“2 Money Disasters That Could Strike on Saturday (one of them could happen sooner!)” blared the headline on a full-page ad that ran in the New York Times, Chicago Tribune, and Washington Post in August 1970. Although by this time Browne’s Arlington House book How You Can Profit From the Coming Devaluation was already selling briskly, such ads were the vehicle by which many mainstream readers were exposed to the book. Browne, the ad promised, “shows you what the effect will be on you, your job or business, your personal finances, your family . . . shows you what your plan should be in each crisis—but always in light of the devaluation that is now inevitable.” Browne’s investment plan was mostly practical: he instructed readers on how to convert their money to Swiss francs; on how much of their cash they should keep in silver coins; how and why to buy stocks in gold-mining companies; and similar investment advice. But his severe vision of devaluation and its consequences pushed him to extreme measures; he told people not merely to buy gold, but to bury it in the ground, as he said he did himself.
Moreover, Browne argued repeatedly that every family should have a “retreat”—a place to live, preferably in a rural area, stocked with gold and silver and enough supplies to last a year. (Browne never explained exactly why survivors of an economic apocalypse would find gold and silver advantageous instruments of barter.) In his seminars, Browne often teamed up with Don Stephens, a futurist designer of ecological homes and the author of The Retreater’s Bibliography, a comprehensive and constantly updated guide to resources for those interested in low-cost and low-impact “retreat” living. The Retreater’s Bibliography envisioned an economic crisis deeper and more violent than the Great Depression. Major fuel shortages, it said, would require a return to horse-driven agriculture and transportation, and crowds of armed, hungry looters would overtake urban streets with lethal effect. “We have stated a number of times that as much as 85% of urban populations could die in such a time of upheaval with about 10% escaping the cities and as little as 5% staying put and surviving,” wrote Don Stephens and his wife Barbie.36
For Browne, the retreat was an important part of a defensive investment “program,” just as important as the Swiss bank account. Should runaway inflation occur, for example, Browne told his readers that their society would become unrecognizable. “Without a currency, the government cannot operate its schools or police forces or pay tax collectors,” Browne explained. “Most likely, all governments in this country—federal, state and local—would collapse.”37 One key to surviving the inevitable crisis, then, was the retreat. “It should be far away from any metropolitan areas,” Browne advised. “Even rural areas will only be safe if the local residents are largely self-sufficient and individualistic. This part of the program includes anything you might do to give you protection, mobility, and freedom from the chaos and rioting that would accompany runaway inflation.” But if readers prepared using Browne’s advice, he pledged that they would persevere and “find an opportunity to new wealth.”
Browne was certainly dabbling in paranoia. Yet the socioeconomic apocalypse Browne predicted differed only in degree and level of detail from the currency crisis of the government that LBJ, Barbara Ward, Harold Wilson, and many other world leaders feared would take place if dollar-gold convertibility collapsed. And in both scenarios, owning more gold seemed like the best solution—the crucial difference being who gets to hold the gold. In a nation where urban riots, a monetary crisis, and a plummeting stock market—in 1969 the Dow Jones Industrial Average dropped about 15 percent—made the investor class especially anxious, Browne’s combination of falling-sky scenarios with hard-money investment advice proved to be a potent formula. Hundreds of thousands of Americans flocked to the message. Browne’s book hit the New York Times best-seller list in November 1970, representing a bonanza for the author and his upstart publisher Arlington House, which printed at least thirteen editions of Browne’s book. Now the gospel of gold was no longer stuck in the provinces of hand-typed newsletters and hotel conference room seminars. Goldbugs of various stripes became minor celebrities; Browne appeared on television and radio talk shows, and mainstream magazines rushed to profile goldbugs.
