19. MY FRIEND THE GNOME OF ZURICH SAYS A MAJOR MONEY CRISIS IS ON ITS WAY

Everybody reads about the Gnomes of Zurich, and people even sometimes talk about them when they are trying to puzzle their way through all the noise about gold problems, but I am the only man I know who really does know a genuine Gnome of Zurich. In fact, the Gnome of Zurich is staying at my house at the moment. He jets over every once in a while, plays with the kids, reaches up and pats the dog on the head, and explains gold and international money crises to me. This is very useful stuff, because if the Gnome of Zurich is right, we will get a major stock market debacle like nobody in this generation can imagine, suddenly, like a tornado out of a blue sky.

Notice I said Gnome, singular. There is only one Gnome of Zurich. That is my Gnome. “The other Gnomes,” says the Gnome of Zurich, “are really Gnomes of Basle, where the Bank for International Settlements is, or Gnomes of Geneva, where you get the Arab oil money and such as that. I am the only Gnome of Zurich, fol-de-rol-de-rally-o, and the very fact that the press keeps worrying about the Gnomes of Zurich plural just shows how unhip they are.”

Anyway, I have this working arrangement with the Gnome of Zurich, sort of a Distant Early Warning service, and the Gnome’s job is to keep me posted on gold so I can get out of the market before the price of money goes through the roof and all the gunslingers at the go-go funds do another job like they did a while back.

Gnomes, of course, are the original gold-bugs. They are related to the original Heinzelmaennchen, who worked in the mines, and distantly to the Hulduvolk, who were really pretty evil, and all that mine work gave them a fixation about gold. Currently most Gnomes are working in Switzerland, because they like to be near the gold, and are members of Geldarbeitsgeschrei Number 11, which is currently, I believe, affiliated with the Teamsters.

“The crisis,” said my friend the Gnome of Zurich, “will take Wall Street completely by surprise. Wall Street is only distantly related to economics and money, so it is not surprising that only seventeen people on Wall Street really understand money.”

Naturally I wanted to know right away who were the seventeen people. The Gnome of Zurich reached for one of my pre-Castro Montecristo Churchills, took his time about lighting up, and blew out the match carefully. “One of them is Robert Roosa at Brown Brothers,” he said, “and the other sixteen know who they are. That’s all I’m going to say, fol-de-rol-de-rally-o.” It is not the easiest thing in the world to deal with one of these damn Gnomes, but if we want to find Truth in the marketplace we must listen to all sides. You have to realize that my friend the Gnome of Zurich is biased, because the world looks different from three-feet-six than it does from six-three. After the Crisis, the Gnomes, according to the terms of their recent contract, will be custodians of all the gold, and will be a very rich union indeed. If you are really interested in all the technical details, maybe Robert Roosa, who used to tinker with these things at the Treasury Department, will tell you about them, but as I said, I am only interested because if the Gnome is right, you can forget about trying to outguess the market; the Crisis is one that will creep up from behind and mug you, because you don’t understand it.

Even though I learn a lot, I am never really happy to see the Gnome; the world, as T. S. Eliot said, cannot bear too much reality, and the Gnome counts himself a realist. So it was rather depressing to answer the front door and find the Gnome of Zurich with his little Swissair bag slung over his shoulder, but I listened.

“One day in spring, or maybe not in spring, it will either be raining or it won’t,” said the Gnome of Zurich. “The market will be hubbling and bubbling, there will be peace overtures in the air, housing starts will be up, and all the customers’ men will be watching the tape and dialing their customers as fast as they can. On Wednesday the market will run out of steam, and on Thursday it will weaken. Profit-taking, profit-taking, the savants will say. Do not listen. Call me.

“The only stocks to go up on Thursday will be American South Africa and Dome Mines, gold stocks, and there will be a perceptible flutter in the other golds—Western Deep Levels and such, and the South Africans with unpronounceable names like Blyvooruitzicht. On Friday the market will weaken some more, because the sixteen people I told you about will be moving; Robert Roosa will be in Washington.

