Crosby, by now seated, seemed to have regained control of his emotions and answered, “Mr. President, you know that the annual meeting of the International Monetary Fund is taking place in Rome this week. Well, some of our so-called friends there have decided to gang up against the dollar. They plan to present us with a fait accompli.”
Now the president’s face did cloud over. The monetary issue, and the international weakness of the dollar, had been plaguing him ever since he had taken office. The problem had become critical with the breakdown of the gold-dollar link which had occurred in 1971. Until that time the world’s monetary system had functioned reasonably well. Under the rules established at the close of World War II when the IMF was founded, each nation had related its currency—marks, yens, francs, pesetas—to the U.S. dollar. Thus one Swiss franc had been “worth” about 23 cents, one German mark approximately 28 cents, and so forth. Everyone agreed that the dollar was the natural benchmark for all other currencies. For one, it was the currency of the largest and most powerful economic unit in the world. For another, the dollar was the only currency which was officially and directly tied to that most ancient medium of exchange and store of value—gold. Since 1934, by law, one U.S. dollar was worth 1/35 of an ounce of gold. The United States had declared to one and all throughout the world that any foreign government which wanted to cash in dollars for gold, or vice versa, could do so at the rate of $35 per ounce.
All this was very agreeable, since it meant that everybody in the world could look toward one standard of value, the American dollar. And for those really sticky types who did not especially hanker for newfangled money, there was always the ultimate comfort that if not they, at least their governments, could always get the real thing—gold.
In August 1971 this thought occurred to some of the more tricky Europeans who suspected that the dollar was getting a bit dicey. So they decided to opt for gold. The Belgians, the Swiss, the French of course, and even the Vatican. As you can imagine, this moment was more than just slightly awkward for the United States. How could it pay off over $65 billion in debts, when there was only $10 billion of gold left in Fort Knox?
The president’s advisors came up with what appeared to be a clever solution. The United States simply announced that the dollar was no longer convertible into gold. As simple as that. Payment was just stopped on all those IOUs which the United States had been issuing to the world in the form of dollar bills for many years past. Having done that, the American government proceeded to tell other nations that it was up to them collectively to find a solution to the world monetary crisis. A few months later the finance ministers of the eleven most powerful nations in the world met in Washington for just that purpose. But as so often before, the wise men of the world played midwife to a mouse. European governments and Japan agreed to revalue their currencies by a few percentage points if the United States devalued the dollar a few percentage points by raising the price of gold from $35 to $38 an ounce. With great pomp and ceremony at the Smithsonian Institution an agreement to this effect was signed, and with a huge sigh of relief the world went back to work as usual.
But there was an extremely serious flaw in the entire Washington settlement, which the U.S. president termed the greatest monetary agreement in the history of the world. It solved nothing. The dollar remained greatly overvalued. Convertibility of the dollar into gold was not restored. It could not be restored at $38 an ounce. If it had been, within hours the entire $10 billion worth of bullion in Fort Knox would have disappeared into the hands of foreign governments. The fact remained that there were still 65 billion unwanted dollars floating around the world, with more going out all the time, which anybody in his right mind would have exchanged for U.S. gold with the speed of light at the price of $38 an ounce. For the free market price of gold was moving inexorably toward $80 an ounce!
Inevitably, new crises occurred. In February of 1973, as a result of yet another run on the dollar, Uncle Sam had no choice but to devalue again, by raising the official price of gold to $42.22 an ounce. But, as before, it was just a temporary patchwork job. The dollar was still not convertible; it was still overvalued.
So the malaise lingered on—until the IMF meeting in Rome.
“Henry, what precisely happened?” asked the president.
“Well, I sent my undersecretary to the meeting with the usual instruction. Just keep the lid on. Do nothing, promise nothing. Stall. Tell ’em we’re working on it.”
“Which he did, I suppose.”
“Of course. And in the public sessions everyone could not have been more sympathetic toward our position. They all agreed that time would heal.”
“So?”
“So behind this public smokescreen, the French in their usual underhanded fashion, worked out a deal.”
“Go on.”
“The French first got to the Germans and convinced them that the time had come for the Common Market to take charge of the world monetary system. Together they bullied the rest of the member countries into going along with the plan. The Japs, our great friends in the East, got wind of it and joined the club immediately.”
“And their plan?”
“They will jointly tie their currencies directly to gold. At a higher price, of course. And all their currencies will be freely convertible into gold. Now you know what that means for us.”
“That the dollar becomes a satellite currency.”
“Right. In about the same class as the Polish zloty.”
“Those dirty bastards.”
“I’ve been telling you that for years.”
“All right,” responded the president, now irritated, “but first tell me how you know all this.”
“Our man in the German Ministry of Finance. He was asked to help work out the draft agreement. I’ve got it here. And as you’ll see, it’s already been initialled.”
Crosby reached into his briefcase and produced a bundle of Xeroxed documents.
“There can be absolutely no doubt of their authenticity.”
“O.K., Henry,” said the president, after taking just a cursory glance at the papers. “I believe you. What’s their timing?”
“On January 2 they’ll be making a joint announcement from Paris. They plan to make the whole thing operational immediately the next day.”
“But how in the world do they expect to get away with it? Surely they must realize that we will hear of this?”
“They probably do. But they figure, and correctly so, that they’ve got us over a barrel.”
“But are we? I’m not so sure,” said the president.
“What do you mean? You know as well as I do—”
“I know this: I’m not going to let the dollar become the laughingstock of the world. I’m not going to let Europe and Japan take over the international monetary system at our expense. God knows what they’ll try to take over next.”
“But how?”
“Quite simply. We’ll make a pre-emptive strike. We’ll put the official gold price right up to $125 an ounce and simultaneously return to full dollar-gold convertibility. And well before January 2.”
“But,” reasoned Crosby, “what will we do if there’s a run on gold? There are by now $75 billion out there that would become potentially convertible. I hardly need remind you that our gold supplies—”
“Look, Henry,” said the president, “Franklin Roosevelt was in the same position in 1934 when he raised the gold price from $20.67 to $35 an ounce. But he figured that the new price would attract a lot more sellers than buyers. And that’s exactly what happened. On dollars you can earn interest, good interest. On gold you cannot.”