Gold, the Dollar and Watergate

How a Political and Economic Meltdown Was Narrowly Avoided

Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137471369
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

The book examines the problems that Nixon faced during his presidential term, focusing on economics but the role of politics is also highlighted. The convergence of the gold-dollar crises, oil crises and Watergate imbroglio posed a unique political and economic threat to global stability.

Part I

Gold

1. A unique metal

Truly it is hard to imagine . . . any standard other than gold—yes, gold whose nature does not alter, which may be formed equally well into ingots, bars, or coins, which has no nationality, and which has, eternally and universally, been regarded as the unalterable currency par excellence.⁴

Stirring words spoken by French president Charles de Gaulle on February 4, 1965, based on a centuries-old and widely held conviction. Capturing the spirit of the preference for gold, the Irish playwright George Bernard Shaw declared:

You have to choose between trusting in the natural stability of gold and natural stability of the honesty and intelligence of the members of the government. And, with due respect to the gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.⁵

But the famous British economist John Maynard Keynes held a very different opinion, stating in 1923 that while “gold still enjoys the prestige of its smell and colour,” it “is already a barbarous relic.”⁶

Throughout at least 6,000 years of history, gold has had a magic ring to it. Possessing the hugely prized yellow metal led to riches for miners, kings, and potentates, provided nation-states with the means for waging war, fostered criminal activity, and in modern times, aided by deep drilling techniques, formed the core of economic activity in countries such as South Africa. Gold proved to be very suitable for making exquisite jewelry by what we now consider primitive societies and much later for use in sophisticated industrial products. But, most important, it played a dominant role in the world’s currency arrangements for centuries and has served as a war chest from early to modern times.

Gold has particular characteristics that make it a metal unlike any other. Apart from its attractiveness as a soft and shiny yellow metal, its density (19 times the weight of water), malleability (it can be completely flattened), and immunity to rust and most acids make it a unique element in nature. And as greedy as much of mankind has always been, gold’s high monetary value has encouraged constant attempts at swindling prospective buyers from ancient times on by representing painted lead or certain alloys as gold. As buyers caught on to these practices, they responded by applying a number of ways to verify the presence of gold in an item, the most effective being the “acid test.” Because gold, unlike other metals, is not dissolved by nitric acid, the lack of a chemical reaction when exposed to the acid proves that a metal object is truly gold. Another old practice is the “bite test,” whereby a prospective buyer is satisfied if his teeth leave a mark in the soft gold.

The main uses of gold today in industry (about 10% of new production), as jewelry (about 40%), and in investment (50%). Purchases of newly mined gold by central banks—once representing a huge chunk of world production—have become a trickle. By contrast, gold’s industrial use has increased steadily. It is now used for electrical wiring for high-energy applications, as a thin layer coating for electrical conductors, for other parts for certain computers, in communications equipment, in spacecraft and jet aircraft engines, as a protective coating on satellites and astronaut’s helmets, in electronic warfare planes, and, of course, in dentistry. Gold jewelry, together with diamonds, is the most popular adornment across the globe, often doubling as an investment.

Investment can take the form of simple hoarding “under the mattress,” for which French peasants have been famous, or as a means of protection against wars, inflation, and bank failures. Asians have traditionally been the world’s largest hoarders of gold. This is particularly so in India, where gold jewelry is regarded as both an adornment and a store of value readily transportable in troubled times. In Western countries, investors have long bought gold as a means of diversifying their investment portfolios or merely for speculation. Because gold does not earn interest, investors depend on higher gold prices to attain a satisfactory yield. Gold holders of this type seldom keep their gold in physical form at home—except perhaps coins—preferring safety and often anonymity. Vaults in Swiss banks and other secretive financial centers contain large amounts of gold held for private customers. Usually these individuals never see their gold and thus never see the beautiful yellow metal, even though they may have Midas’s touch when it comes to investing.