“On Friday night the Treasury will make a quiet little announcement. I’ll explain it all a bit later. We live in a modern age, the Treasury will say. Gold is a barbaric relic. So we are cutting gold from the dollar; they will float free. Ho ho ho,” said the Gnome of Zurich, like the Jolly Green Giant commercials he watches.

“Monday morning the market will be down twenty points, and Tuesday morning, fifteen. Wednesday William McChesney Martin will say he has been wanting to resign for a long time. And when it is over—and it will be over fairly fast—the market will be down four hundred points. There will be chaos and shambles, and people will be looking for scapegoats. The scapegoat will be me. The Gnomes of Zurich did it, they will say, but by then we will have all the gold. Sticks and stones may break my bones—say anything you like.”

“Help yourself,” I told the Gnome of Zurich, because his fingers are creeping into the cigar box, and I wanted to know why this Crisis was coming and ways that maybe it wouldn’t come so the wonderful stock market can keep going.

“Don’t mind if I do,” said the Gnome of Zurich.

The phrase “the Gnomes of Zurich” was coined by George Brown, the Deputy Prime Minister of Great Britain. The year was 1964, and the Labour Government had just squeaked in. The Labour people had been waiting to get in for a long time and they had a lot of plans, so it was very frustrating to get into power and find that the plans had to wait because Britain was facing a Financial Crisis. Very simply, They—whoever They are, perhaps the international branch of They—took a look at Britain’s trade balances and balance sheet and decided to sell sterling. Then all the currency speculators began to sell sterling, and pretty soon nobody was buying sterling except the Bank of England, which has to, and poor Mr. Hayes from the Federal Reserve Bank of New York had to stay up all night getting the financial surgeons together and preparing a massive trans-Atlantic transfusion. George Brown lashed out at the International Conspirators who were out to make a killing by busting the pound—and England in the process. “It is the Gnomes of Zurich,” he said, rolling the words out with hatred, lingering over them, pronouncing the g hard in Gnomes, making it a two-syllable word. Thus the Gnomes of Zurich came to stand for International Speculators, or for skeptics. But as I told you, most Gnomes are in Basle and Geneva, and the Zurich Gnome is at my house.

“Skeptics, yes,” said my friend the Gnome of Zurich. “We stand for disbelief. We are basically cynical about the ability of men to manage their affairs rationally for very long. Particularly politicians. Politicians promise things to the people for which they cannot pay. So we Gnomes stand for Reality, or discipline, if you will. Without us, the printing presses of every government would simply print currency, there would be wild inflation, and in no time the world would be back to barter.”

I told you the Gnome of Zurich was biased.

“Whether we have a crisis or not,” said my friend the Gnome of Zurich, “depends on who wins the race between belief and disbelief. The dollar is the real international currency. Some may always wish to believe in it, because the alternative is shambles, international trade crumbling from uncertainty. So the nations of the world get together and try to set up something else, a kind of international checking account. Meanwhile the disbelief in the dollar is growing, because every year there is a balance of payments deficit.”

When I hear the words “balance of payments” and “deficit” I start to get a headache. It is only the thought of Xerox dropping from 230 to 18 and General Motors from 74 to 8 that makes me pay attention.

“Let me get this right,” I said. “If we fix up the balance of payments, then everybody believes in the dollar for a while longer, time enough to set up an international currency. So that’s all we have to do.”

“That would be a good start,” said the Gnome of Zurich. “But nevva happen.”

The Gnome of Zurich is a cynic, I told you. Now about this balance of payments stuff, you have probably been all through it. In trade the United States is in pretty good shape—a couple billion more coming in from sales of soybeans and wheat and aircraft than go out for the Volkswagens and Scotch and copper. But then the tourists take wing—more of them every year—and scatter dollars abroad like autumn leaves. Zap goes the beautiful trade balance.

“Very easy to fix,” I said. “We put a big airport head tax on everybody leaving the country.”

“I foresee that,” said the Gnome of Zurich, “but it is politically unpalatable, interfering with the basic right of Americans to travel. And you are further along toward Judgment Day than most people know. The Treasury has suggested a thirty percent tax on foreign stocks, so already Americans are finding it tough to invest abroad. The Treasury has already renegotiated all the foreign debts, and Mr. Roosa’s currency swaps are well oiled. Now you are selling off assets of the U.S. Government, called participation certificates, a very pretty bookkeeping trick. But the hourglass is running and we are getting down to the real nitty-gritty.”

