Yet Bator’s view must be balanced against the fact that Operation Goldfinger began its existence in strict secrecy; there is not much point in a show of force that no one knows about. Moreover, there were still men in Treasury, Interior, and Congress advocating Operation Goldfinger’s more extreme, nuclear options even after the gold market was suspended in 1968, at which point any Goldfinger propaganda effects had been made largely irrelevant.
It was not, then, Operation Goldfinger’s effectiveness (or lack thereof) that determined its ultimate irrelevance; it was, rather, the course of worldwide events. The devaluation of the British pound in late 1967 set off a series of gold-supply crises so threatening to the global economic order that no one around Johnson could afford to spend time thinking about how much gold was contained in deer antlers. By late 1967, Joe Barr would gladly have traded his struggles for the days when congressmen from gold-producing states wanted to harangue him. “In ’67 when the British got in all this difficulty, everybody all over the world said, ‘I don’t want to hold paper money, I want to hold gold,’ ” Barr later recalled. “We had to meet these commitments, and we were losing gold at an enormous rate. So were all our partners. Everybody was terrified and the markets were just convulsed all through late ’67 and early ’68. We couldn’t pass a tax bill in the United States. The British had devalued. Everybody was just petrified.” 45 The long-feared currency crisis had begun.
CHAPTER 8
Dueling Apocalypses
Harry Browne’s runaway best seller, published in 1970, helped convince hundreds of thousands of Americans that an economic collapse was imminent, and recommended gold as personal financial protection, even though it was not legal for Americans to own.
THE PLANES WERE TECHNICALLY called C-141s, but they were best known by their nickname: Starlifters. In the 1960s Starlifters were the largest cargo planes in the world, with the ability to carry a load of more than 60,000 pounds. In 1967, a typical Starlifter sortie was most likely to be carrying troops or supplies to Vietnam, but on November 29 several Starlifters had a purely economic—and confidential—mission that began at Fort Knox, the garrison of gold created by Roosevelt’s Treasury Department thirty years before.
Earlier that month, the flailing British government under Labour Prime Minister Harold Wilson had taken the vertiginous step of devaluing the pound, setting off a worldwide rush to buy gold. The once-calming rules of the Gold Pool, established for the London Market in 1961, were no longer enough to match the world’s insatiable appetite for gold. In the four days following the pound’s devaluation, gold sales were so heavy that the Bank of England could not keep up its daily supply to the private market. On Thursday, November 23—in the United States it was Thanksgiving—the Bank of England secretly “exhausted” its supply of gold.1 The next morning at 8 a.m., a Treasury official wrote to Secretary Fowler: “It would not be an overstatement to say that panic reigns in the gold market.”2 For several days, the Bank was forced to come up with creative bureaucratic swaps to fill the demand for gold, while the US Treasury scrambled to figure out a solution.
The solution was none other than the Starlifters. Through the Military Airborne Command—which at times acted as a kind of expensive courier system for various arms of the US government—Treasury arranged for a massive, 214-ton delivery of gold out of Fort Knox. The shipment was so urgent that Treasury Secretary Fowler ordered that the “gold will be delivered from Fort Knox without prior weighing.” Each Starlifter shipment was worth $100 million and cost $15,000 to execute; the bill was paid by Treasury—another creative use of the Exchange Stabilization Fund. This was, and still is, the largest known one-time shipment of gold out of the United States. There would be two more shipments of comparable size to the UK over the next few months.
The planes landed at the Royal Air Force base in Mildenhall, which had recently become a hub for US military activity after France, in a quintessential DeGaullian move, quit the military arm of NATO. Mildenhall, appropriately enough, had been in the 1940s the site of a major discovery of precious-metal objects from the Roman Empire. A group of trucks from the Bank of England awaited the plane, along with an escort of police vehicles (the police were armed, unusual for the British police at the time). This convoy carried the hundreds of tons of gold the 71 miles to London, where the gold was loaded into the courtyard of the Bank of England on Threadneedle Street.
Even more than Operation Goldfinger’s desperate alchemy, the frantic, gargantuan gold shipments of late 1967 and early 1968 demonstrated a global monetary system whose logic had gone mad. Because the private market for gold overheated and threatened the world’s gold supply, the United States, the world’s largest holder of gold, had to use its air force to ship hundreds of tons of the metal across a vast ocean—where it was immediately snapped up by the same private market speculators who had provoked the crisis in the first place. This herculean effort was designed to bolster the theoretical value of the dollar, but it produced the opposite effect. It’s not merely that the cure was worse than the disease—the medicine was actually making the system sick.
