One Nation Under Gold

by James Ledbetter

  That morning, the president had signed an executive order transferring to Secretary of Commerce Alexander Trowbridge the authority that the president normally had to regulate foreign investment. These powers would be used to slow and cap most foreign investment. In particular, Johnson said, “new direct investment outflows to countries in continental Western Europe and other developed nations not heavily dependent on our capital will be stopped in 1968.” It was, Trowbridge acknowledged, the first time in history that the US government placed mandatory controls on private investments overseas.13 Banks and financial institutions were also asked to cut back their foreign lending by $500 million.

  But by far the most unusual request was that American citizens not leave the Western Hemisphere until 1970 unless they absolutely had to. “It is important to the country,” Johnson said, “that every citizen reassess his travel plans and not travel outside of this hemisphere except under the most important, urgent and necessary conditions.” Here, too, Johnson’s pronouncements seemed contradictory. On the one hand, he presented the travel restrictions as voluntary. “We believe that the most effective action . . . would be for the citizens themselves to realize that their traveling abroad and spending their dollars abroad is damaging their country. If they just have a trip in them that must be made, if they could make it in this hemisphere, or see their own country, it would be very helpful.”14 On the other hand, he explicitly said he’d need authority from Congress: “We do expect that it will be necessary to have certain adjustments made in our present travel policy, and we will ask the Congress to do it.”

  If it had ever been possible to consider Vietnam as a small, temporary engagement requiring few sacrifices from American civilians, that view was erased by a president making pleas on New Year’s Day. Predictably, the travel industry and those whose businesses relied on international travel criticized the measures as “disastrous” and “hysterical.”15 Others mocked the seeming pettiness of the proposals from what was supposed to be the world’s most powerful country. In a column for Newsweek, economist Milton Friedman—who advocated a “floating” dollar with a value based on its market relationship to other currencies—derided the administration as incompetent and its remedies as risible. “How low we have fallen! The United States, the land of the free, prohibits its businessmen from investing abroad and requests its citizens not to show their faces or open their pocketbooks in foreign ports. . . . Are we wasting so much of our substance on foreign travel that we must be cajoled by our betters to stay home? Total spending on foreign travel in 1967 was less than 1 per cent of total consumer spending.”16

  Allies abroad, however, were largely placated by a coordinated administration lobbying mission. Three State Department officials took Treasury officials and economists on missions to Asia, Australia, Canada, and Western Europe to explain the US plan to address the balance of payments. They found general acceptance—even though allies were anxious about some of the proposed remedies, at least the administration finally seemed committed to do something. Everywhere the delegates flew, however, central bankers and governments asked about removing the gold cover, and insisted that “a successful program depends on our ability to get additional taxes and to cut Government expenditures.”17 And while Congress was not scheduled to return to business for two weeks, leading legislators hailed the president’s pronouncements and promised swift action.

  The measures announced on New Year’s Day were unlikely to reverse the long-term balance-of-payments problem—for that, Johnson would need pointed congressional action, as he laid out in his January 17 State of the Union address. In the meantime, Johnson’s advisers set to accomplish as much as they could using executive action alone. For weeks, some of the most powerful figures in the White House debated arcane questions, such as how to define normal business expenses in order to enforce the international travel ban (which would never be enacted anyway).18 Still, for a few weeks, it seemed as if the pronouncements were working. The demands abroad for US gold subsided and the dollar strengthened in foreign exchange markets. The private gold market returned to some sense of normal, and in the first few days of January the Gold Pool actually took in several millions of dollars.

  The White House was grateful to buy time. But the new stability was hardly enough to alleviate the White House gloom, especially in late January as the North Vietnamese attacked scores of South Vietnamese towns in the calamitous Tet Offensive. In early February, British prime minister Harold Wilson visited Washington, primarily to show his skeptical population that he could speak out against America’s war in Vietnam. During a private White House session, Johnson showed Wilson a brief analysis that had been prepared for him by Barbara Ward, a prolific economic author and journalist prominent on both sides of the Atlantic. Born in Britain and later knighted as Lady Jackson, her work, much of which dealt with developing nations, had a conspicuous appeal for Johnson. The president once said that Ward’s were the only books he read, and said of one of her volumes, “I read it like I do the Bible.”

