This blog is based on an article forthcoming in the Economic History Review, now available on Early View at the following address: https://onlinelibrary.wiley.com/doi/10.1111/ehr.13052
By James L. Butkiewicz (University of Delaware) and Scott Ohlmacher (US Census Bureau)*
*Any opinions and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Census Bureau.
On 15 August, 1971, President Richard Nixon shocked the world by ending the Bretton Woods international monetary system the United States had created in 1944. The system had been under pressure almost from its outset, as US balance of payments deficits eroded the US gold reserve. As speculative pressure mounted during the summer of 1971, Nixon reluctantly suspended gold convertibility and floated the dollar, setting in motion a series of decisions that ultimately ended the fixed exchange rate system. Using Nixon’s Secret White House Tapes, our paper provides an insider’s view of this crucial policy decision.
The driving force for changing the Bretton Woods System was Treasury Undersecretary Paul Volcker, who believed that a fixed exchange rate system based on the US dollar would continue to be workable only with a significant realignment of exchange rates. Volcker’s plan to obtain a realignment was to temporarily suspend convertibility, float the dollar, and impose a three month wage-price freeze to control inflationary effects. Volcker also wanted policies that would control inflation in the long-run, and he regretted not explicitly including these in his proposed plan. Treasury Secretary John Connally added a 10 per cent import surcharge, tax cuts and credits, trade restrictions, and a vague proposal to extend price controls to make the proposal more politically viable.
President Nixon readily agreed to the domestic policy proposals, but he feared floating the dollar and suspending gold convertibility would be politically damaging, and strenuously resisted the international proposals. However, a news report that a Congressional subcommittee urged devaluation incited speculation against the dollar beginning on Monday, 9 August. At a meeting on 12 August, with Connally and Director of the Office of Management and Budget George Shultz, Nixon agreed to the entire plan and decided to bring his economic team to the presidential retreat at Camp David for a long weekend to co-opt their approval. The policies had been decided prior to the famed Camp David summit, although once there, Nixon wavered about suspending gold convertibility, but ultimately decided to implement the entire plan. Nixon announced his new economic policies to an unsuspecting world on Sunday, 15 August, 1971.
In the realignment negotiations, the US initially adopted a hard line, insisting that other trading partners significantly realign their exchange rates while the US maintained its gold price at $35 per ounce. The US also wanted a reduction in tariffs and quotas and financial assistance with the costs of defending the free world. The French insisted that the US revalue its gold price; a French revaluation with a fixed US price of gold would be financially harmful to the many French citizens who held monetary gold.
At a meeting with President Pompidou in early December, Nixon acquiesced to increasing the dollar price of gold to $38 per ounce. Subsequently, with the Smithsonian Agreement, the Group of Ten nations agreed to a realignment, devaluing the dollar, and the maintenance of fixed exchange rates. The realignment was less than the US wanted, and the agreement did not include any changes in trade policy or sharing of the costs of defense.
Trading partners wanted the US to discipline its macroeconomic policies to control inflation. The ‘policy trilemma’ demonstrates the incompatibility of fixed exchange rates, openness to international capital flows, and an independent monetary policy. Nixon had relaxed some restrictions on capital mobility and wanted to eliminate all restrictions. Following the Smithsonian Agreement, Nixon constantly railed against restraining domestic monetary policy to defend the fixed exchange rate, and he consistently opposed restoration of gold convertibility. Nixon continually pressured Federal Reserve chairman Arthur Burns to pursue expansionary monetary policy to increase growth and reduce unemployment in support of his 1972 re-election.
George Shultz succeeded Connally as Treasury Secretary, and Nixon developed great confidence in Shultz’ economic advice. Shultz was a strong advocate of floating exchange rates, as was his University of Chicago colleague and informal presidential advisor, Milton Friedman. Both advocated a floating exchange rate regime and the need to restrict the money supply to defend the exchange rate. Nixon, however, was opposed to monetary restraint.
As US inflation soared, the US balance of payments deficit increased. Trading partners were forced to absorb dollar assets to maintain fixed exchange rates, which increased their money supplies and rates of inflation. The dollar was revalued again on 12 February, 1973. Speculation against the dollar continued, forcing Europeans to close foreign exchange markets on 1 March, 1973. When currency markets reopened two weeks later, exchange rates floated.
The United States initiated the 1944 Bretton Woods conference intending to eliminate the beggar-thy-neighbor policies of the 1930s. The intention was to design a system of fixed exchange rates and reduced trade restrictions to promote the expansion of international trade and overall economic growth. But this system, which operated only from the final days of 1958 until the Nixon shock, was plagued by continuing crises. The Secret White House Tapes reveal Nixon’s preference for open capital flows and a very expansionary monetary policy. With advisors who strongly advocated floating, the US drift toward floating exchange rates was inevitable.
To contact the authors :
James L. Butkiewicz, firstname.lastname@example.org
Scott Ohlmacher, email@example.com