When the month of August is thought of in connection with Richard Nixon’s Presidency, usually his resignation is the first thing that comes to mind. But August 15 will mark another anniversary – forty years since RN took to the airwaves to inform the nation that his Administration was responding to rising inflation and European currency jitters by ending the American dollar’s convertibility to a fixed amount of gold.
At the time, the attention of most in the United States was focused on the other two aspects of the speech, the announcements of a ninety-day wage-price freeze and a ten-percent import surcharge. But the closing of the “gold window” was what counted in the long run. It marked the end of the system decided on at an international conference in Bretton Woods, New Hampshire in 1944, which, following the end of World War II, had governed the economic relations of North America and Europe for a quarter-century. Starting in 1971, the dollar’s exchange rate, in relation to other currencies, became a floating one.
At the time, the President’s decision was widely acclaimed; the New York Stock Exchange soared the following day. And although the experiment with the freeze, and subsequent wage-price controls, failed to prevent the rise of inflation during the rest of the decade, after inflation finally was brought under control in 1982 the end of the gold standard as it had functioned in the Bretton Woods period appeared in retrospect to have been the right thing to do, since the dollar constituted the fairly sturdy backbone of the Western financial world for the remainder of the Cold War era.
But with the rise of the global economy in the 1990s and the subsequent weakening of the dollar and those currencies most closely tied to it, there has been a lot of discussion about whether the “gold window” should ever have been closed. Now, an article by longtime financial journalist Roger Lowenstein in Business Week makes an argument that the causes of today’s bruising financial situation can ultimately be traced back to the decision to end convertibility. He looks at the substantial role Treasury Secretary John Connally played in RN’s decision, and concludes:
[Milton] Friedman’s prediction that, left to the market, currencies would regulate themselves with only gradual adjustments proved wildly incorrect. The dollar plunged by a third during the ’70s, and currency volatility has threatened several national economies since; in 1997, Asian and Latin American countries were wrecked by currency runs. To this day, Volcker regrets that Bretton Woods was abandoned. “Nobody’s in charge,” he says. “The Europeans couldn’t live with the uncertainty and made their own currency and now that’s in trouble.” The effect on America’s domestic economy was even worse. As Shultz says, “Price controls gave the illusion of doing something about inflation.” They further liberated Nixon from concern for the normal rules. Late in 1971, he wrote to the Fed chief, “You have given me absolute assurance that money supply growth will be adequate to maintain growth.” Burns scrawled in the margin, “Never gave him absolute assurance. What nonsense!” But Burns, intentionally or not, delivered on Nixon’s demand for an expansionary monetary policy.
Controls had the desired short-term effect; inflation was quiescent through the end of 1972, when Nixon easily won reelection. The controls, however, proved difficult to end. The 90-day freeze begat a more complicated wage and price regime, a Phase II, followed by a Phase III, lasting into ’74. And Burns’s easy money fostered a monetary steam cooker that controls could not suppress. By August ’74, when Nixon resigned, inflation had topped 11 percent. Soon it would go even higher. Expectations of rising prices became embedded in the system.
The Nixon Shock was a central cause of the Great Inflation. It also spelled the end of the fixed relationships that had governed the financial universe. Previously, people took out mortgages for set periods and at fixed rates. They had virtually no options for saving money other than in banks, and the interest rates that banks could pay were capped. Floating currencies unleashed a new world of risk and instability. For the first time, investors could bet on the direction of interest rates or the Swiss franc. New financial instruments, new speculative tools, proliferated. The world gravitated from the certainties of Bretton Woods to the dizzying market cycles we’ve lived with since. Donald Kohn, who joined the Fed in 1970 and retired last year as vice-chairman, thinks Bretton Woods was doomed. But bankers have yet to find as rigorous a standard as gold. And they have become ever more apt to please politicians, deferring recessions at the risk of inflating asset bubbles.
The economic policies pursued in the Nixon years are the most problematic aspect of his Presidency, in this writer’s humble opinion; they had a far bigger effect on how Americans live today than anything involving Watergate, but only a few books have looked into the 1971 economic changes in any detail, and what articles there have been on the subject have mainly been in specialized journals. This makes Lowenstein’s article all the more significant, whether or not one agrees with its conclusions.