The abolishment of the Dollar-Gold-Standard in 1973 is usually forgotten. Surprisingly even in economics it is not teached or discussed even though it provides a great example to economists about monetary policy, an economists role, and how important to the comma exact regressions are in reality (hint: less than you think). However, with the little which is provided now in historical archives of this incident we can already see the bottom line:
1. The US had a clear Agenda of demonetizing the gold. The goal in the longer run which they achieved was to get the Gold out of the monetary system. The reason is clear: Gold would have restricted the US empire to put the cost of its wars and expansion on the shoulders of others (especially the Europeans).
2. Central banks are not independent. All the above decisions were made in the oval office, i.e. the state not the FED. FED officials are supposed to serve a function. They are under constant political pressure and have to make compromises. Some crucial monetary variables are even fully out of their control like the decision of a gold standard or not or government debt management. In that case it doesn’t even matter how benevolent the FED is.
3. Reserve currency status is untouchable. Any theat to the reserve currency status and the enormous importance of the US banking (clearing) system is monitored with high attention. Foreign policy is used to maintain the status. A reserve currency allows the homeland to keep the peripheral dependent and always ‘linked’ to the center. Once you are dependent on dollars, you are at their will. In capitalism power expresses itself in and is reinforced by the monetary system as the appearence of money produces intended human behavior. Hint: In the current Ukrainian-Russian-USA conflict we see Putin exactly playing with the reserve currency status of the dollar as he knows how much it matters to the US while Western is not getting the full range of this.
My conclusion of this is as short as sad: Points 1-3 are all relevant to understand monetary economics. These facts have to be taken into account if economists want to really add value to public discussion (and if there are any, who feel that craving to actually understand the monetary phenomenon). Questions suddenly appear: Which is the White House’s agenda on the dollars position in the world today? To what extent does such an agenda influence todays monetary policy both at the FED and the White House? What are their instruments (IMF, DOJ, etc.)
And now to some enlightening quotes from the main characters of the drama. I just copied some of them and they are not necessarily consecutively. Interested (or skeptical 😉 ) readers may follow the provided links to the original documents.
Washington, April 25, 1974; Minutes of Secretary of State Kissinger’s Principals and Regionals Staff Meeting
[. . . ]
Secretary Kissinger: Now, I had one deal with Shultz—never to discuss gold at this staff meeting—because his estimate of what would appear in the newspapers from staff meetings is about the same as mine.
[. . . ]
The agenda shall not be public.
Mr. Enders: [. . . ] 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; [. . . ].
It is the “traditional goal” of the US to demonetize gold…
Secretary Kissinger: [. . . ] they’re in effect putting gold back into the system at a higher price.
Mr. Enders: Correct.
Secretary Kissinger: Now, that’s what we have consistently opposed.
The Europeans wanted to use their gold to setup a new gold standard to protect themselves from the continuous dollar “printing”. They planned to back their currency with gold putting it ‘back into the system at a higher price’. A serious threat to the reserve currency status.
Mr. Enders: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.
So, in effect, I think what you’ve got here is you’ve got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.
There are two things wrong with this.
Secretary Kissinger: And we would be on the outside.
Obviously the White House knew that there are such things like a small group of bankers dominating crucial world decisions. A blind spot of current economics. Of course it does not lack any irony that they fear that a few central bankers determine the money value among themselves.
Secretary Kissinger: Why did the Germans agree to it?
Mr. Enders: The Germans agreed to it, we’ve been told, on the basis that it would be discussed with the United States—conditional on United States approval.
Secretary Kissinger: They would be penalized for having held dollars.
Mr. Enders: They would be penalized for having held dollars. That probably doesn’t make very much difference to the Germans at the present time, given their very high reserves. However, I think that they may have come around to it on the basis that either we would oppose it—one—or, two, that they would have to pay up and finance the deficits of France and Italy by some means anyway; so why not let them try this proposal first?
Germany has to pay France’s and Italy’s current account deficits anyway. And the German government is fully aware of it. Sounds familiar?
Secretary Kissinger: I am just totally allergic to unilateral European decisions that fundamentally affect American interests—taken without consultation of the United States. And my tendency is to smash any attempt in which they do it until they learn that they can’t do it without talking to us.