  If the Ward memo that Johnson showed Wilson had a biblical aspect, however, it was Old Testament. In the wake of sterling’s devaluation and the continued assault on the dollar, Ward warned of a global depression that could effectively destroy the Western capitalist system:

  A situation is brewing up in the world economy with some dangerous overtones of the 1929/31 disaster. If a crisis were to occur, the economic consequences might be so considerable a dislocation of world trade that depression and massive unemployment could appear in Europe and deflation spread quickly to the developing continents. This in turn would have profound political effects. The Russians might scent the long-hoped-for failure of capitalism and revert to hard-line adventurism and hostility. Despair in the poorer countries would cancel out present disillusion with China and its cultural revolution. The world could tip dangerously away from its present not wholly ineffective “coexistence.”

  Ward’s prophecy seemed only confirmed by the external and internal chaos of early 1968: the Tet Offensive in Vietnam, the resignation of Defense Secretary Robert McNamara, and North Korea’s seizure of the USS Pueblo and its crew of 83 men, many of whom were beaten and tortured. On February 8, the Federal Reserve Bank of New York announced that the monetary gold stock had dropped $100 million in the previous week and stood at $11.884 billion, the lowest point in thirty years.

  And whatever minor peace the New Year’s pronouncement and State of the Union address had bought disappeared on February 28, when Senator Jacob Javits lobbed a grenade into the White House’s plans. Javits, a liberal New York Republican who indicated that he was reflecting the views of many Wall Street bankers, called for the United States to stop making gold payments to other countries. Without such a measure, he said, “we stand in a very grave economic danger . . . of losing materially the remainder of our gold stock and materially jeopardizing faith and confidence in the American dollar and the ability of the dollar to stand as the standard international unit of currency in the world.” The response of the administration to the long-standing balance-of-payments issue, Javits scolded, “has been singularly free of both realism and imagination.” The balding avuncular Javits posed on the Senate floor a question that almost no one with insider knowledge had been willing to utter publicly: What happens when the gold stock runs out? Preserving the terms of the Bretton Woods monetary system had shifted from a means to a stable postwar world to an end in itself—but as hundreds of millions of dollars were being flown out of Treasury every month or week, what was the end in sight? The longer the United States put off terminating the dollar-gold convertibility—an action Javits said “is probably inevitable in any case”—the smaller the gold pile to protect would be.

  When markets and foreign governments reacted with alarm, the administration appeared to be caught off guard. Yet Javits may have done Johnson’s advisers a considerable favor. By this point, many in the White House agreed that the folly of shipping America’s gold abroad had to sto
p, but they were still petrified to take action that could deepen the sense of crisis. Javits’s pronouncement, however, was impossible to ignore. It was taken, rightly or wrongly, as a signal of future government policy, which caused Americans to buy gold and silver stocks and investors abroad to snap up bullion at a pace comparable to November’s. On Friday, March 1, the Pool lost $90 million in gold trading, and $53 million the following Monday. Pool members signaled that they could not sustain participation much longer. Italy had to buy gold from the United States in January just to cover the amount it lost in trading; Belgium and the Netherlands also looked shaky. Would-be experts were whispering about all kinds of cataclysmic scenarios, some of which echoed Barbara Ward’s bleak warnings: South Africa, which had already reduced the amount of gold it made available to the private market, would switch from selling its dominant gold supply in London to Paris; the United States was preparing to make a massive withdrawal from the IMF to cover the gold losses from the pound’s devaluation. It was impossible for anyone even to keep track of all the tales moving the markets, much less verify or refute them. “The world is still feeding on each and every rumour that comes its way,” lamented The Economist.19

  The rich countries of the West were looking to the United States to solve their shared problems, but a gridlocked Congress in an election year made comprehensive fiscal reform impossible. Some other fix, some rearrangement in gold’s relationship to the world’s money, would have to do. On March 8, national security adviser Walt Rostow said to the president in a memo: “My own feeling is that the moment of truth is close upon us.” Less than a week later, on March 13, with Pool losses for the day around $200 million, Federal Reserve chairman Martin phoned Europe’s central bankers and told them the United States might have to close the gold markets. On that day, Vice President Hubert Humphrey wrote to a colleague: “We literally have to frighten people by telling them the sorry facts—the danger to the dollar, the possibility of severe budget cuts, the necessity of financing the war, and the danger of inflation.”20

