The Johnson-Nixon Era


President Johnson and President Nixon.
photo credit: Nixon Presidential Materials Staff


Politicos and history buffs have developed an enduring fascination with Lyndon Johnson and Richard Nixon … as titanic political leaders, little inhibited by considerations of ethics, of the Cold War era. The gold-exchange standard — called by Rueff, in The Monetary Sin of the West, “an unbelievable collective mistake … an object of astonishment and scandal” — was from its inception doomed.  Presidents Johnson, and then Nixon, guaranteed and accelerated the demise of the world monetary order.  If it happens that they did so more out of hubris than malice, that is small consolation.

Lyndon B. Johnson

Francis Gavin is the Director of the Robert S. Strauss Center for International Security and Law and the first Tom Slick Professor of International Affairs at Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.

Prof. Barry Eichengreen, in a review of Gavin’s book Gold, Dollars, and Power: The Politics of International Monetary Relations , 1958-1971, Chapel Hill: University of North Carolina Press, 2004, observes:

Frances J. Gavin’s erudite account of the politics of international monetary relations in the Bretton Woods years has more in common with the second viewpoint. Gavin sees the Bretton Woods System as central to the Cold War bargain. European financial support for the dollar was the quid pro quo for U.S. military support for European security. But as the Europeans came to feel more secure and became more determined to shape their own security policy, that bargain grew less appealing. Once foreign support for the U.S. balance of payments was withdrawn, America faced a dilemma. It could withdraw from Europe, abrogating its foreign policy commitments and casting the world’s geopolitical future into doubt. Or it could impose controls on capital outflows, devalue the dollar, and close the gold window, abandoning economic multilateralism. Through the adoption of a series of expedients, the status quo survived through 1970, but inevitably it came tumbling down.

Gavin, in his essay Ideas, Power, and the Politics of America’s International Monetary Policy during the 1960s, puts matters most vividly:

In 1964, the James Bond thriller “Goldfinger,” was released in movie theaters throughout the United States and Great Britain. In the Ian Fleming novel on which the film was based, the sinister Goldfinger, ably assisted by Pussy Galore, plot to steal the American gold supply from Ft. Knox.2 But in the film, Bond is understandably skeptical that Goldfinger can physically remove tons of gold from the most secure building in the world. Goldfinger tells agent 007 that he does not have to physically remove it. Instead, he only needs to get inside Ft. Knox and explode a timed nuclear device supplied by the People’s Republic of China, which would instantly increase the value of Goldfinger’s private hoard. And with the American gold supply rendered unusable, international liquidity would seize up and the western trade and monetary systems would collapse. The Chinese would exploit the collapse of the free world economy to achieve an easy victory in the cold war without firing a shot. Fortunately, this calamity is averted by a timely combination of Bond’s usual quick thinking and an unlikely last second shift in political (and sexual) sentiments by Ms. Galore. Together, James and Pussy save the free world from chaos and disaster.

As surprising as it may seem to us now, during the 1960's the primary objective of U.S. foreign economic policy was to find a way to control the American balance of payments deficit and stem the loss of gold from the American Treasury. Even more surprisingly, many of the policies that were enacted or considered in order to solve the payments problem and ease the gold drain conflicted with the larger goals of American foreign policy and made little sense when viewed under the lens of macroeconomic efficiency. These policies created enormous tensions within both the U.S. government and the Western Alliance, and affected a whole range of policies, from American troop deployments overseas to American investment in Europe. Despite these political tensions, American policy-makers feared an economic catastrophe if the balance of payments deficit was not reduced and the gold outflow ended. Many policy-makers, correctly or not, drew parallels with the international monetary conditions of the 1930's, and feared that a failure to correct the problem could unleash an international economic collapse and political disaster.



Nowhere is this more obvious than in the history of American monetary policy during the 1960’s. We are often told that the Bretton Woods system functioned in an economically optimally way during this period. Robert Gilpin recently argued that Bretton Woods was successful in the 1960s because it “solved the fundamental problems of the world economy.” “Distribution” issues were settled at both a national and international level, “national autonomy” questions never arose, and the “international regime” functioned effectively because the United States behaved responsibly and the issues the system faced “were relatively simple.” But of course, this was not the case at all. National autonomy, or “politics,” drove international monetary relations throughout the decade. The issues involved were quite complex, the distribution questions unclear and unsettled, and the international regime powerless to resolve disputes.  In other words, the history of monetary relations during this crucial decade cannot be explained by reading a macroeconomics textbook. The most important forces driving America’s monetary policy during this period surrounded questions of security and alliance politics in Europe.  You cannot understand the monetary history of the 1960’s without a detailed knowledge of the German question, alliance nuclear politics, de Gaulle’s vision of organizing Europe, and Great Britain’s relationship with the Commonwealth, to name just the most important issues. Politics, power, and ideas, and not concerns about economic efficiency, drove the key policy choices during the 1960s.

