixon, if you are listening, I did not do it, I promise you.”9

  Even the president, whose overall enthusiasm for the Nixon campaign was muted, tried to spin the gold crisis into Republican votes. In a late October campaign appearance for the Nixon ticket, Eisenhower told a Philadelphia crowd that the European press blamed the gold price hike on “a growing fear of the cheap money and radical spending” that the Democrats’ platform offered.10 “If these promises should be carried out,” Eisenhower continued, “the impact on our economic position, and on the free world, could be catastrophic. . . . [L]et them understand that they and their party assume not only full responsibility for the present dangerous speculation in gold, but also for the developing fear about the future worth of the American dollar.”

  On November 9, the day after Kennedy eked out a victory, Anderson gave Eisenhower some sobering figures: US gold holdings were about to dip below $18 billion for the first time in many years; $12 billion of that was required to cover the currency, and there were $9.5 billion in external demands that could theoretically come in at any time. Reading a list of twenty small countries now asking to cash in claims, Anderson told Eisenhower bluntly: “We have almost a gold panic situation.”11

  In truth, despite the genuine anxiety many in financial circles felt about gold and the balance-of-payments crisis, the outcome of the election was unlikely to alter much. After all, Kennedy had issued a firm statement that “if elected President I shall not devalue the dollar from the present rate,” thereby reassuring the markets and limiting any political fallout. Still, the issue was potent enough that, even with the election over, some in the Eisenhower White House interpreted the situation in partisan political terms, evoking memories of Hoover being eclipsed by FDR. Defense Secretary Gates expressed “worry over the President’s personal position. Should this directive turn out to create a major issue, Senator Kennedy will consider the issue a great advantage to himself.” Gates compared this situation to the bank holiday of 1933 and said “the Democrats could ride this white horse for the next twenty years. They will point out how Democrats had had to straighten out the errors of this Administration.”12

  For his part, Eisenhower appeared detached from the political urgency. The topic of gold had been around a long time, and it seemed to make him world-weary about any prospects for change. In an October 1957 National Security Council meeting, for example, Eisenhower recalled that shortly after he’d taken office in 1953, he’d convened some economic experts to advise him on the convertibility of gold, but had fou
nd their answers wanting. “All that they had to say,” Eisenhower recalled, “was that the President should pray that no one ever really woke up to the fact that in essence gold is valueless—you can’t eat it, you can’t build things with it, or fire it in guns.”13 Now in the waning days of his presidency, he seemed more curious about utopian fixes. In November 1960, he offered to a group of advisers that since the United States was sitting on about $21 billion worth of refined uranium and plutonium, perhaps these valuable elements could be used as a gold substitute.14 This proposal was met with polite dismissal.

  As outlandish as the idea of using radioactive material as a currency reserve might seem, the administration did feel the need to take bold action. Prior to the election, having no public reaction to the gold market’s tumult might have made sense, but the longer the gold price remained significantly above $35 an ounce, the more risk there was in doing nothing; it could undermine confidence in the dollar and force a run on gold. Something had to be done, and to some degree, it didn’t matter what. In a never-before-disclosed confidential meeting in December 1960, a Treasury official told colleagues: “Six months ago we could say, if we don’t talk about it, no one will notice. Now it is front page news and the only thing that will restore confidence in the world today is a firm feeling that somehow we are going to do something about the problem. And anything that is done is good psychologically.”15

  However, many of the short-term fixes under consideration had either already been tried, or risked worsening the crisis, or both. For example, preventing this type of disaster was part of the mission of the International Monetary Fund, a Bretton Woods institution that, in the 1950s, was still ramping up operations. The IMF’s funds were available for precisely such emergencies and, indeed, the Eisenhower administration had very quietly already tapped the IMF for substantial gold “loans”—twice. In early 1956, the Treasury Department had arranged to purchase $200 million worth of gold from the Fund.16 This transaction had been little noticed by Congress or the press—or financial markets, where it could easily have set off a dollar-weakening storm. Treasury went back again to the IMF for an additional $300 million in September and October 1959. That summer, the IMF was in the process of increasing the quotas that each member country contributed to the Fund’s whole; this required the United States to submit $344 million from its gold stock in June, which had to be approved by Congress. But the Treasury was wary of parting with this much precious metal, so it arranged for the IMF to buy $300 million worth of gold back, being careful to make it look as if the idea originated with the IMF, for purposes of increasing its investment funds. Now at the end of 1960, with the presidential race finished, the IMF discreetly arranged to sell the US Treasury another $300 million of its gold.

  There were longer-term policies that could address the balance-of-payments problem. One obvious proposal was to reduce or remove the requirement that 25 percent of the currency be backed up by gold; this idea had vocal support on Wall Street, notably from Henry C. Alexander, chairman of the Morgan Guaranty Trust, a banker whose views were closely followed in Washington. Another ambitious plan was to scale back the massive military presence abroad (particularly in Germany and Japan), which was a legacy from World War II. Stationing hundreds of thousands of troops and their families abroad contributed heavily to the balance-of-payments problem, because it involved spending billions of dollars outside the country’s borders. And of course, broader economic strategies—such as attracting more tourists to the United States (and getting them to spend dollars here) and increasing exports—would also help. But these were big-picture items that would require time to implement, as well as working with Congress, and the Eisenhower administration’s days were coming to an end.

