Operation Return to Gold

In 1944, the United States became the world’s supplier of safe financial assets.

As agreed at the conference held in Bretton Woods, New Hampshire, only the US dollar would be convertible to gold. Other major currencies would have an indirect link, through a fixed exchange rate to the dollar.

(American citizens, strangely, could not exchange their dollars for gold. Only central banks.)

The agreement made the US “the world’s sole banker in charge of supplying the rest of the world with safe dollar-denominated assets,” as economist Hanno Lustig explains.

This was inadvertent. No one thought of the Bretton-Woods system in those terms until much later.

It was also inevitable; the US held 70% of the world’s supply of gold at the time and accounted for 50% of the world’s manufacturing output.

Central banks, seeking a link to gold and needing to buy industrial equipment for their rebuilding economies, had nowhere else to go besides the US dollar.

Not everyone was happy with the arrangement.

President Charles de Gaulle resented the “exorbitant privilege” that Bretton Woods seemed to bestow on the US, arguing that it allowed the US “to incur debt to foreign countries at no cost.”

That made issuing Treasuries a new form of seigniorage that only the US could collect, and which de Gaulle did not appreciate paying.

Additionally, de Gaulle’s advisors warned that the Bretton-Woods system was unsustainable — the US would eventually have to devalue the dollar relative to gold, they predicted. 

So in the 1960s, with its economy booming, France began converting the dollars their exporters earned into gold, at the rate agreed at Bretton Woods.

But rather than leave their gold in US vaults, as was the norm, de Gaulle went further, launching l'opération vide-gousset — Operation Empty the Pocket — to bring the gold home.

The operation proceeded discreetly over several years, with gold shipped back to France in the cargo holds of ocean liners.

In the final trip, however, France made a show of it. 

In August 1971, the French sent a guided-missile destroyer to New York Harbor to transport roughly 200 million in gold back to France.

That was not an act of war against the US, of course — but it was unmistakably a shot fired at the US dollar.

It seemed to hit the bullseye. Just days later President Nixon announced that the dollar would no longer be convertible to gold.

This was, first and foremost, a recognition of reality. 

The pockets of the US Treasury were effectively empty by then, drained in part by de Gaulle’s operation, but mostly by the budget deficits the US had been running to pay for the Vietnam War, the Cold War, and LBJ’s Great Society.

Two years later, the post-war system of fixed exchange rates was also abandoned, formally marking the end of the Bretton Woods agreement. 

It was not, however, the end of America’s role as the world’s provider of safe assets.

To de Gaulle’s great annoyance (I’m guessing), the world’s central banks continued to use the US dollar as their primary reserve asset.

Gold, it turned out, had very little to do with the dollar’s reserve status. Instead, the world wanted dollars because the US had the largest, most liquid, most open financial markets, strong property rights, and trusted institutions.

It still does, and as a result, the US continues to enjoy its exorbitant privilege, five decades after the end of Bretton Woods.

Lately, however, there have been signs this might finally be changing.

Treasuries are no longer where investors go to hide: “It is hard for Treasuries to be safe havens when the American government itself is driving the turmoil,” the Economist recently opined.

US institutions are less trusted: A Swedish pension fund recently cited the “reduced predictability” of the US government in its decision to divest from Treasuries.

Most worryingly, the dollar is losing its near-monopoly as a reserve currency: This morning, Bloomberg reported that China has told its banks to reduce their holdings of US government debt.

To sum up: After a decade of shouting into the wind, Bitcoiners may be on the verge of being proven right about everything. 

Except the price of bitcoin.

The most tangible manifestation of declining trust in the dollar is the price of gold, which is up 74% over the past year.

Digital gold, however, is down 27%.

Bitcoin is meant to be just like gold — a store of value with no issuer — but better because bitcoin, being digital, is also useful in payments. 

That’s partly why the dollar became the world’s reserve currency at Bretton Woods — because it was easier to move than gold, no warships required. 

Bitcoin is even easier to move than that — no banks required. 

Now would seem to be the perfect time for such a thing as digital gold. The world is clamoring for a new store of value and a new payments system.

But even if America’s pockets are finally empty, Bitcoin doesn’t appear to be it.

— Byron Gilliam

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