Honest Ben Cartwright, hero of the hit TV Western Bonanza, couldn’t stop gold-backed money being gunned down five decades ago. But the primetime cowboy and his three God-fearing sons on the Ponderosa ranch very nearly won it a reprieve at 9pm Eastern time on 15 August 1971.
Like this year’s 50th anniversary, it was a Sunday, and so an episode of Bonanza was due to air on US network NBC. This gave Richard Nixon cold feet.
Spying risk everywhere from inside his private lodge at Camp David – the rural retreat where he and his own posse had been hiding out since the Friday – the President feared voters might never forgive him for delaying their favourite Wild West drama with the economic speech he and his advisors had spent all weekend writing in secret.
That week’s episode of Bonanza was just a repeat however, and after topping the ratings a decade before, the programme’s popularity had already waned.
So Nixon rode back to the White House by helicopter and made his 18-minute speech two hours before the financial markets opened in Tokyo. It proved momentous viewing.
‘The Challenge of Peace’ – so titled “because of the progress we have made toward ending [the Vietnam] war” – was written with “the attitude of scriptwriters preparing a TV special”, according to the President’s Chief Economic Advisor, Herbert Stein. It needed to be.
Nixons speech announced three policy shocks each was strongly opposed by a key figure in his team
Source: BullionVault via US Census Bureau, St.Louis Fed, LBMA, NMA
Chart One: "My fellow Americans..."
As the Vietnam War had dragged on that summer, Nixon’s own ratings had taken a dive, dropping below 50% approval for the first time since he’d taken office 18 months earlier. More urgently, the cost of living and the jobless rate were now both rising. This defied the economic orthodoxy (aka the Philips Curve) that there was a trade-off between inflation and unemployment.
To snap America out of this stagflation – a word he didn’t use, but which was first coined in the mid-1960s to describe Britain’s ailing economy and was set to take hold worldwide in the 1970s – Nixon’s speech announced three policy shocks. Each was strongly opposed by a key figure in his team.
Against the advice of Management & Budget Director George Shultz, the President asked America to accept a 90-day freeze on domestic prices and wages. Opposed by Treasury Under-Secretary Paul Volcker, he imposed a 10% tariff on foreign imports. And despite pleading from Arthur Burns – appointed Chairman of the Federal Reserve by Nixon in 1969 with the strict instructions “No recession. You see to it.” – he also suspended the convertibility of the dollar into gold by foreign governments.
“What a tragedy for mankind,” wrote Burns in his diary that night. But Nixon already mistrusted his central bank chief after the downturn of 1970. And besides, said John Connally – former Governor of Texas, now Nixon’s Treasury Secretary, and “the only man who can sit and strut at the same time” according to a contemporary – “Foreigners are out to screw us. It’s our job to screw them first.”
Who Gains From These Crises?
Nixon himself didn’t accuse “foreigners” of forcing his hand, at least not directly. But as Connally’s comment shows, the concerns of America’s allies hardly figured. (“I don’t give a shit about the lira,” Nixon spat at his advisers on another occasion.) Instead, the President’s Sunday night special pitted honest, upstanding Americans against a shadowy gang of baddies.
“In the past seven years,” he said, “there has been an average of one international monetary crisis every year. Now, who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.”
Speculators had, in truth, only helped bring the money crisis to a head, not created it. Indeed, the global monetary system, built upon America’s gold-backed dollar in the ashes of WW2, was already working too well to keep working by 1959, according to the “dilemma” presented to Congress that year by Belgian economist Robert Triffin.
With the dollar fixed to gold, and all other currencies fixed to the dollar, the US currency stood in for bullion as the lynchpin of global settlements. So the world wanted ever more dollars to fuel trade and growth, Triffin explained.
Yet, foreigners would only keep trusting and using dollars if Washington imposed low-inflation policies at home, limiting the currency’s supply and risking “a disastrous reversal in the post-war trend toward freer and expanding world trade”.
Something had to give. Betting that it would be the dollar-gold rate, many of Nixon’s bad guys were in fact fellow Americans, not foreigners.
Yes, some larger US speculators were encouraged by consultants with “strange accents” (to quote an employee of billionaire Texan silverbugs, the Hunt brothers). But despite private gold ownership being banned since 1933, a rule extended in vain to overseas holdings by John F. Kennedy after he beat Nixon in the 1960 election, many more ordinary savers had by the summer 1971 begun buying foreign currencies and precious metals on the advice of home-grown tipsters.