And the crisis was completely predictable—indeed it had been predicted. The US government had known for years that the British pound was vulnerable. As one Treasury official put it: “You’ve got a major confidence crisis in sterling about every fall on the fall, so to speak, and there was in ’64, ’65, ’66 and then it culminated in ’67.”3 President Johnson, whom the British government often solicited for personal meetings and for financial aid, viewed the problem as a lack of fiscal discipline. In a 1965 phone conversation with Federal Reserve chair William McChesney Martin, he compared Britain in his Texan twang to “a reckless boy that goes off and gets drunk and writes checks on his father, and he can honor two or three or four of ’em [then] finally call him in, and tell him, ‘Now we’ve got to work this out.’ . . . Time’s coming we got to turn him down.”4
There was a persistent fear that if the pound got too sick its contagion could not be stopped—its devaluation could damage the dollar and inflame the international monetary system. In 1966, the Federal Reserve prepared a contingency study warning of “dire consequences for the international economy” following a drop in the pound’s value at between 10 percent and 20 percent. The study, which was widely discussed among Johnson’s economic advisers, divided American policy options into three main categories: maintain the status quo; end the universal gold-dollar convertibility but try to maintain the value of the dollar by splitting the public and private markets for gold; or exploit the opportunity to “get the gold and balance of payments monkey off our back.”
The pound’s devaluation seemed increasingly probable by the spring and summer of 1967, due to three shocks to the British economy.5 First, the British decision to join the European Common Market, the precursor to the European Union, seemed likely to create a balance-of-payments deficit and set off a round of speculative bets against the pound. Second, the catastrophic closure of the Suez Canal in the anxious time following the Six-Day War between Arabs and Israelis created substantial delays for British imports. Finally, dock strikes in September created delays on the export side. The days of the British Empire were truly coming to an end, and there were limits to how much the rest of the world could help. Prime Minister Harold Wilson and his chancellor James Callaghan sought, in October and early November, assistance from the United States, IMF, and other quarters, but the billions they sought were not enough to stem off crisis.
By early to mid-November, a sense of resigned inevitability about the pound’s demise had set in at the Johnson White House. On the 12th, Treasury Secretary Henry Fowler described to the president a meeting he’d had with a British diplomat: “They [are] at the end of the line, unless they have assurance of substantial long-term credit soon. They may be forced to devalue—perhaps within a week.”6 When the British ambassador requested to see the president on Friday, November 17, Johnson knew what was coming: the British government had been forced to
devalue the pound, from $2.80 to the dollar to $2.40. “It was still like hearing that an old friend who has been ill has to undergo a serious operation,” Johnson recalled in a memoir. “However much you expect it, the news is still a heavy blow.”7 (Johnson could count himself somewhat fortunate; the IMF received “little more than an hour’s notice of [sterling’s] devaluation.”)8
That fall, Federal Reserve official Charles Coombs had taken to describing sterling devaluation and gold markets as “twin time bombs”—if one went off, it would certainly detonate the other. And detonate they did. Immediately upon the announcement of sterling’s devaluation, Johnson issued the requisite statement: “I reaffirm unequivocally the pledge of the United States to buy and sell gold to foreign official holders at the existing price of $35 an ounce.” But the effort lacked any power over the markets. Over the weekend after the devaluation was announced, multiple nations announced their own devaluations, like falling dominoes: Barbados, Cyprus, Denmark, Hong Kong, Israel, Jamaica, Spain, and New Zealand. In British-controlled Hong Kong, devaluation caused small shops to raise their prices overnight by as much as 25 percent. On the next weekday, Monday, November 20, Japan’s stock market experienced its largest one-day drop since World War II. Banks and stock exchanges in Britain remained closed to handle the devaluation aftermath, as did the London gold market. Nonetheless, speculators rushed to buy gold, certain that the devaluation fate that befell Britain and other nations would recur in Washington. Even on the usually tiny private gold markets—chiefly in Zurich and Paris—some $27 million in gold changed hands, many days’ worth of normal trading. By Wednesday, with the London market open, the volume of gold traded nearly quadrupled, to $106 million. The next day it reached $142 million—and that was when the Bank of England told the US Treasury that it could no longer back up the market’s daily transactions.
Even with the massive Starlifter gold deliveries, there seemed to be no way that the Gold Pool could stay intact. The year 1966 had already proved anxious, and the first ten months of 1967 were worse. On seven separate occasions during that period, Pool members had had to inject payments of $50 million’s worth of gold into the system. Making matters worse, France let it be known in late November that it had abandoned the Gold Pool; in fact, it had done so months before, but the timing seemed calculated to weaken the US position. France’s withdrawal from the group meant that of every $50 million payment the Pool made, about $30 million came from the United States. The sterling devaluation brought this teetering system to a collapse. In the week preceding devaluation, Gold Pool losses amounted to a heavy $68 million—that is, in a matter of days, the Pool lost more money than any country (other than the United States) had put into the Pool when it was established in 1961. In the week after devaluation, the losses were a staggering $578 million.9 The London cupboard was bare—every single ounce of gold being sold on the teeming private market was effectively coming straight out of the government coffers of the United States and larger Western European nations.