  That set the stage for one of the most tumultuous days in modern financial history. It began the morning of March 14, when Treasury Secretary Fowler appeared before the Senate Finance Committee. He testified that the constant bleeding of gold “threatens the very preservation of the international monetary system as we know it today.” He also revealed that the Federal Reserve was going to hike its discount rate, causing an immediate selloff on the New York stock market; the Dow Jones Industrial Average saw its biggest one-day drop for the year in what was already shaping up as a gloomy quarter for stocks.

  A few hours later, the Senate took a vote to lift the gold cover on Federal Reserve notes, thereby freeing up some $10 billion in gold. Failure to pass the bill would almost certainly further crash markets around the globe, yet the acrimonious relationship between Congress and the White House meant that the outcome was far from certain. In February, the House bill removing the gold cover passed by a precarious margin of nine votes. That morning, Senate majority leader Mike Mansfield called Treasury and warned that he wasn’t sure he had the votes to pass the bill; there was also a risk that the bill could be delayed or even buried by the amendment process. The day before the Senate vote on the White House bill, another bill nearly passed which would have retained a 12.5 percent gold cover. This measure was especially urged by the westerners who’d been pressuring Treasury and the White House to do something about gold since the beginning of the decade. Colorado’s two Republican senators warned of “grave dangers” if the gold cover was removed. Not willing to take any chances, Treasury Secretary Fowler and Federal Reserve chairman Martin paid a highly unusual visit to Senate majority leader Mike Mansfield, hoping to persuade him to push through the House bill with no amendments.

  Johnson must have longed for the days of FDR passing financial legislation with near unanimity. Although the bill was presented as an emergency measure, it barely squeaked through the Senate—39 to 37—a far closer margin than the White House had planned for.21 More telling than the vote itself was the manner in which the administration’s economic reasoning was by turns isolated and rejected. In the final days before the bill’s passage, an unusual coalition emerged: conservatives from both parties teamed up with liberal critics of the Vietnam War, presenting the gold-cover bill as a feeble attempt to deal with years of failed spending priorities. Many Republicans and some Democrats echoed Javits’s criticism from two weeks earlier;22 they argued that lifting the gold cover would merely make more gold available to private speculators. George McGovern of South Dakota—his state had a significant gold-mining industry, and he would become the Democratic nominee for president in 1972—typified the connection that congressional liberals made between the gold cover bill and Vietnam spending. Transcripts of executive sessions released in 2010 show that by March 1968, many senators had come to have profound doubts about the viability of the Vietnam War and the truthfulness of the Johnson administration about the war, going back to the Tonkin Gulf incident. To them, the gold-cover bill was a tacit admission that Johnson’s foreign adventures had been reckless. “Asking Congress to lift the gold cover is not a cure for the balance of payments; it is a temporary device that will simply further open up our dwindling gold reserves to foreign claimants,” McGovern said. “One of the few leverages Congress has left to restore a greater measure of commonsense to American policy is to deny the continuing drain of our gold and to reject the unwise tax increases now being requested to fuel the costs of globalism.”23

  Most Republicans who spoke up agreed. The near-psychic bond that McKinley-era Republicans had felt to gold was almost nowhere on display—it is striking how few Republicans in 1968 proclaimed any fealty to one of the last vestiges of a currency backed by gold. Instead, most took the position that the Johnson administration was doing too little to address fiscal and economic issues that undermined the dollar—such as inflation, the failure to balance the budget, and runaway Vietnam spending. Strom Thurmond, a Republican who’d been a Democrat until 1964, was typical of the opposition: “I cannot believe that removal of the gold cover will restore confidence. In my judgment, it will be interpreted abroad as a sign of weakness—as a sign of our trying to take the easy way out, rather than making the more difficult decision to take the necessary steps to halt the decline in the dollar’s purchasing power.”

