Nixon Shock: Ping Pong Diplomacy

Found a relevant article in relation to my upcoming Treatise, Financial Warfare. I am thinking about buying a copy of this recent book and figuring out if there is a more authoritative source regarding the Death of Bretton Woods. The book is entitled, Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy. If I had to choose between Nixon and Trump, I’d go for Nixon because the Essence of something is far more important than its mere Appearance. At least with Nixon, there is an eternal vision at play and the need to actually overcome the Death of Bretton Woods as opposed to simply adapting to the financial nihilism. That is ultimately where Nixon differs from Trump within the context of my own research.

“When the Nixon administration came into office in 1969, they realize that the world economy had grown very, very big. Everybody wanted dollars, so the Federal Reserve was printing lots of dollars. As a result, there were four times as many dollars in circulation as there was gold in reserves.

“The rate of $35 for an ounce of gold was good in 1944, but it hadn’t changed, so by 1971 the dollar was really overvalued. That meant imports were very cheap, and exports were very expensive. We experienced our first trade deficit since the 19th century. We were experiencing employment problems. For the first time, the U.S. started to talk about losing competitiveness.

[O]n top of all that, there was the beginning of inflation. If it continued long enough, dollars would be worth less than they were before. The Nixon Administration was afraid that other countries were going to ask for gold and the U.S. wouldn’t have it. That would have been an enormous humiliation and a breaking of their commitment to exchange gold for dollars.

What the U.S. really wanted was some way to devalue the dollar, but because it was pegged to gold, the administration couldn’t do that.”

“It’s in the nature of international economic issues that only a small group of people understand and appreciate the impact of policy decisions like this. That said, Nixon’s announcement got a lot of attention at the time—but a lot happened that summer. We were pulling troops out of Vietnam. In June the Pentagon Papers were released. In July Nixon shocked the world announcing he planned to visit China after decades of no diplomatic relations. Nixon loved the image the China announcement created. He was beginning to be known for making big, bold decisions that would surprise everyone and do something constructive.”

“He saw this economic meeting as a similar opportunity. The decision would be made secretly at Camp David. It would be announced with great fanfare and with one stroke, he would modernize the global monetary system and demonstrate to the American people that he knew how to steer the U.S. and the global economy.

The days leading up to the announcement were critical because, at all costs, Nixon needed unanimity. He needed the U.S. to speak with one voice because he didn’t know how other countries or international markets would react. He didn’t want to create a market crisis because there wasn’t consensus within his own economic cabinet. Like any good team leader, he wanted everybody to buy in.”

“Sunday night, Nixon went on television and very clearly articulated what had been decided. The Dollar would not be backed by Gold anymore. There would be a 90-day Wage-Price freeze in the U.S. to put down Inflation. And he imposed a 10% tariff on all imports, which would be removed only after there was a new international monetary agreement. That put a gun to the head of all other countries. Not only was it done unilaterally, but it was done with enormous force. The United States could never get away with that again—it was a singular moment. These policy changes had enormous implications. It’s hard to think of a bigger economic package announced all at one time.”

“Domestically, it was received with enormous approval. It had the effect that Nixon wanted. Politically, he was seen to have grabbed control of a situation that had been deteriorating—namely, increasing inflation and growing trade imbalance.

A wage-price freeze had never been done in peacetime. It was very controversial. He knew that 90 days wouldn’t be the end of it, but it was a way of saying, the U.S. is willing to take drastic steps to get a handle on its inflation.

That tough domestic measure gave the U.S. credibility with other countries. Which was important because markets abroad really went into chaos. But then the U.S. sent Paul Volcker, and eventually John Connally, to all the key countries for negotiations. People settled down because they understood the changes had to happen. It took two months of very intense negotiations to come up with a new agreement about what the dollar and other currencies would be worth.”

That agreement on a new set of fixed exchange rates didn’t last. There was the OPEC oil embargo. There were food shortages. A huge number of disturbances in the international economy eventually made it clear the fixed system couldn’t last. In 1976, the IMF blessed floating exchange rates. The arrangement had actually been in effect for some time, but it took a while for countries to get comfortable with it as the best possible option.”
“Some of Nixon’s advisors would have preferred negotiation. Nixon and Connally had concluded that holding negotiations would cause market crises. Every time there was an announcement about the negotiations, every time somebody blinked, there’d be 20 interpretations and a continual economic crisis.

If anyone had said that the outcome of this unilateral decision would be greater international cooperation, no one would have believed it. I’m not sure that Nixon would have believed it. But Nixon masterfully created a situation where suddenly countries understood that they needed coordinated policies to deal with finance, trade, energy, and food. We entered a period of enormous international cooperation on the heels of this very tough decision that Nixon made at Camp David.”
“I tried to write something which shows how governments really work. Often, they can make a decision, but they can’t really envision what the collateral impact is going to be. They try. They have lots of scenarios. It’s like planning for a war—when the first shot is fired, all the plans go awry. That’s what happened.”
“But these guys were smart and resilient, and they were on the same team. Even though they had very different viewpoints, Nixon kept them in harness. They were able to adjust to big changes in the global economy that they never envisioned.”

Categories: Financial Warfare

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