Monetary gold

By far the largest stocks of gold are held by central banks or national treasuries, known as monetary gold—nowadays to the tune of 35,000 metric tons, worth almost $18 trillion at present market prices: 11% more than the United States’ gross domestic product.⁷ Monetary gold, which in the past increased steadily in volume because central banks bought the bulk of newly produced gold, has played a crucial role in world history since the early 19th century. Gold was long generally accepted as a means of payment for domestic transactions, as well as across international borders, and it became the pivot of the monetary system known as the gold standard.

Nations also considered their gold reserves a war chest for use during times of conflict. In ancient times, gold was seen as the nervus belli, or sinews of war. Later on, gold was also used as collateral against borrowing from foreign bankers. And if collateral was not required, gold nevertheless provided comfort to potential lenders. At one extreme, powerful countries conquered smaller and weaker ones chiefly to obtain their gold. In the early 16th century, Spain’s conquistadores, such as Hernan Cortez, overpowered Indian tribes in Latin America in a quest for gold. But when El Dorado was not found, the conquistadores had to settle mainly for silver brought back to Spain. In the late 19th century, British troops conquered the small republics in South Africa that had been established by the Boers (mainly descendants of Dutch settlers who called themselves Afrikaners). The main push for British occupation came from the fierce imperialist Cecil John Rhodes, who combined a dream of British dominance from the Cape to Cairo with a desire for the diamonds (he founded the De Beers company) and gold that had been discovered in Transvaal in the late 19th century. Over the years, South Africa became the world’s largest gold producer.

The golden fleece

No written history of the first use of gold exists—only informed guesses. Gold artifacts found in the Balkans and the Levant dating from 4,000 BC are often cited as the beginning of the yellow metal’s ascendancy. Early gold was probably mined in present-day Transylvania (a part of Romania) and Thrace (in the south eastern corner of the Balkans). Gold production followed in the Middle East around 3,000 BC, by the Sumerians, in present-day south Iraq, whose gold jewelry showed imaginative design. In Pharaonic Egypt, hieroglyphs from 2,600 BC onward mention gold, most of it mined in Nubia, in present-day Sudan. An evolutionary jump occurred around 1,500 BC as gold assumed the role of the standard medium of exchange for conducting international trade. Subsequently new and more sophisticated techniques for mining and designing jewels were introduced, mostly in the Middle East. And on the shores of the Black Sea, gold dust from river sands was extracted by using unshorn sheepskin, which after drying out released the gold flecks when shaken. The legend of the quest for the “golden fleece” by Jason and the Argonauts is probably derived from this practice. In a further step, the Scythians, a people who inhabited parts of present-day Ukraine from 200 BC to 800 AD, achieved remarkable results in gold jewelry design, today sought after for museum display.

Although in China little squares of gold were legalized as a form of money in 1,091 BC, the first gold coins were minted in Lydia, in present-day Turkey, around 610 bc. The use of coins meant that gold and silver lumps or ingots no longer had to be weighed. Determining the weight and fineness of these metals was a cumbersome process and slowed down commercial transactions. Issuing pieces of gold and silver in a standardized way was one thing, but for coins to receive general acceptance, they also had to be stamped with an authoritative testament to their weight and fineness. Soon the right of coinage was reserved to the state or crown (states were generally kingdoms in pre-modern times), the “stamp” usually consisting of the king’s image or his coat of arms.