  However, two relatively easy fixes did present themselves as 1960 came to a close. One was to create an informal “gentlemen’s understanding” between the United States and other large economies to try and prevent violent swings in the London market. Initially, this took the form of an Anglo-American agreement in late October that the Bank of England would intervene in the London gold market as necessary to keep prices down, and the United States would reimburse it with its own gold. Around the same time, several central banks agreed that they would not buy gold in the London market above a certain price (the US dollar selling price plus shipping cost, or approximately $35.25), thereby not adding fuel to any speculative sparks that might arise.

  These steps stabilized the London market somewhat; one of the London gold market companies noted in its 1960 annual report that central bank buying at the tail end of that year “virtually ceased.”17 But from the perspective of the US gold stock, that didn’t solve the outflow problem; after all, it did not affect the fundamental reasons why central banks were purchasing gold in the first place. At best, it simply shifted where the gold was purchased—from the London market to the US Treasury’s so-called gold window. In early 1961, when both Germany and the Netherlands revalued their currencies, a currency war created a rush to buy gold that drained some $500 million from the US gold stock in a week.18

  Stricter measures were needed. After months of negotiation, an informal multilateral pact took effect in late 1961, whereby six other nations with major gold holdings agreed to join the US-UK agreement. They committed to provide the Bank of England with a backstop of between $10 million and $30 million each to sell gold into the market to keep the price below the $35.25 danger point.

  This founding of the “London Gold Pool” was remarkable for at least two reasons. First, as the economist Susan Strange has noted, it transformed the presumed nature of the London market. What had been the world’s largest place for privately held gold to be traded was now a market that was effectively controlled by the Bank of England (and one in which the Bank could also make a tidy profit, at least for a time). Second, as inconceivable as it seems, the agreement was never written down. There were no official signatories to the Gold Pool because there was nothing to sign—not a treaty, not an executive agreement, nothing. Indeed, the central bankers who’d agreed to the Pool’s terms initially hoped that the existence of the agreement would be kept a secret. This radical informality no doubt reflected the difficulty that individual governments would have found obtaining speedy political consensus for the Pool’s terms. But political expediency is a double-edged sword; an informal agreement that makes entry easy also makes exit easy, and indeed the “spirit” of the Gold Pool would find itself threatened not long after it began.

  Of all the short-term tactics that the outgoing Eisenhower administration considered to address the balance-of-payments crisis, none seemed easier or more effective than closing the biggest loophole that gold prohibition had left open: the ability of American citizens to buy and hold gold abroad. Just as the original gold prohibition of 1933 had not been a particular aim of FDR’s, there is no indication that forcing Americans to sell gold held outside the United States was a priority for Eisenhower himself. But in late 1960, top officials from Treasury and the Federal Reserve—including Fed chair William McChesney Martin—debated this measure with lively disagreement, as well as a conspicuous lack of reliable information. Fundamental questions presumably central to policy-making—How many Americans owned gold outside the United States? Of that group, how many lived inside the United States, as opposed to overseas? What percentage of the London market swings could be attributed to these groups? What was the total value of their holdings?—were unanswerable.

  At one crucial meeting, for example, a Treasury official asserted that one of the London gold market participants had estimated that between 30 and 40 percent of the market activity came from Americans—especially among those in Milwaukee, California, and Texas. One of his colleagues countered that his research made him doubt that American participation in the gold market was “anything more than a nominal one,” though he hedged by saying that if the 30–40 percent figure was accurate, then it must represent orders coming in through opaque Swiss banks. A third official
said that 70 percent of the London gold market went to Americans living outside the United States (a figure that seemed to surprise his boss, Treasury Secretary Anderson). Others worried that Americans were borrowing on huge margins in Canada, then buying and holding gold in that country; such a plan was being promoted, perhaps in part for personal gain, by a right-wing Texan newsletter writer named Dan Smoot. (Smoot was a former FBI agent whose activities for some years were bankrolled by H. L. Hunt, and thus he probably attracted outsized attention from White House officials.)

  The combined inability of top officials from the Eisenhower Treasury Department, the Federal Reserve, and the International Monetary Fund to produce a trustworthy figure for how much gold Americans owned abroad, pointed to a major potential policy problem—enforceability. Policing domestic gold ownership was hard enough, and for some it seemed especially odd that a Republican administration would go down a path that even the Roosevelt administration had considered unwise. Frank Southard, an IMF economist who’d worked for Treasury under Roosevelt and had been involved in the Bretton Woods negotiations, pleaded with the administration to reject the idea of prohibiting gold ownership abroad: “The New Deal, in its bravest days, did not say this should be done, knowing you can’t enforce the law—you can’t proceed against the people if you can’t find the evidence.”

  A related concern was that in a country like the United States—which by design had relatively few controls on how its citizens invested their money or how noncitizens invested in the United States—singling out one asset for overseas prohibition seemed arbitrary and morally hazardous, in the economic sense. If an American citizen or company wished to use dollars to buy stocks in the London stock market, open a Swiss bank account, or invest in real estate in South America, there would be no problem, but to move those same funds into gold bars held in those countries would be illegal—that scenario made little sense to economists.