“How else can we fix this problem?” I asked, mentally fingering the portfolio.

“You could bring your quarter of a million troops and all their wives and PXs home from Germany,” said the Gnome of Zurich. “Mr. Krupp is building plants all over the Communist countries. Fiat is going to make cars in Russia, and so is Renault. The Europeans do not seem scared of the Russians.”

“But we’re committed to stay,” I said.

“The Germans want the troops—it’s better than a quarter of a million tourists—but they don’t want to pay for them,” said the Gnome.

“We’re committed. What else?”

“There’s Vietnam,” said the Gnome of Zurich. “Now, I care nothing about politics—only about money. And Vietnam is costing you a lot of gold. You know that the money you spend there goes into the Bank of Indochina, owned by the French, and then goes back to Paris, where it becomes a claim presented in New York for gold. But did you know the Chinese actually take the gold home?”

“Chinese? What Chinese? How?”

“Easy. Out of the black market in Saigon—and you know even soap distributed to villagers shows up in the black market, not to mention all the goods stolen right on the docks—out of the black market come dollars to Hanoi, sent by Charlie—the Viet Cong. They go from Hanoi to Hong Kong, where the Bank of China (Mainland) exchanges them for External Sterling. This is presented as a gold demand to the London Gold Pool, and the gold bars are shipped via Pakistan International Airlines, London to Karachi to Peking. So you lose twice there, both the means and the gold, because you are providing fifty percent of the London Gold Pool.”

At this point I began to get skeptical; it all sounded a little too James Bond-y.

“Not at all, it’s reported in your own papers. The Engineering and Mining Journal, for example. Ask anybody. Ask Franz Pick.”

Franz Pick is a currency expert. All of a sudden my headache is worse.

“Well, if you know a way out of Vietnam, I’m sure President Johnson would like to hear it,” I said.

“Politics are not my trade, gold is,” said the Gnome of Zurich. “I could go on with specifics, but perhaps a generalization would help. You have the mightiest economy in the world. Even the Vietnam war hardly makes a dent in it; you are spending a smaller percentage of gross national product this year on arms than six years ago. But internationally, you do have problems. Your posture in the world does not match your resources. This is not 1948. You are not the benevolent father of everybody in the world. It’s very difficult to reconcile your posture of saving the world with your balance of payments deficit. I suspect it is because you did save the world, and the statesmen who produced this triumph are still in power. Men tend to linger over their triumphs. So you fight in Vietnam and keep troops in Germany and provide liquidity for the world because that was the way things were done in the hours of triumph, twenty years ago. But your triumph was twenty years ago, memories are short. Gold is hard. The claims on your gold are already twice the amount you have, even if you remove the gold backing from your currency. When money is owed, the creditor pipes the tune. Look at England in 1964. Before you and the Boys in Basle would throw them the life preserver, you made them promise to shape up, and well you should have. A Labour Government had to put workingmen out of work. Irony.”

By now my head is throbbing, and I have to repeat, “Xerox, two hundred and thirty to eighteen” to muster my motivation. Now, I know what happens in a Crisis. The Bank Rate goes to seven percent, business goes down the tube, and the stock market crumbles to powder. The Gnome now has me worried about the Crisis all right, but I still want to know the last mechanical details.

“You will hear a lot of nice-sounding phrases, and a lot of rationalizations,” said the Gnome of Zurich. “Propaganda, if you will, to cover mistakes. But 1966 was the first year in which there was a decrease in the gold stocks of all the major nations. All the gold that was produced last year went into the hands of hoarders, served, of course, by the International Brotherhood of Gnomes, Geldarbeitsgeschrei Number Eleven. Ask the First National City Bank. They wrote it up.”

“George Brown was right,” I said. There is a conspiracy. The Gnomes of Basle.”

“Only a conspiracy of skeptics, of realists,” said the Gnome of Zurich. “Now, your Treasury will never willingly devalue the dollar. But they are committed to supply gold at thirty-five dollars an ounce, and as the speculators get more and more of the gold and the Treasury has less and less, it’s obvious that one day Mother Hubbard will go to the cupboard and you know what happens then. The Treasury is worried.”