The next significant step in the evolution of gold was the introduction by the Romans of hydraulic mining methods, mainly in Spain and Dacia (an ancient name for Romania, used as a penal colony by Rome). As gold was extracted in increasing quantities in different regions, it became important war booty. The armies of Alexander the Great, Julius Caesar, and Charles the Great were all successful plunderers of gold. Because gold was seen as the way to riches by so many, attempts to produce gold by chemical processes started as early as 300 bc. The first alchemists were the Greek and Jewish residents of ancient Alexandria. Lead was often used as the base for their experiments in the hopes that it would interact with a mythical substance known as the philosopher’s stone. Despite their lack of success, alchemists persevered for an amazing two millennia, a testament to the human obsession with gold.⁸

Throughout history, coins have often been made of silver instead of gold. Thus in 1066, the year of the Norman conquest of England, the British pound, made of a poundweight of sterling silver, was introduced. Some 200 years later, England, having introduced the florin as its first major gold coin, adopted a monetary system of gold and silver. And the rich republic of Venice introduced the famous gold ducat in 1284, a coin that was used around the world for five centuries. The thirst for gold, seldom uplifting, became especially ugly when King Ferdinand of Spain, who had earlier succeeded in driving the Moors and the Jews from his country, exhorted explorers to “[g]et gold—humanely, if you can—but at all hazards, get gold.”⁹ The consequence was the brutal subjugation of indigenous inhabitants of what is now Latin America. In 1700, the Portuguese colonizers discovered gold in Brazil—which in a mere 20 years became the world’s largest gold producer. A weakened Spain could only watch as its Iberian neighbor raked in the profits.

A brief bout of bimetallism

Around the same time, much of the world was moving to bimetallism, with gold and silver circulating side by side in a fixed ratio. In England in 1700, when Isaac Newton was master of the mint, the price of gold was established at just below 85 shillings per troy ounce, where it remained until 1914. The ratio of gold to silver was fixed at 16:1. The United Sates adopted a bimetallic standard in 1792, with a 15:1 ratio. Bimetallism proved to be an unstable system and was later abandoned, first by Great Britain in 1816 and then by the United States in 1873, over the strong objections of American supporters of silver. In 1896, William Jennings Bryan, a presidential candidate and impressive orator, drew directly on America’s Christian heritage when he proclaimed, “[Y]ou shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”¹⁰ Soon afterward, he was defeated by William McKinley, who staunchly supported the gold standard. Bryan, an anti-Darwinian, became even more famous not only by losing three presidential elections, but by also being on the losing side in the famous Scopes monkey trial.

Another fanatic “silverist,” Senator Key Pittman from silver-producing Nevada, would cause considerable irritation and delay at the World Economic and Monetary Conference, held in London in 1933, during the Great Depression.¹¹ The conference had been called to discuss what could be done to improve the dire state of the world economy. Because all members of the League of Nations, along with the United States, were present, expectations of an economic breakthrough were high.

But the 7-week conference, now largely forgotten, was a failure. A number of participating countries were strongly in favor of restoring the gold standard—abandoned in 1931 by Great Britain and, not long before the conference, by the United States, a response to the financial crisis. The American delegation carried in their pockets a draft resolution advocating a return to gold. To their great surprise, President Franklin Roosevelt stated while the American delegation was still crossing the Atlantic that he had come to realize that gold was “an absolute fetish of so-called international bankers.”¹²

The American draft resolution, suddenly obsolete, had also contained some language on restoring the monetary role of silver, an idea that had not been seriously discussed since Bryan’s impassioned oration, and little attention had been paid to it before the conference. But unexpectedly, much of the discussions in London on monetary matters were devoted to the silver issue. Senator Key Pittman, from Nevada, who chaired the subcommittee on silver, insisted that his favorite metal’s role in the monetary system be restored—which would require that the price of silver be raised. Pittman, widely considered an eccentric, made quite a name for himself while the conference dragged on, appearing shabbily dressed at a reception and greeting the British monarch with the words, “King, I’m glad to meet you. And you too, Queen.”¹³ He was described as going on “monumental drunks during which he shot out street lights.”¹⁴ But he diligently chaired his subcommittee, actually achieving—after 7 weeks of excruciatingly boring meetings—the only concrete result of the whole conference. He steered an “international agreement on silver” to adoption that ultimately meant little but that made the state of Nevada happy for some time to come. Among those who forbore in the subcommittee was J. Willem Beyen, who would lead the Dutch de...