Bookstores clamored for volumes similar to Browne’s, which publishers large and small rushed to provide. Don and Barbie Stephens reported that with Browne’s success—he mentioned them in a short bibliography—the “trickle of orders for [The Retreater’s Bibliography] suddenly became an outburst.” An early 1971 book, Inflation-Proof Your Future, featured little on gold, but dozens of do’s and don’ts on collecting autographs, stamps and coins, Florida swampland, and first editions of Stephen Crane, as well as high-growth stocks. A wordier title the same year was The Fateful Subversion of the American Economy Consequent on the Gold/Dollar, Trade/Economic and Tax Crises. In late 1970, Arlington House followed up Browne’s hit with How to Beat Inflation by Using It, and then in 1972 with Everything You Need to Know Now About Gold and Silver. Each chapter of the latter featured an interview with an expert—Harry Browne, Franz Pick, Murray Rothbard, and others. Tellingly, the copyright for the book was owned not by any of the authors, but by the Pacific Coast Coin Exchange, a California-based numismatic trading outfit whose founder, Louis Carabini, wrote the book’s introduction (and presumably conducted the interviews). The book was republished several times; a transition was under way, from advising readers to buy gold to out-and-out selling it to them.
The goldbugs of the late ’60s and early ’70s were numerous and interconnected enough to constitute a movement, one that would increase in influence over the next decade. This didn’t mean, however, consensus on all the particulars. Some embraced a conspiratorial/paranoid worldview that was avoided by those chiefly interested in investing. Some believed in using the American electoral system to advance their ideas—Harry Browne, notably, would later run for president as the nominee of the Libertarian Party in 1996 and 2000—while others rejected any association with government. And despite increased popularity, most goldbugs remained well outside mainstream American politics—at least through the mid-1970s. To Rothbard and many of his acolytes, there was no sense in trying to reform institutions like the Federal Reserve Board or the US Mint; government monetary control was intrinsically inflationary, corrupt, and destructive. Similarly, in some crucial ways, it didn’t matter to Browne and Rothbard whether the American government defined or didn’t define its currency in terms of gold, because in their view gold was the only real money and everything else was a government-created fiction. (Browne would largely abandon the United States in the 1970s; he kept his “retreat” in Canada and moved to Switzerland in 1977 before dying in 2006.) One issue on which all goldbugs could agree, however, was that gold prohibition should end. The metal-heavy investment strategies they favored would function much more efficiently and reach a broader public if not consigned to black markets, backyard bunkers, and secret accounts. Soon enough, they would get their wish.
CHAPTER 9
This Time for Real
On a Sunday night in August 1971, with Congress in recess, Richard Nixon “closed the gold window” by suspending the convertibility of the dollar into gold. His action ceased the run on America’s dollar, but led to years of economic turmoil. Courtesy Richard Nixon Presidential Library and Museum / Byron Schumaker
ON SATURDAY, JULY 10, 1971, Undersecretary of Treasury Paul Volcker sat at his office desk, overlooking a sea of disturbing numbers. Volcker was in charge of international monetary affairs, and trouble emerged anywhere he looked. When the Johnson administration had decoupled the dollar from monetary gold in 1968, the hope was that this move would halt or substantially slow the gold drain out of the country’s monetary reserves. That failed to happen—instead, US gold stock continued to dwindle. In the second week of May, for example, the United States had lost a steep $400 million worth of gold to Belgium, France, and the Netherlands, causing the US gold supply to hit its lowest level since the 1930s. At best, the demonetization of gold had addressed a symptom with
out curing the underlying disease: the US balance-of-payments deficit, which Volcker knew could hit $4 billion or even $5 billion that year.
Through the 1960s, foreign official dollar holdings had remained in the range of $13 to $15 billion; as Volcker sat at his desk, the number had soared to more than $24 billion. Germany’s central bank, the Bundesbank, alone held more dollars than there was gold in Fort Knox. Even if the world’s richest countries could no longer easily exchange their dollars for gold, they were impelled to handle such imbalances through trading on currency exchange markets. And beginning early that May, when Germany sent signals that it was considering letting the value of the mark float on the open market, they began doing so in droves. Huge volumes of dollars began to be traded for German marks, Dutch guilders, and Swiss francs—currencies tied to governments that the international market perceived to be practicing better fiscal discipline than Volcker’s.