I demanded to know how the Gnome of Zurich knew all this, aside from being a card-carrying Gnome.

“On Mondays,” said the Gnome of Zurich, “at eleven-thirty there is a tennis game.”

“A tennis game?”

“A tennis game played on the single tennis court owned by the United States Federal Reserve.”

“The Federal Reserve has a tennis court?”

“I thought everybody knew that. Used to have more courts, but they needed the parking spaces. The tennis is doubles, the Federal Reserve versus the Treasury. William McChesney Martin has a mean forehand drive. Every once in a while the ball is hit out of the court. The ball boy returns it. I am the ball boy, and I listen well.”

By now I don’t know whether to believe the Gnome or not, so I call a man on the Washington Post and ask him where William McChesney Martin is at 11:45 on Mondays. The reporter says that William McChesney Martin is usually playing tennis at that hour, just before he speeds up to have lunch with Henry Fowler, Secretary of the Treasury.

“If you want to check on me further—my references,” said the Gnome of Zurich, handing them to me. “Call any of them. They know me.”

You can call the references yourself. Maybe you know them. There is Xenophon Zolitas, Governor of the Bank of Greece, and Dr. S. Posthuma of the Bank of The Netherlands, and the Britishers Reginald Maudling and Maxwell Stamp, and so on.

“There is,” said the Gnome, “one rabbit you could possibly pull out of the hat that would save you.”

“Give up Vietnam, Germany, and foreign travel,” I said.

“That’s not a rabbit. The rabbit I am referring to is called Project Goldfinger. It is the mission of the United States Treasury to solve the gold crisis by finding more gold right here.”

By this time I have just about had it with the Gnome and his James Bond shenanigans, but then there are these lingering doubts—the Federal Reserve does have a tennis court, and so on.

“Technology does marvelous things in this day and age,” said the Gnome. “So Dr. Donald Hornig, scientific adviser to the President, was given the mission of finding more gold in the United States, preferably on Federal lands, using modern scientific techniques, laser beams for boring, infrared spectrometers, spectrophotometric determination, and I don’t know what all. There may be gold in Maine, in Texas, who knows, in Central Park.”

You begin to hear that James Bond music?

“The Treasury thinks Project Goldfinger might save you, but I don’t,” said the Gnome, “although it would certainly give you time. In the end, you can’t keep techniques a secret, and if there is gold in Central Park there is also gold in the Bois de Boulogne. If there is gold everywhere, the problem comes back, gold sells for fifty cents an ounce. Sooner or later you have to come to reality, and stop being father to the world. Lead it, yes. Buy it no. Fol-de-rol-de-rally-o.”

The Gnome went out to play in the sandbox and I started to mull about his sermon. It is Gnome-oriented, of course. There must be another side. What about all the companies we own abroad? If the French get nasty, we remind them we own Simca, or Chrysler does. What about all the learned gentlemen in the Group of Ten, the IMF, the 216 economists in the Treasury working on this, and so on. No government—not even the French—is going to trigger off a financial mushroom cloud. And governments these days are bigger than all the speculators put together.

Or are they? How come the speculators sopped up more gold last year than all the major nations?

To cheer up, I called up my favorite roomful of gunslingers, who were busy trading stocks to each other. I told them we better be wary of the market, there is a cloud up there no bigger than a man’s hand, the transistor radios stolen from the GIs are turning into gold in London, and those Pakistan Airlines planes are carrying it right to Peking. My friend Charley said I was crazy.

“Come on down,” he said. “We bought a stock yesterday that’s up twenty-five percent today. Buy some, it’ll make you feel better. Listen to that tape. Enjoy, enjoy.”

“I just told you we were heading for a gold crisis,” I said. “I have it from a card-carrying member of Geldarbeitsgeschrei Number Eleven, William McChesney Martin’s ball-boy.”

“Forget it,” Charley said. “The gold-bugs have been around forever. The market still has gas. Who understands gold, anyway? And how can you worry about something you can’t understand?”