Free Gold by Matthew Hart Page B

flow of money out of the United States would in time be matched by money flowing back in, as the reconstructed national economies gained the ability to buy American products.
    For a while, that’s how it did work, with Japan and Europe “eager for dollars they could spend on American cars, steel and machinery.” But beginning in 1950, the U.S. share of world output dropped from 35 percent to 27 percent. Also, American spending, especially on the Vietnam War, deluged the world with dollars. In one indicator of this trend, foreign-owned dollar deposits in U.S. banks and foreign-owned purchases of U.S. government debt more than doubled between 1950 and 1960, from $8 billion to $20 billion, and that was before the Vietnam spending took off. Other countries’ citizens were not spending the money as fast as they were banking it. Americans bought the goods produced in the new factories of other countries, factories often built with American capital, but those countries did not buy as much from the United States.Surplusdollar holdings built up in the central banks of foreign countries. In the gold-standard regime, that would signal the balancing of books. Bullion would leave American ports for European and Asian destinations. And that’s what happened.
    At the center of the Bretton Woods system lay that old serpent, gold. While the main financial action ran on dollars, gold convertibility still backed those dollars. In the first postwar years, because the currency was what everybody wanted, dollar convertibility was essentially a technicality. This technicality changed to practice with crushing speed.In a span of only thirteen years, the combined effect of international largesse and foreign war, a global military establishment and trade deficits, drained the Treasury of the United States of half its gold. Moreover, the number of foreigners holding U.S. government debt had doubled. If foreign creditors had all at once cashed in their dollars for gold, the U.S. gold stock would have vanished. Only the fear of provoking a run on the dollar and undermining their own dollar holdings prevented foreign owners of U.S. banknotes from cashing them in. But the world was getting edgy. At a point when the United States owed $60 billion and its gold stock was $12 billion, a French economist pointed out that asking America to pay its debts in gold was pointless: “It’s like telling a bald man to comb his hair,” he said. “It isn’t there.”
    In early 1965 the French president, Charles de Gaulle, fuming at America, told a press conference at the Elysée Palace that the dollar had lost the right to be the world’s money, and the international community should return to the only standard that made sense.“Gold!” he intoned, the standard that “has no nationality” and “is eternally and universally accepted.”
    Two years later, de Gaulle again displayed his pique with the status quo, pulling France out of a system called the London Gold Pool.The pool was a price-fixing cartel of eight governments: the United States, Britain, Germany, France, Italy, Switzerland, Belgium, and the Netherlands. It maintained the official gold price of the Bretton Woods arrangement: $35 an ounce. To stop speculators bidding up the price, the pool would dump gold into the market to satisfy any demand, always ready to sell at $35. But speculators, betting that this support could not last, amassed large holdings. They believed that the $35 price would crumble, and that it would have to rise as faith in the dollar fell. Not long after de Gaulle took France and its gold out of the pool, the United States had to transfer almost $1 billion in gold to London to sell at $35 to buyers who would otherwise have paid more, destroying the official price. The speculators saw the $35 price as a bargain. Gold, in this view, was on sale, and eventually that sale would end.
    The pool members struggled against the