Harry Schultz for instance. No relation to Nixon’s cabinet official, he had been mailing out his eponymous newsletter since moving to Europe in the early 1960s, publishing a Handbook for Using & Understanding Swiss Banks in 1970. Closer to home, Wall Street analyst James Dines got fired – and so now published his newsletter himself – after forecasting in 1961 that gold would break its official $35 peg and reach $400 an ounce. Advertising man Harry Browne also began urging Americans to shelter their savings outside the dollar, hitting the best-seller lists in 1970 with the blunt and prophetic How You Can Profit from the Coming Devaluation.
The President’s Sunday night special pitted honest upstanding Americans against a shadowy gang of baddies
Financial Collapse Ahead
Private speculation in gold wasn’t new. Nor were the realities behind it.
The US had in 1960 recorded its first trade deficit of the century, sending more dollars abroad to pay for goods and services than it earned from exports. 1960 also saw foreign holdings of US dollars (government and private combined) rise above the value of US government gold reserves, priced since the Great Depression at $35 per ounce. That October, amid worsening US tensions with the USSR over Cuba and Eastern Europe, gold prices in London – reopened six years earlier after closing for WW2 (see article by Michele Blagg and Fergal O’Connor, Alchemist 95) – touched $40 per ounce.
Blame fell on Switzerland. “Gold bars and coins can be acquired as easily as groceries in a supermarket,” gasped a US Congressional report. During those “hectic days” of October 1960, “more than 50% of Swiss buying orders were of US origin”.
A decade later, however, such speculation had gone mass market. Urging Americans to buy gold, silver, mining stocks and Swiss francs, Browne’s short, pacey book quickly sold more than 100,000 copies, warning that “financial collapse is just ahead”. Devaluation would in fact come within two months, said the June 1971 edition of the World Market Perspective from another guru, Jerome Smith – “mid-August being the most probable time”.
Smith’s spookily accurate forecast chimes with an “eyes only” policy paper circulated six months earlier among Volcker’s team at the Treasury. It proposed shocking America’s allies into revaluing all their currencies higher (thereby devaluing the dollar and boosting US exports) by suspending gold convertibility in late-summer 1971. Nixon could then hold gold to ransom at a meeting of the International Monetary Fund scheduled for September.
Did this cold-blooded plan pull the trigger? There’s no smoking gun in Nixon’s infamous tape-recordings of every meeting he held (unlike for the Watergate break-ins which brought him down in 1974). But events in spring and summer 1971 gave him all the cover he needed anyway.
“In recent weeks,” the President told his viewers, “the speculators have been waging an all-out war on the American dollar.” The reverse felt true to Washington’s partners in the fixed-exchange rate system. After soaking up $2 billion in US dollars in two days that spring, West Germany shut its official currency dealing on 5 May, letting the Deutsche mark float upwards. Belgium, the Netherlands, Austria and Switzerland immediately let their currencies rise against the dollar, hoping to stop their imports of German goods driving the cost of living higher, in what the New York Times called “one of the most severe monetary crises since World War II”.
Source: BullionVault via WGC, NMA, Timothy Green
Chart Two: The run on US gold
Paranoid About Gold
“These changes of parities were insufficient to settle the mounting dollar crisis,” said London merchant bank Samuel Montagu’s annual market report for 1971. Gold jumped, averaging $40 per ounce across May (a level it had seen before, but has never again since). The words “rumour” and “new rumours” then pack Montagu’s review of the following weeks.
America’s balance of payments would show a record deficit for the second quarter. The Japanese were preparing to revalue the yen and the Banque de France wanted to convert its latest flood of dollars into gold, but the US Treasury would refuse!
Then, on Saturday 7 August, the US Congress’s economic committee declared the dollar to be “overvalued”, urging a “significant” devaluation to “stimulate exports, raise the cost of imports ... and attract foreign investment in the [US] stock and bond markets”. The final straw came the following Monday, when the British economic representative to Washington went in person to the Treasury and demanded $3 billion in gold.
Or at least, he asked the US to “cover” $3 billion of Britain’s dollar holdings, a phrase so frightfully polite that no one understood what it meant according to Jeffrey Garten’s new history of the Nixon shock, Three Days at Camp David.
Either way, that sum represented over 2,500 tonnes of gold, more than a quarter of America’s remaining reserves, which were now equal to just 1/8th of all foreign-owned dollars. “Connally was so paranoid about a run on gold,” says Garten, “he was all too happy to use the momentary confusion to paint the most dire picture” when Nixon’s team then gathered in secret on the Friday.
More dramatically still, the British request struck “a note of extraordinary irony” as Peter Bernstein’s ever-wonderful history of the yellow metal, The Power of Gold, puts it. Britain had spurred the Great Depression four decades earlier by overvaluing the pound when it returned to gold after the First World War. Britain then abandoned gold again in the economic chaos of 1931, relied on huge US credits and support during WW2, became a joint partner in creating the Bretton Woods agreement in 1944, but then failed to make sterling convertible as the deal required until 1958, while devaluing by 30% in 1949 and then by another 14% in 1967.
