British Requests For $3 billion In US Treasury Gold – The Trigger That Closed The Gold Window

August 19, 2021

“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States." 

– Richard Nixon, Sunday 15 August 1971

Exactly 50 years have passed since the US Government famously suspended the convertibility of US dollars into gold on 15 August 1971 in a speech announced by then US president Richard Nixon.

This convertibility of US dollars into gold applied to US dollars held by foreign governments and foreign central banks, which based on the rules of the Bretton Woods monetary system, allowed them to legally show up anytime at the ‘gold window’ of the US Treasury and exchange their excess US dollars for physical US Treasury gold.   

There will be much written this month about the 50th anniversary of the closure of the US gold window, but less so about what exactly triggered it and why the timing had to be 15 August.

So without further ado, here is why, and it all revolves around the British ambassador to the US. the 3rd Earl of Cromer, a.k.a. George Rowland Baring, showing up at the US Treasury offices in Washington D.C. on 12 August 1971 and demanding that US dollars held by Britain be converted into gold.

A Weakening Dollar – The System under Strain

Early 1971 saw a noticeably growing US balance of payments deficit, with governments and central in major economies accumulating ever larger quantities of US dollars in volumes far exceeding the US Government’s (US Treasury’s) stock of gold. The US trade balance also moved into deficit.

In April 1971, major currencies began to appreciate against the US dollar in the forward markets, and currency volatility increased as central banks outside the US (chiefly in Europe) tried to stabilize their currencies against the US dollar by taking in large amounts of dollars and selling their domestic currencies (after expanding their own money supplies), which at the same time added to inflationary pressures in their economies.

This volatility caused Eurodollar interest rates to rise, which attracted further speculative dollar inflows into European countries led by West Germany, and triggered wider European currency trading bands as these currencies strengthened against the US dollar. On 10 May 1971 the Bundesbank was forced to float the Deutschemark, and the US dollar began falling in value against the West German currency.

This in turn led to the belief that the US dollar would be formally devalued, which in turn caused further speculative inflows into other currencies and out of the US dollar, and led to central banks in Europe holding huge amounts of unwanted US dollars.

On Friday 6 August 1971, Henry Reuss, Chairman of the Joint Economic Committee on Exchange and Payments, said that the US dollar was overvalued and the next day his Committee released a report reiterating this statement. This in turn caused further turmoil on the financial markets when they reopened on Monday 9 August 1971.

Panic about a Gold ‘Drain’

Given the limited amount of gold that the US Treasury held, or claimed to hold, versus the far larger amount of US dollars in the hands of ‘foreign’ central banks all over the world, this naturally caused panic in the US government and the US Treasury that the remaining US gold stockpile would be ‘drained’ by foreign central banks converting their huge US dollar balances into gold at the US Treasury gold window.

Dance off: Nixon and his economic advisors, Camp David, weekend of 13-15 August 1971. Source.

The panic to prevent a gold drain was clear even from early August 1971 and can be seen in a 2 August 1971 discussion between US president Richard Nixon, US Treasury Secretary John Connally, US Director of the Office of Management and Budget George Schultz, and White House Chief of Staff Bob Haldeman, which appears in the famous Nixon tapes.

This 2 August 1971 discussion is fascinatingly explained in a 2009 University of Delaware thesis submission paper by Scott W. Ohlmacher titled “The Dissolution of the Bretton Woods System, Evidence from the Nixon Tapes, August – December 1971

Ohlmacher writes:

Connally continues to stress just how important it is to stop the gold drain.”

Connally [direct quote]: ‘In the international field the problem is one – the convertibility of dollars into gold and we’re going to have to stop that at some point…Everybody, I say ‘everybody’, most people tend to think that ten billion dollars [in gold reserves] is the point below which we should not go.

Much later in the conversation, Nixon and Connally are joined by Haldeman. Connally and Haldeman detail just how serious the gold drain has become. Haldeman notes that the United States has lost $850 million in gold reserves in the week of August 2, 1971 alone.

Connally continues that the French have called in over $1 billion in reserves in the past few weeks and that the Germans and the Dutch are looking to call in some $200-250 million more. Connally thinks that the President could hold on a decision until mid-September, but not later.