  Whether Thurmond’s interpretation was correct or not, it was undeniable that, to use the phrase that would catch on in Chicago a few months later, the whole world was watching. While the Senate debated, gold counters at Swiss banks were overwhelmed with orders. A Zurich dealer told a reporter, “The gold buying has reached such proportions that we are not taking any more orders. The physical stamina of my bank employees has reached and now passed permissible limits.”24 Swiss banks closed their gold trading two hours early, just to stay on top of purchase orders. In Paris, a US official cabled to Washington that “mobs” had taken over the Bourse, and 40 tons of gold traded that day in Paris—more than fifty times the average day’s volume. In Brussels, dealers simply ran out of gold. Would-be buyers were told they would need to wait three months, with no guarantee of delivery.

  At 5:30 pm East Coast time, the Open Market Committee of the Federal Reserve Bank held a hastily scheduled conference call. The committee’s special manager Charles Coombs told the assembled bankers that “the international financial system was moving toward a crisis more dangerous than any since 1931.” The committee then authorized a series of changes to its currency swap arrangements, in hopes of preventing a run on the dollar in the next day’s foreign exchange markets.

  Across the Atlantic, British prime minister Wilson spent the night trying to keep up with the rapid fire of central bank signals, which increased his fear that a new global depression was imminent. At midnight his time, he sent a despairing cable to Johnson, which historians have largely overlooked. In it, he invoked Ward’s grim prophecy that Johnson had shared with him: “We must both realise that
we may tonight have reached the situation you foresaw when you showed me, in the White House last month, the short document you had received, envisaging a remorseless development of events which could land us back in 1931. At that time you thought it might come through the weakness of sterling. In fact it has come through the scramble for gold.”25 And Wilson’s dark night was not yet over. He and his home secretary Roy Jenkins went to Buckingham Palace to see the queen, and at 1 a.m. announced an emergency bank holiday for the next day. At 1:45 a.m. Wilson called a meeting at 10 Downing Street with top economic ministers. They had to manage the fallout that would occur in a few hours, as the world learned that the London gold market would be closed for an indefinite period.

  Over the next forty-eight hours the administration reached out to every European government, summoning central bankers to an emergency weekend negotiation in Washington. When embassies abroad reported initial difficulty making contact, Secretary of State Dean Rusk instructed: “You must track down these men at all costs.” Every major European economy except France was represented in the hastily assembled meeting in the Federal Reserve Building on Constitution Avenue, as well as representatives from the Fed, Treasury, International Monetary Fund, and Bank of International Settlements. The ten men in the negotiations collectively controlled some $30 billion in combined gold reserves, or three-quarters of the world’s monetary supply. Outside the building, Vietnam War protestors handed dollar bills and apples to reporters and shouted that the United States was spending “$1000 a second to destroy Vietnam.”26

  Every now and then, a crisis atmosphere can be very beneficial; a sense of imminent doom helps focus the minds of sparring principals, and minimizes interference from secondary considerations. In this instance, ten men in a massive conference room—two stories high and sealed like a bank vault—managed to overcome years of squabbling and singlehandedly dismantle the Pool arrangement that had governed the gold market since 1961, as well as mortally wound the Bretton Woods system. Although most elements of the eventual agreement had existed on paper for some time, the pact that emerged was remarkable, given the tight time frame. The Gold Pool would be dissolved but, somewhat surprisingly, the top central banks agreed that the gold they already possessed was sufficient to meet the world’s monetary needs. In the future there would be, in noncrisis periods, no need for the world’s wealthiest nations to buy and sell gold in private markets. If central banks needed to transfer wealth between themselves, they could still use the gold they had at the rate of $35 an ounce, and if the world required more liquid funds in the whole system, it could use the Special Drawing Rights created with the IMF, the development of which all parties now agreed to accelerate. The arrangement also meant that future gold produced would not be needed to prop up world currencies—it could all go to private investors, and to artistic and industrial use. The US Treasury would no longer buy gold from private sources, nor sell it to licensed artistic or industrial users; those transactions would take place privately. And the private market could do whatever it wanted, since its daily fluctuations would no longer threaten the world’s currencies.