That second cut – sold to the British public as meaningless for “the pound in your pocket” by Prime Minister Harold Wilson – invited fresh speculation against the dollar and led directly to the chaos in gold of March 1968, when private demand overwhelmed and broke the London Gold Pool of co-ordinated central bank gold sales, trying since 1961 to protect the dollar at $35 per ounce.
And now the Brits wanted “cover” for the greenbacks they held? One might forgive Connally’s view of “foreigners”.
Gold bars and coins can be acquired as easily as groceries in a supermarket
The Nation Will Benefit
At first, the only real shock in Nixon’s decision was that it hadn’t come sooner. By 1971, the situation had become “ludicrous” as Alan Baker, then five years into his career at N.M. Rothschild and later LBMA’s chairman, told me when we spoke earlier this summer.
Nixon “was just giving in to the inevitable”, formalising the retreat from a gold-backed dollar, which the two-tier market operating since 1968 (see article by Rachel Harvey entitled '15 August 1971 and the London Gold Market' in this issue) had shown to be no longer viable.
The US press loved the President’s speech. “After months of drift, President Nixon has moved with startling decisiveness to stabilize the Dollar and spur economic growth,” said Monday’s New York Times. “Industry executives and economists agree,” said the Associated Press. Through lower export prices, “The nation will benefit ... from the President’s decision to stop paying out gold.”
New York’s stock market also loved the new no-gold dollar, jumping over 3% on the Monday, its best one-day gain in more than a year.
Gold in contrast retreated, ending August more than $3 below the peak of near $44 hit the Monday before Nixon went on air. And why not?
Speculators taking profit had got part of their wish, if not yet an official break of the dollar’s $35 peg. That would come in December, when the dollar was revalued to $38 per ounce of gold under the Smithsonian deal with America’s G10 allies.
With his typical humility, Nixon called it “the greatest international monetary agreement in the history of mankind”, throwing the 1944 Bretton Woods summit of more than 40 nations and 700 delegates into serious shade. He also removed that gun-to-the-head 10% import tax imposed in August.
By the time of the Smithsonian devaluation, however, gold was already trading $5 above its new official price. When the US devalued the dollar again in February 1973 to $42.22 per ounce of gold – the price it still records today for America’s giant gold reserves, frozen in time and space – the open market was trading nearer $70 per ounce.
Fixed exchange rates were finally abandoned the following month, ending the Bretton Woods system and leaving the market to determine currency values. Then the real trouble showed up.
The British economic representative to Washington went in person to the Treasury and demanded $3 billion in gold
The Bugaboo of Devaluation
There isn’t space or need here to rehearse the dollar’s post-gold descent in purchasing power (let alone the pound’s), nor the long-term economic misery it caused. But, in 1974, and with gold peaking at $175 per ounce, Harry Browne added “a retreat out in the hinterland” to his list of must-have investments, “stocked with enough provisions to survive for a year or so... as an insurance policy” against the social chaos, violence and government tyranny, which he forecast would worsen with inflation in his new best-seller You Can Profit from a Monetary Crisis.
Such anxieties only heightened calls for some kind of a return to gold. In the US, they culminated in the Gold Commission, authorised in 1980 by Nixon’s hapless successor Jimmy Carter, as inflation touched 15% per year and gold peaked at $850 per ounce. By the time the Commission published its report on 31 March 1982, however, inflation in the US had been “cut roughly in half” and “much of the impetus for restoring a gold standard [had] been lost” thanks to the truly shocking double-digit interest rates imposed by the Federal Reserve, now led by Paul Volcker.
Those double-digit interest rates, higher above inflation than any time since the Great Depression, are now almost as distant as balance of payments transfers being settled in gold bars. Money remains literally weightless and anchorless today, enabling policymakers to fight deflation – inflation’s equally evil twin, whose long shadow from the 1930s did so much to encourage the inflationary policies of the 1960s and 1970s – with zero and negative interest rates, plus unlimited central bank money creation. What Nixon had dismissed in August 1971 as “the bugaboo of devaluation”, echoing Harold Wilson’s ill-fated rhetoric of four years earlier, is something policymakers are now actively seeking to revive.
As for a return to gold-backed money, some figures in Nixon’s Republican Party continue to name-check it on the stump, while some more thoughtful monetary economists have also asked if its policy limits and stability might be worth revisiting. But asked in 1972 whether the US would return to a gold standard, Harry Browne’s tip for what could be done to make it more possible still sounds wise half a century later: “Become God and change the whole direction of the universe.”
Money remains literally weightless and anchorless today enabling policymakers to fight deflation