Richard M. Nixon

The dramatic monetary and economic debacle fostered by Nixon has never been more astutely described than by historian, philanthropist, and Lehrman Institute founder and chairman Lewis E. Lehrman in a piece in the Wall Street Journal, "The Nixon Shock Heart ‘Round the World”:

On the afternoon of Friday, Aug. 13, 1971, high-ranking White House and Treasury Department officials gathered secretly in President Richard Nixon's lodge at Camp David. Treasury Secretary John Connally, on the job for just seven months, was seated to Nixon's right. During that momentous afternoon, however, newcomer Connally was front and center, put there by a solicitous president. Nixon, gossiped his staff, was smitten by the big, self-confident Texan whom the president had charged with bringing order into his administration's bumbling economic policies.

In the past, Nixon had expressed economic views that tended toward "conservative" platitudes about free enterprise and free markets. But the president loved histrionic gestures that grabbed the public's attention. He and Connally were determined to present a comprehensive package of dramatic measures to deal with the nation's huge balance of payments deficit, its anemic economic growth, and inflation.

Dramatic indeed: They decided to break up the postwar Bretton Woods monetary system, to devalue the dollar, to raise tariffs, and to impose the first peacetime wage and price controls in American history. And they were going to do it on the weekend—heralding this astonishing news with a Nixon speech before the markets opened on Monday.

The cast of characters gathered at Camp David was impressive. It included future Treasury Secretary George Shultz, then director of the Office of Management and Budget, and future Federal Reserve Chairman Paul Volcker, then undersecretary for monetary affairs at Treasury. At the meeting that afternoon Nixon reminded everyone of the importance of secrecy. They were forbidden even to tell their wives where they were. Then Nixon let Connally take over the meeting.

The most dramatic Connally initiative was to "close the gold window," whereby foreign nations had been able to exchange U.S. dollars for U.S. gold—an exchange guaranteed under the monetary system set up under American leadership at Bretton Woods, N.H., in July 1944. Recently the markets had panicked. Great Britain had tried to redeem $3 billion for American gold. So large were the official dollar debts in the hands of foreign authorities that America's gold stock would be insufficient to meet the swelling official demand for American gold at the convertibility price of $35 per ounce.

On Thursday, Connally had rushed to Washington from a Texas vacation. He and Nixon hurriedly decided to act unilaterally, not only to suspend convertibility of the dollar to gold, but also to impose wage and price controls. Nixon's speechwriter William Safire attended the conference in order to prepare the president's speech to the nation. In his book "Before the Fall," Safire recalled being told on the way to Camp David that closing the gold window was a possibility. Despite the many international ramifications of what the administration would do, no officials from the State Department or the National Security Council were invited to Camp David.

The president had little patience or understanding of the disputes among his economic team members. He found wearisome the mumbo-jumbo from Federal Reserve Chairman Arthur Burns. But the president had determined he would have a unified economic team and a unified economic policy, no matter what the consequences. So the White House dutifully leaked stories designed to undermine and humiliate Burns, as Connally waited in the wings with his "New Economic Policy."

At Camp David, Connally argued: "It's clear that we have to move in the international field, to close the gold window, not change the price of gold, and encourage the dollar to float." Burns timidly objected but was easily flattered by the president. By the evening of Aug. 15, Burns was on board with terminating the last vestige of dollar convertibility to gold, depreciating the dollar on the foreign exchanges, imposing higher tariffs, and ultimately ordering price and wage controls.

Nixon and Safire put together a speech to be televised Sunday night. It had taken only a few hours during that August 1971 weekend for Nixon to decide to sever the nation's last tenuous link to the historic American gold standard, a monetary standard that had been the constitutional bedrock (Article I, Sections 8 and 10) of the American dollar and of America's economic prosperity for much of the previous two centuries.

At least one Camp David participant, Paul Volcker, regretted what transpired that weekend. The "Nixon Shock" was followed by a decade of one of the worst inflations of American history and the most stagnant economy since the Great Depression. The price of gold rose to $800 from $35.

The purchasing power of a dollar saved in 1971 under Nixon has today fallen to 18 pennies … Nixon's new economic policy sowed chaos for a decade. The nation and the world reaped the whirlwind.

As Thomas Paine once wrote:  "As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. There can be no such power in a republican government: the people have no freedom — and property no security — where this practice can be acted: and the committee who shall bring in a report for this purpose, or the member who moves for it, and he who seconds it merits impeachment, and sooner or later may expect it."

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