That would be my basic instinct, apart from the merits of the issue.
The basic instinct: Europe is peripheral to the homeland US. Obama’s position on the NSA issues with europe now understood?
Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.
Secretary Kissinger: But the French would never go for this.
Mr. Enders: We can have a counter-proposal. There’s a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.
How to play the game. We see what institutions like the IMF and World Bank are there for ‘as well’. Are gold sales politically motivated today as well? Why would the IMF announce to sell 400t in 2009/2011?
Mr. 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 11 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—
Secretary Kissinger: But that’s a balance of payments problem.
Mr. 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. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible—no longer acceptable. Therefore, we have gone to special drawing rights, which is also equitable and could take account of some of the LDC interests and which spreads the power away from Europe.
Again just how much Europe’s gold standard ambition threatened the US.
Secretary Kissinger: Who’s with us on demonetizing gold?
Mr. Enders: I think we could get the Germans with us on demonetizing gold, the Dutch and the British, over a very long period of time.
Secretary Kissinger: How about the Japs?
Mr. Enders: Yes. The Arabs have shown no great interest in gold.
Mr. Enders: It seems to me, Mr. Secretary, that we should try—not rule out, a priori, a demonetizing scenario, because we can both gain by this. That liberates gold at a higher price. We have gold, and some of the Europeans have gold. Our interests join theirs. This would be helpful; and it would also, on the other hand, gradually remove this dominant position that the Europeans have had in economic terms.
to “gradually remove this dominant position that the Europeans have had in economic terms”.
Mr. Enders: Yes. The Arabs have shown no great interest in gold.
Secretary Kissinger: We could stick them with a lot of gold.
Mr. Sisco: Yes. (Laughter.)
Mr. Sonnenfeldt: At those high-dollar prices. I don’t know why they’d want to take it.
Secretary Kissinger: For the bathroom fixtures in the Guest House in Rio. (Laughter.)
Laughing about corrupt buddy dictators.
Secretary Kissinger: The gold market is generally in cahoots with Arthur Burns.
Mr. Enders: Yes. That’s been my experience. So I think we’ve got to bring Arthur around.
Secretary Kissinger: Arthur is a reasonable man. Let me talk to him. It takes him a maddening long time to make a point, but he’s a reasonable man.
A “reasonable” economist is…
How it then was presented the Europeans is found here. In short, the same quasi-economic arguments that are early similar to today’s: “nobody wants to buy or sell” / “overly rigid financial system” etc.
Washington, June 1, 1974: Memorandum by Secretary of the Treasury Simon
The memo of what finally was decided and how independent the IMF was:
6. Gold valuation and settlement obligations should be removed from the Articles of the IMF and from other multilateral monetary agreements.
7. At a time when the change can be introduced without severe risk of market disruption, U.S. citizens should be granted permission to invest in gold, and it should be anticipated that the U.S. Government would sell sufficient gold from its stocks to insure that such permission did not have an undesirable effect on the U.S. international payments position.
Washington, June 3, 1974: Memorandum by the Chairman of the Council of Economic Advisers
Simply put: Then the Economic advisors i.e. economists can approve what has been decided earlier and give feedback.
Projections about how much the American households liked gold – in opposition to their politicians:
“Any estimate of the future American private demand is so wholly conjectural that we should not build policy on guesses that this demand will be small.”
Of course all of this gold-demonetization preceded a massive expansion of government (spending). This is why Nixon wanted the “easiest money man in town” to have the FED chair.
Washington, February 6, 1973: Conversation Among President Nixon, Secretary of the Treasury Shultz, and the Chairman of the FED Board of Governors (Burns)
A random quote, allowing us to dive more into the ways of how powerful people thought (think?):
Nixon: What about an international—is the time ever going to come, in the 3 years and 11 months we have left here, to have an international monetary—arrangement that’s going to mean anything? We don’t want to just lurch from crisis to crisis.
Burns: Hmm. Well [unclear]—
Shultz: Although I think this actually could—
Burns: This could—
Shultz: —help move the thing along, in the sense that—
Burns: Crises have a function.
The FED chairman knows how to use crises to push international monetary arrangements…