Even that dire situation did not represent the full extent of the United States’ gold exposure. The international jitters that devaluation created gave other countries even more incentive to buy gold directly from the US Treasury, and in late November, an unusually large gold order came from an unexpected source, none other than Algeria. The country barely had a functioning economy, having only recently emerged from a long bloody war of independence from France. It was led by a military “revolutionary council”; its relations with the United States were, as the New York Times put it, “cool if not verging on the hostile.” Of course, Algeria had as much right as any nation to convert its dollars to gold, but the amount—$150 million—alarmed US government officials.10 In addition to the sheer size of the order, representing some 4 percent of Algeria’s GDP at the time, Johnson administration officials feared that France was covertly pushing Francophone Africa to join its efforts to cash in dollars for US gold.
After a brief calm in early December, the London gold market boiled up again by the middle of the month; between December 11 and 15, the Gold Pool nations lost more than half a billion dollars. The central bankers of nearly all the Gold Pool members let the Federal Reserve know that they were on the brink of abandoning the Pool. The time for decisive action had come. The administration had assembled a balance-of-payments cabinet committee, and its meetings in December 1967 took on an increasing sense of alarm.
In addition, the administration had for weeks been preparing to battle with Capitol Hill on lifting the “gold cover,” the requirement that the government had to hold a given amount of gold to prop up the value of its currency. Johnson was skeptical that the budget-hostile Congress would give him what he wanted, especially as he was also trying to push through a “vitally needed tax bill.” The cautious Treasury Secretary Fowler believed Congress would cooperate after running through various partial solutions (reducing, say, the gold cover amount from 25 percent to 10 percent). The committee insisted that much more needed to be done, whether Congress liked it or not. It recommended sweeping, unprecedented reductions in money flowing out of the United States, particularly tightening foreign lending, restraining US corporate investment abroad, and reducing foreign aid. These steps were bound to be unpopular. As historian Francis Gavin put it, “For an embattled president entering an election year, this plan was nothing short of political suicide.”11
Not surprisingly, a frustrated Johnson resisted the plan for as long as he could. The Vietnam War was devouring nearly all of his time and energy. Paying for bombs and napalm was in fact worsening the balance-of-payments crisis, but not to fight the war seemed to Johnson impossible. Through late December, Johnson still perceived gold and the balance of payments as an issue to be worked out by his staff. Moreover, he resented that the thanks the United States got for supporting the world economically and militarily was the imminent threat that its currency would be crushed and its gold reserves wiped out. While his economic advisers grew increasingly anxious through December, Johnson had no initial intention of spending the Christmas holiday huddling with them to deal with the balance of payments. He had committed to attend the December 22 funeral of Australian prime minister Harold Holt, a personal friend and Vietnam ally who had died in a swimming accident. Johnson extended that duty into a 4½-day, 27,000-mile trip that also included a Christmas meeting with Pope Paul VI and, unbeknownst to most of the world, a failed attempt to negotiate peace in Vietnam during meetings in Pakistan, Thailand, and elsewhere.12
Johnson was finally moved to public, personal action by a December 22 telegram—he was either in Australia or at the US air base in Korat, Thailand when he received it—from his top domestic aide Joseph Califano. The balance-of-payments gap had widened in the first nine months of 1967, despite improvements in trade; the biggest culprit was net military spending abroad, up more than $500 million. The fourth quarter, however, “threatens to turn the year into a disaster.” International speculators on the dollar were a menace that the administration couldn’t begin to control. Johnson’s advisers, led by Treasury Secretary Fowler, were pushing several remedies: a “border tax adjustment,” which would tax imports and subsidize exports by 2 percent or more; a per diem tourist tax of $6 a day on trips abroad; and strong disincentives for US companies to invest abroad.
A clearly agitated Johnson sent back a long response the next day. He lamented Britain’s “inept handling” of the pound devaluation. He hated the import tax and predicted that taxing Americans for traveling abroad was “certain to be used by Republicans in an election year—therefore damaging to the president.” He sent the committee back to examine options like how best to prevent investment abroad, and to get European nations to pay more for their defense—a not very popular Christmas gift to his staff.
On December 30, the commerce and treasury secretaries flew to the president’s private ranch in Johnson City, Texas, along with several top advisers and the majority and minority leaders of the House and Senate. They brief
ed the president on the bitter medicine he would need to deliver. Many were skeptical that the program could pass Congress, but on New Year’s Day, Johnson, speaking from his ranch, issued one of the strangest requests to the American people that any president has ever made. The speech was simultaneously sweeping and contradictory. The president started off by underscoring the interdependence of the global economy: “Your job, the prosperity of your farm or business, depends directly or indirectly on what happens in Europe, Asia, Latin America or Africa.” Then in the next breath, he exhorted Americans to cut back their financial ties with the rest of the world.
One Nation Under Gold Page 21
