EP16: The Night the Window Closed

The Night the Window Closed

Take out a banknote and ask it the oldest question in this story. What are you? For twenty seven years after the war, the dollar had an answer, and it was a good one. Thirty five dollars was one ounce of gold, and any government on earth could bring its dollars to the United States Treasury and walk away with the metal. On a Sunday evening in August 1971 that answer changed. This is the story of the night the gold window closed, and of the single word that was supposed to make it temporary.

A bank with more claim tickets than gold

We left the system in The Golden Promise of Bretton Woods with the flaw already visible in the blueprint. For the world to hold dollars, America had to send them out. But every dollar abroad was another claim on one finite pile of metal, and the pile did not grow to match.

The Federal Reserve states the outcome plainly. The Bretton Woods system held until persistent American balance of payments deficits led to foreign held dollars exceeding the US gold stock, which meant the United States could not fulfil its obligation to redeem dollars for gold at the official price. The Centre for Economic Policy Research puts figures on it: American liabilities to foreign official institutions rose from around 16 billion dollars at the end of 1969 to 50.65 billion by the end of 1971, against a gold stock worth only some 10 to 11 billion at 35 dollars an ounce.

Roughly five dollars of promise for every dollar of metal. Any bank in that position has a name. It is called a bank about to suffer a run.

The run begins in Paris

It began politely, and years early. On 4 February 1965 President de Gaulle used a press conference at the Elysee Palace to call for a return to gold, describing it as the one unquestionable monetary basis which did not bear the mark of any individual country. That is the American State Department's own record of it.

France then did more than talk. From 1965 it began systematically converting its dollar holdings into metal, and the effect is visible in the composition of its reserves: gold accounted for 73 per cent of French reserves at the end of 1964, and 86 per cent by the end of 1965, according to the International Monetary Fund. Paris was quietly swapping paper for the thing itself.

Others noticed. On 15 March 1968 the London gold market closed its doors and the London Gold Pool was abandoned, leaving two prices for the same metal: an official 35 dollars for governments, and a free market price that drifted upward and never came back. By the summer of 1971 the Federal Reserve records that speculators were moving out of dollars and central banks were rapidly converting dollars into American gold. The queue at the window was no longer a metaphor.

Three days on the mountain

On Friday 13 August 1971 President Nixon took about fifteen advisers to Camp David. Among them were John Connally at the Treasury, Arthur Burns at the Federal Reserve, and an under secretary named Paul Volcker who would spend the rest of his career living with the consequences.

It was arranged, in the State Department's phrase, in the greatest secrecy. The State Department and the National Security Council were unaware the meeting was even taking place when it began. Henry Kissinger later observed that a decision of major foreign policy importance had been taken about which neither the Secretary of State nor the national security adviser had been consulted. The same record notes that Burns made a lonely and unsuccessful attempt to keep the gold window open.

They were not adjusting a policy over that weekend. They were ending a monetary order twenty seven years old, while the markets slept.

Nine o'clock, Sunday evening

On 15 August 1971, at nine in the evening, Nixon spoke from the Oval Office, live on radio and television. The words are worth reading exactly as delivered: "I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets."

Temporarily.

There was more in the same address. A freeze on all prices and wages throughout the United States for a period of 90 days. An additional tax of 10 per cent on imported goods, of which he said: "This import tax is a temporary action." And then the reassurance, spoken down the camera into every American living room: "If you are among the overwhelming majority of Americans who buy American made products in America, your dollar will be worth just as much tomorrow as it is today."

The world's money changed that night. Not by treaty, not by war, not by any parliament's vote. By a television address describing a temporary measure.

The switch that stayed off

They tried to rebuild it. In December 1971, at the Smithsonian Institution in Washington, the dollar was devalued against gold by about 8.5 per cent, to 38 dollars an ounce. Nixon stood in the Commons Room that evening and called it "the most significant monetary agreement in the history of the world".

It lasted barely a year. On 12 February 1973 the dollar was devalued a further 10 per cent, to 42 dollars an ounce. Within weeks the structure gave way completely: the Bundesbank, having bought 1.7 billion dollars on the morning of 1 March 1973 to defend the rate, was permitted the next day to stop buying altogether, and Germany's exit from the system of fixed exchange rates sealed the fate of Bretton Woods. The major currencies floated. Bretton Woods was over.

Since 1973 every pound, dollar and euro has been backed by precisely one thing: the word of the government that issued it. That is what fiat means. Let it be done. Money, because we say so.

The fossil in the accounts

One detail survives, and it is the best fact in this whole story. Open the books of the United States Treasury today and its gold is still carried at the statutory rate of 42.2222 dollars per fine troy ounce, the figure set in 1973 and written into law. Not the market price. The 1973 price, frozen in the ledger for more than half a century, the last remaining trace of the last day the dollar meant a fixed weight of gold.

In The Day They Took the Gold we watched a promise printed on the money revoked by the party that wrote it. Here is the same lesson, thirty eight years later, at the scale of the whole world. The window was closed temporarily. That was fifty five years ago. It never reopened.

The metal did not change that night. The measuring stick did. No one suspended gold, and no one ever can.

Chapman Gold deals in the metal, not the promise. See The Vault, or if you have gold of your own, sell with Chapman Gold.