The result was a disaster for the dollar; between January and June the value of the dollar against currencies of Germany and Switzerland fell by about 4 percent. An IMF economist later wrote: “Never before had the world witnessed a flight out of a key currency of such dimensions.”1 The flood of dollars into Germany’s Bundesbank could not be sustained, and on the morning of May 5—having taken in $1 billion in 40 minutes of trading—Germany halted trading in its currency. The deutschmark was now by default a floating currency—it was no longer valued in gold, and the central bank behind it was no longer buying or selling dollars. Smaller countries closely tied to German’s economy—Austria, Belgium, Switzerland, and the Netherlands—soon followed suit, amplifying the dollar’s weakness. The effects were widely and concretely felt; some American citizens traveling soon found that hotels and airlines would no longer accept dollars as payments, and neither, in places like Switzerland, could they exchange dollars for local currency.
Volcker, a six-foot, seven-inch economist who often appeared in rumpled suits and knew as much about international finance as anyone else in government, had anticipated nearly all of this for months. Yet he had been powerless to prevent it from occurring. Some of the pressure could be relieved by reducing US military spending, but he knew that, as with previous administrations, such cuts were not forthcoming. Another remedy would be to relax the fairly narrow bands in which currencies were allowed to trade against one another, but negotiations on that front were stalled and unlikely to take full effect for two years. Lacking other options, Volcker strongly considered “closing the gold window” once and for all. Indeed, he and his staff had since the spring of 1971 secretly been preparing contingency plans for removing gold convertibility. Volcker and some other economists believed that separating the value of the dollar from that of gold might cause some pain in the short term, but would have many benefits in the long run. It was far from clear, however, that Volcker’s new boss—former Texas governor John Connally had taken the Treasury job in February—would be willing to take such a drastic step. Just a few weeks before, Connally had addressed an IMF gathering, saying, “I want without any arrogance or defiance to make abundantly clear that we are not going to devalue, we are not going to change the price of gold, [and] we are going to control inflation.” That seemed unambiguous, although when Volcker questioned his boss about it, Connally replied cryptically: “That’s my unalterable position today. I don’t know what it will be this summer.”
President Richard Nixon might have been even more reluctant, with his reelection vote a mere fifteen months away. The Vietnam War continued to rage with little end in sight, and the public was fed up with it; that spring hundreds of thousands of protestors had descended on Washington, including hundreds of Vietnam veterans who threw their medals over a fence on Capitol Hill. No one could really forecast what would happen to the world economy if most or all of the major currencies were floating with flexible exchange rates. Moreover, Volcker believed that there would be “enormous pressures to increase the gold price once we suspend gold payments,” just as had been the case with FDR, again with outcomes that were impossible to forecast with any certainty.
What tipped Volcker’s hand that Saturday morning was data on the June trade deficit. Even though the United States had enjoyed a substantial trade surplus in 1970, the June 1971 figure showed a deficit of nearly $600 million. This was precisely the type of fiscal practice for which currency markets had been punishing the United States. And while a deficit in one month or quarter could be reversed, the country was facing the prospect of running its first yearlong trade deficit since 1893, when Grover Cleveland was president. Volcker phoned his Treasury colleague William Dale, a longtime Treasury officer who had also worked for the International Monetary Fund, at home and instructed him to come into the office. Dale, too, was no stranger to the concept that at some point the dollar would need to be separated from gold. As far back as March 1969, he had written Volcker a confidential memo that began, “I have become convinced that gold convertibility of the dollar cannot be maintained indefinitely.”2 When Dale arrived at the office, Volcker asked him what size trade deficit would rock the exchange markets. Dale, fully aware of May’s tumult, provided an estimate, and Volcker replied, “you’ve got it.” (And indeed, later that month when the trade deficit figures became public, the already weak dollar went into a multiday slide.) Dale recalled, “He then directed me to do a plan closing the gold window and said, ‘This time it’s for real.’ ”3
Of course, any plan to close the gold window would need approval from Connally and Nixon, who might well resist a plan that would overturn all international postwar monetary behavior. (And while it could theoretically be done against the will of Federal Reserve chairman Arthur Burns, he would certainly know in advance and would argue strenuously against it.) In contrast to Kennedy’s longtime gold obsession or Johnson’s rising exacerbation, Nixon most of the time was not even indifferent to the question of gold’s relationship to the dollar. White House records of the late spring and early summer of 1971 show almost no presidential interest whatsoever in questions of gold or the currency exchange market. Instead, Nixon spent May, June, and July discussing diplomatic overtures to China; strategic arms talks with the Soviet Union; Middle East negotiations; some domestic economic matters (such as inflation and labor unrest); his reelection campaign and how to influence voters; and, of course, a vendetta against the “conspiracy” of people who leaked the Pentagon Papers, and thus the crucible of the Watergate scandal that would in three years drive him out of office.
