We will take another break from capital destruction, to treat a topic which has come up this week. On March 11, we said:
“…central bankers do not think about gold.
Granted, they once did. In the 1960’s, there was the now-infamous London Gold Pool to keep the price of gold at $35. This is endlessly cited as evidence of current central bank price suppression, without bothering to mention that until 1971 the official US policy was to maintain the dollar to gold exchange rate of $35 to the ounce. …
But today? We see no sign that central bankers care about the price of gold.”
This turned out to be very controversial. Some conspiracy theorists cited Deputy Secretary of State Thomas O. Enders in 1974. The State Department records the minutes of a meeting with Secretary of State Henry Kissinger. Here is an excerpt:
“Henry Wallich, the international affairs man, this morning indicated he would probably adopt the traditional position that we should be for phasing gold out of the international monetary system…”
Changing the Dollar
This meeting can only be understood in context. So let’s review three key changes to the dollar that led up to it. The dollar had long been redeemable in gold. However, in 1933 President Roosevelt was desperate to stop the run on the banks (and to push interest rates down). He ended gold redeemability to Americans in 1933 (and criminalized the possession of gold).
When the soon-to-be-victorious Allied Powers met in 1944 at Bretton Woods, they agreed to an insane postwar monetary system, in which the national currencies would be pegged to the US dollar which would be redeemable in gold at a fixed exchange rate. This system contained the seeds of its own destruction as Robert Triffin said in the 1960’s. However, the Allied economies were in ruins (not to mention the Axis)—so who was in a position to say no?
By the late 1960s, gold was flowing out of the US under relentless and accelerating redemptions. This was a process of de-moneying the dollar (as we have written about currencies de-dollarizing today). The money was literally being sucked out of the dollar.
This crisis came to a head in 1971. So President Nixon decreed that—temporarily—the dollar would not be redeemable in gold. Of course, it was not temporary, but permanent. However, it took time for the new reality to become clear. In 1973, the regime of fixed currency exchange rates was ended, and the world moved to so called floating rates (they’re all sinking, but most people only see relative changes).
This brings us to the April 25, 1974 meeting with Kissinger and Enders. They had grown up with the understanding that gold is money, unlike most people alive today who were programmed from the earliest age to think of money as pieces of paper (or electronic digits).
Gold was the base of the monetary system, though bit by bit, the various governments were changing their views and their policies. Gold was not phased out yet, in 1974, but things were heading in that direction. Thus Enders’ remark quoted above.
Now consider a later exchange in that meeting.
Kissinger: “But why is it against our interests? I understand the argument that it’s against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?”
Enders: “It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 1 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control—“
Kissinger: “But that’s a balance of payments problem.”
Enders: “Yes, but it’s a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power.”