“Let’s chat for a few minutes.” President Walters stepped behind the desk and took a seat in a comfortable leather recliner. Ben, Beverly, Graham, and I settled into the leather couch.
The president folded his hands on the desk and stared at us. “Before we start, I want to thank you for joining us. Your presence will go a long way toward selling the American people on my economic plan.”
“Plan?” I frowned. “What plan?”
The president glanced at Donovan. “Didn’t you brief them?”
Donovan’s face turned beet red. “Not exactly, sir.”
The president sighed. “Well, I guess we’ll get to that part. But first, I’ve asked Keith and Ben to talk a little about the Fort Knox depository as well as the recent history of the American monetary system.”
I had no idea what was going on, but I was starting to realize it was much bigger than merely touring America’s so-called treasure chest.
Donovan turned toward us. “As you know, we’re flying to Fort Knox, a U.S. Army base located in Kentucky. And as you also know, we’ll be visiting the United States Bullion Depository while on the premises. Technically, the depository is operated by the Treasury Department. But the gold itself belongs to the Federal Reserve. It’s kept at Fort Knox, on deposit, as collateral against the national debt.”
“How much gold are we talking about?” Beverly asked.
“I, uh… hang on.” Donovan began flipping through his notepad.
“One hundred and forty-seven million fine troy ounces,” Ben told Beverly. “That represents the entirety of the Fed’s deep storage gold reserves.”
I arched an eyebrow. “Aren’t you forgetting the Denver depository?” I asked. “And the one at West Point?”
“It’s not well-known, but we’ve been forced to liquidate those reserves over the last few months.” He hesitated. “The reason will be apparent soon. But suffice it to say, certain central banks will no longer accept the U.S. dollar as payment for international transactions.”
This seemed like a troubling development, but I decided to leave it alone for the moment.
“Let’s say an ounce of gold goes for a thousand dollars.” Beverly looked at the roof, silently calculating numbers. “That’s $147 billion. Not bad, but nothing compared to the national debt.”
Donovan closed the notepad. “It’s just collateral. We’re not actually selling Fort Knox’s reserves.”
“We’re getting ahead of ourselves here.” Ben paused. “Do any of you know how Fort Knox got its gold in the first place?”
We shook our heads.
“Once upon a time, the U.S. currency was backed by gold,” Ben said. “A person could take a sack of gold powder into a bank and exchange it at $20.67 per ounce. That changed in 1933 when President Roosevelt issued Executive Order 6102. It required Americans to give up their personal gold and bullion at that same price.”
I arched an eyebrow. “Required?”
He nodded. “Numerous Americans were prosecuted because of 6102. Their gold was seized and some of them actually went to jail.”
“Owning gold.” Graham chuckled humorlessly. “The ultimate crime.”
“I’m sure FDR had his reasons,” Donovan said defensively.
“He did. Mainly, he wanted to spend more money than the laws of the time allowed.” Ben paused. “Same as now, the Federal Reserve operated a fractional-reserve banking system. So, banks only needed to keep a fraction of gold deposits on hand. The rest could be used to make loans or investments. But such a system wasn’t risk-free.”
“You’re talking about bank runs,” I said.
“Exactly. If the public suddenly panicked, they might’ve tried to withdraw gold en masse. And since banks didn’t have enough gold to fulfill the demand, they would’ve defaulted.” He crossed his legs. “But if the public could no longer legally own gold, they couldn’t redeem it. And so, 6102 eliminated the risk of a gold-oriented bank run. This allowed the Federal Reserve to create as much money as it wanted. You could argue that’s a good thing since it helped finance the massive government deficits during World War II. On the other hand, the ability to create lots of new money causes the nasty phenomenon known as inflation.”
We were silent for a moment.
“So, the U.S. government seized all of America’s gold. And of course, it needed a place to store it.” Beverly looked thoughtful. “I guess that explains why Fort Knox was built.”
Donovan nodded. “That’s correct.”
I glanced at Ben. “So, that was the end of the gold standard?”
“Not completely. Gold couldn’t be redeemed, but it was still tied to the dollar. This became apparent shortly after 6102. You see, the Treasury still used gold for international transactions. So, when President Roosevelt upped its official price to $35, there was some domestic fallout.”
“Why?” The president looked confused. “He got the gold at $20.67 and sold it at $35. That’s a 70 percent profit.”
“For the government, maybe. But think about it from the average American’s perspective. He got $20.67 for one ounce of gold. But if he wanted to buy that same ounce back, he’d have to pay $35.”
“Oh, I see.” President Walters nodded. “In other words, FDR devalued the dollar.”
“Actually, he destroyed its value. In one fell swoop, he cut the purchasing power by 40 percent.” Air Force One trembled ever so slightly. Ben waited for the turbulence to stop before continuing. “That leads us to Bretton Woods. In 1944, forty-four nations met in Bretton Woods, New Hampshire to establish a new global monetary system. Each nation agreed to peg its currency to the U.S. dollar. In turn, the U.S. agreed to continue linking the dollar to gold at $35 per ounce. Bretton Woods made the U.S. dollar the de-facto global currency. That system survived, for better or worse, until President Johnson took office. Between the Vietnam War and the Great Society, he pushed government spending to all new highs.”
“I remember that,” Graham said. “He called it his ‘guns and butter’ strategy.”
“That’s right. Eventually, President Nixon took office, but the spending didn’t end. And as the Federal Reserve printed more and more money to pay for its expenditures, the value of the dollar began to decline. The Bretton Woods signatories grew nervous. Their dollars were becoming worthless and they’d lost faith in the U.S. government’s ability to turn things around. So, they started trading in their dollars for gold at $35 per ounce.”
“And that gold came out of Fort Knox?” Beverly asked.
Ben nodded. “Prices started to rise and Americans got angry. Nixon tried to blame things on international speculators and bankers. When that didn’t work, he closed the gold window.”
I perked up. “The what?”
“The gold window. In other words, he stopped selling gold at $35 per ounce. Then he cut the link between the dollar and gold. Fort Knox was sealed off and America’s currency was set free to float with the tides.”
“Must’ve been quite a shock.”
“Oh, it was. Even Nixon’s own state department didn’t know about it until the official announcement.” Ben shrugged. “Americans, for the most part, loved it. They thought Nixon was rescuing them from price gougers and international bankers. Few people at the time realized Nixon’s spending, as well as the spending of his predecessors, had caused prices to rise in the first place.”
“And that leads us to today,” Donovan said. “Currently, America operates with a fiat currency. In other words, the U.S. dollar isn’t backed by gold or anything tangible. Instead, it’s backed by the full faith and credit of the United States government. The advantage of a fiat currency is that a country can always print new money and thus, never go bankrupt. The bad thing is that there’s nothing to restrain spending. And if you spend too much—”