Goldfinger as a critique of Bretton Woods — How a Bond villain exposed two fundamental flaws of the gold standard ButtChocolate Follow Jul 11, 2019 · 6 min read

The James Bond franchise is hardly known for its in-depth critiques of economics and global geopolitics. Bond villains usually have simple to understand but fantastical plots that could be defeated by our favorite vodka martini swilling super-spy, usually by beating the bad guy up. There is one exception however — Goldfinger. From the perspective of an economist, Goldfinger is a simple to understand critique of the gold standard and the Bretton Woods system. The titular character, Auric Goldfinger, exposed two core flaws of the post war economic system.

Note: spoilers ahead

Towards the beginning of the story, Bond is tasked with investigating the gold smuggling activities of Auric Goldfinger. As the Bank of England official explains to Bond, they suspect Goldfinger of smuggling gold from the UK to India. The price of gold is significantly higher in India then it is in the UK due to its strong jewelry industry. By smuggling gold out of the UK, Goldfinger is destabilizing the British economy.

The book dove into the details of Goldfinger’s scheme in a bit more depth than the movie did. In the novel, it was explained that Goldfinger purchased large quantities of gold in the UK at low prices. The gold then turned up in India, where it was sold at prices up to 70% higher than in the UK. The bank of England cannot figure out how the gold was being moved — this is where Bond comes in.

To a modern viewer, there is nothing illegal about Goldfinger’s scheme besides perhaps some tax evasion. In fact, Goldfinger provided a vital service to the global economy. Demand for gold in the UK was very low, hence the low prices. Goldfinger purchased this gold, and moved it to India, where demand is high, and sold it at a profit. He engaged in arbitrage, and if it was any commodity other than gold, we would say that he provided a vital service in the market and make the economy more efficient. Why did the Bank of England consider him to be a treat to the stability of the international economy then? To understand this, we must first discuss how the Bretton Woods system operated.

Under the Bretton Woods system, the US dollar was pegged to gold at a price of $35 an ounce. Before 1967, £1 was pegged at being worth $2.80 USD. The Rupee was pegged to the dollar at ₹ 7.5 INR = $1 USD. Therefore, an ounce of gold was pegged at £12.5 GBP or ₹ 262.5 INR. The Federal Reserve maintained convertibility of gold and therefore, it was possible (with restrictions until 1971) to trade dollars to the Federal Reserve at the predetermined price of $35 an ounce.

Exchanged rates were pegged with each other, and due to the Federal Reserve converting dollars to gold, it meant that global currencies were indirectly pegged to the value of gold. However, the demand of gold differs between regions. The difference in demand makes it unrealistic to maintain a single worldwide price of gold. Yet without a worldwide consistent price of gold, the currency pegs will break down, destroying the world economy.

Therefore, governments worldwide instituted export controls limiting the imports and exports of gold. By buying gold in the UK and selling it in India, Goldfinger was driving up gold prices in the UK, while driving down gold prices in India. This, as the Bank of England official explained, puts pressure on the British pound, and unless Goldfinger’s activities are stopped, the UK will experience hyperinflation. In the case of gold, arbitrage literally destroyed the global financial system. The market must be inefficient, as an efficient gold market would create currency fluctuations that destroyed the Bretton Woods system of pegged currencies.

In monetary theory, there is a concept called the impossible trinity, which established that it is impossible for a currency to maintain a fixed foreign exchange rate, free capital movement, and independent monetary policy simultaneously. When a currency is pegged to another, only two of the three can be maintained.

As we can see the Bretton Woods system relied on a strict set of capital controls on the flow of gold. Without it, the peg cannot be maintained. A highly inefficient gold market with localized shortages was just an inevitability of the capital controls. Attempts at arbitrage must be stamped out, or else the (unrealistic) pegs can no longer be maintained. Legitimate industrial activities involving gold were thus the roadkill of the gold standard, they were run over by the central banks and doomed to suffer from shortages.

Later in the film, in one of the great villain speeches, Goldfinger revealed to Bond his great plan — Operation Grand Slam. Goldfinger, with the collaboration of the Chinese (presumably the Peoples Republic, not the Republic of China) will irradiate all the gold in Fort Knox.

In the book, Goldfinger intended to steal the gold in Fort Knox, a plot point that was heavily criticized for being absurd. After all, it is impossible to quickly move the tons of gold in Fort Knox and get away with it (a fact that Bond pointed out in the film version). In the film however, Goldfinger wanted to detonate a dirty bomb in Fort Knox instead. By irradiating the world’s biggest stockpile of gold and therefore removing it from circulation, Goldfinger would cause immeasurable damage to the global financial system while massively enriching himself. The Peoples Republic of China, as a country who did not participate in the Bretton Woods system, also stood to gain from the resulting chaos in the global economic system.

Imagine what would happen if Goldfinger successfully removed a large portion of the world’s gold reserves from circulation. Central banks who participated in the Bretton Woods system need to react in one of two ways, either they devalue their currencies significantly, thereby allowing Goldfinger to trade his gold for a lot more dollars; Or they will have to somehow force their currencies to rapidly appreciate, to maintain that $35/ounce peg despite the rapidly appreciating value of gold.

Goldfinger therefore revealed another major weakness in the gold standard — Central banks are forever at the mercy of trends in the gold market. Gold after all, is a commodity with its own demand and supply, and changes in demand or availability of gold forces central banks to react accordingly to defend their peg.

Federal Reserve chairman Jerome Powell recently explained, that the gold standard is detrimental to the capabilities of the Federal Reserve in achieving their two mandates: maximizing employment and stabilizing prices. He claims that “There have been plenty of times in fairly recent history where the price of gold has sent a signal that would be quite negative for either of those goals”. Under the gold standard, monetary policy would have to follow the trends of the gold market, there would be no independent monetary policy to support the dual mandates of the federal reserve. To defend the peg, if Goldfinger irradiates Ford Knox, the dollar must appreciate. If Mansa Musa comes to town and crashes the price of gold, the dollar must depreciate.

Throughout history, various commodities have seen their prices spike and collapse. These fluctuations in commodity prices have caused economic distress, but none of them could possible cause a structural collapse of global currencies like a fluctuation in the price of gold could in a gold standard system. If Goldfinger was successful in removing a large portion of the world’s gold from circulation, he could instantaneously damage the world economy more than the Japanese real estate bubble, the energy shock, the .com implosion, and the US real estate bubble combined.

Going back to the Impossible Trinity theory, in order for the peg to the maintained, central banks must surrender their policy independence and implement monetary policy in lockstep with shifts in the gold market. The gold standard really puts central banks in the worst possible situation. They can only hold on to one of the three. In order for them to maintain the peg, capital controls must be instituted while monetary policy must move in lockstep alongside trends in the gold market.

Goldfinger expects more than just Bond to die, he expects Bretton Woods to die too!

In hindsight, we didn’t even need a Goldfinger to implode Bretton Woods, the system imploded on its own. Not even James Bond can save the inevitable decay of a flawed economic system. A few years after the film was released, economic mismanagement in the UK drove the government to devaluate the Pound Sterling in 1971 (effectively what Goldfinger was doing by selling British gold in India for a profit), while the Federal Reserve ended convertibility of gold to the US Dollar in 1971, or what would have probably happened if Operation Grand Slam succeeded.