It is remarkable, then, that a mere thirty-six days after Volcker told Dale “This time it’s for real,” the president of the United States would appear in a dark-blue summer suit on prime-time, Sunday night television to declare he had asked the Treasury “to suspend temporarily the convertibility of the dollar into gold or other reserve assets.” How did the Nixon White House embrace such a momentous monetary step in such a brief period?
The end of the Bretton Woods system had been foreshadowed by Robert Triffin and others, and was inevitable. Nonetheless, it is surprising that the fateful decision to sever the tie between the dollar and gold would come during Nixon’s presidency, particularly toward the end of the first term. At the start of Nixon’s presidency, there was “limited support and some strong opposition” to floating the dollar, according to Allan Meltzer’s history of the Federal Reserve. During the 1968 presidential campaign, Nixon’s top economic adviser Paul McCracken had organized a committee to counsel Nixon on economic matters chaired by Gottfried Haberler, a Harvard professor affiliated with the “Austrian school” of economics, who focused particularly on issues related to international trade. Although the task force explored possibilities for international monetary reform, it argued that tackling domestic inflation ought to be America’s highest priority; if that goal could be achieved, other nations could be more readily persuaded to maintain their currencies in a way that would prevent a balance-of-payments crisis.
This became the cornerstone for the early Nixon administration
monetary policy widely labeled “benign neglect.” Nixon’s closest advisers preferred the term gradualism, but neglect was an apt description for several reasons. One was that the policies put in place in 1968—the restrictions on international investment, the creation of the two-tier gold market, and the passage of a surtax to help slow inflation and pay for the Vietnam War—actually did improve the country’s balance-of-payments situation for a time. Indeed, in 1968, the United States experienced a rare surplus, of $1.6 billion, and again in 1969, of $2.7 billion. So long as the existing system appeared to work, there would be little impetus to change it. Instead, the Haberler task force urged an end to the capital controls that Johnson had established and a focus on making currency exchange rates more flexible.
An equally important, if harder-to-quantify, rationale for “benign neglect” was the low priority that Nixon and his closest advisers assigned to international monetary matters. Economists and officials in the Kennedy and Johnson White House tended to be creatures of a Western monetary consensus: they viewed Western European governments, central banks, and global institutions as vital—if sometimes difficult—partners in a shared project of creating growth and minimizing economic crises. Nixon, who of course inherited the massively debilitating Vietnam War, was mostly focused on conducting foreign policy. To the extent that Nixon and his national security adviser Henry Kissinger had a goal for international monetary policy, it was to minimize interference with carrying out foreign-policy goals. For example, one former Nixon official told the political scientist Joanna Gowa that Nixon “refused even to sanction the continuation of pressure on West Germany to extract foreign-exchange concessions because he valued German-US ties more highly than he did the payments accounts.”4 Vietnam was, not surprisingly, even more off limits; a member of Nixon’s Council of Economic Advisers told Gowa, “we didn’t like the idea of bringing our troops home or that kind of stuff.”
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