[Source: Tape – August 2, 1971 (Conversation Number 553-6) Nixon with Connally and Shultz. White House Chief of Staff H.R. “Bob” Haldeman enters later. “The Dissolution of the Bretton Woods System, Evidence from the Nixon Tapes, August – December 1971” By Scott W. Ohlmacher, 2009. Thesis submission, University of Delaware] 

US President Richard Nixon and US Treasury Secretary John Connally in the Oval Office, Washington DC.

France Spooks the Yanks

The list of countries demanding US gold during July 1971 included Switzerland, which bought $50 million in US Treasury gold, and France, which converted $191 million into gold. These gold transactions are confirmed by a 21 July 1971 US Federal Reserve Board of Governors report which states that:

“In official transactions this month…the U.S. Treasury sold $50 million equivalent of gold to Switzerland.

“In August the U.K. and France will be repaying $638 million and $600 million equivalent, respectively, to the IMF. France has already notified the U.S. Treasury of its intention to purchase the $191 million in gold required for its [IMF] Fund repayment.”  

(Source – Fed Greenbook 21 July 1971)

This $191 million gold sale to France did definitely go through in early August as the August 1971 Fed Greenbook states that:

“Late in the afternoon of Friday, August 6, the U.S. announced its Fund drawing of $862 million equivalent in Belgian francs and Dutch guilders plus the sale of $191 million in gold to France.

Source – Fed Greenbook 18 August 1971)

 A sum of US $191 million at $35 per troy ounce would mean France purchased 5.457 million ozs of gold (169.74 tonnes). This could have been the same gold which the French are said to have then transported back to France by military ship from the east coast of the United States (see below). As the Banque de France is an IMF gold depository, it would still be logical to bring the gold back to Paris since the gold purchase was intended to pay back the IMF and could be transferred into the IMF gold holdings at the Banque de France.

In addition to this $191 million gold purchase by France, it appears that in early August 1971, the French wanted to buy even more US Treasury gold and maybe did so. The French had also, according to US Treasury Secretary Connally (see above) “called in over $1 billion in reserves in the past few weeks.

But beyond this, the British request for US Treasury gold was the main event of August 1971.  There is ample evidence in everything from archives to academic papers to the memoirs of the US Government officials involved, that it was French but crucially British requests to exchange US dollars for gold in the week prior to 15 August that forced the US government to close the gold window and suspend US dollar convertibility into physical gold.

Nixon gets ready for TV announcement of the suspension of US dollar convertibility into gold, 15 August 1971. Source

A quick review of some of these sources adds color to proceedings. Note that the French president at the time in 1971 was Georges Pompidou. The British prime minister at the time in 1971 was Edward Heath. The US president at the time in 1971 was Richard Nixon.

Hello Chaps, We’d like $3 Billion in Gold

In a 2016 article by Chris Barber titled “The Burden of Bretton Woods” published by the Nixon Foundation, Barber writes that:

In the second week of August 1971, the British ambassador appeared before the United States Treasury and asked that $3 billion be converted into gold to act as “cover” for all their dollar assets.

It was then, in the midst of impending economic calamity, that Nixon had to confront the major crisis.

In 2017, a NBER working paper by Michael D. Bordo, tells us that:

“The decision to suspend gold convertibility by President Richard Nixon on August 15 1971 was triggered by French and British intentions in early August to convert dollars into gold.”

[Source: “The Operation and Demise of the Bretton Woods System; 1958 to 1971” Michael D. Bordo, Working Paper 23189, National Bureau Of Economic Research (NBER)]

In 2011, the well-known Yanis Varoufakis (who would go on to be Greek Minister of Finance in 2015) in an article about currency unions and recycling dollar surpluses tells us that:

“In August of 1971 the French government decided to make a very public statement of its annoyance at the United States’ policies: President George Pompidou ordered a destroyer to sail to New Jersey to redeem US dollars for gold held at Fort Knox, as was his right under Bretton Woods!

A few days later, the British government of Edward Heath issued a similar request, though without employing the Royal Navy, demanding gold equivalent to $3 billion held by the Bank of England. Poor, luckless Pompidou and Heath: They had rushed in where angels fear to tread!”

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Gold is widespread in low concentrations in all igneous rocks.

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