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In mid-August, 1971, Treasury official Paul Volcker was on the fence – philosophically, politically, practically. “Would Americans be humiliated by going off the gold standard? This was the sort of thing I had worried about over the several months spent working on the policies,” worried the under-secretary of the Treasury for international monetary affairs. He was right to worry.Within the Nixon Administration, Volcker was the point person in dealing with America’s many unhappy trading partners about President Nixon’s “New Economic Policy” announced on Sunday, August 15. Although the program’s core was to take the U.S. off the gold standard and end the Bretton Woods agreement, Nixon also implemented a series of other measures to control inflation and adjust America’s balance of trade. U.S. trading partners like Japan needed to be informed of the U.S. moves – information that Nixon dictated could not be shared until just before his Sunday night speech. Volcker was in the hot seat because he would have to assuage global concerns.
Volcker’s colleagues meeting at Camp David that weekend understood how hot was his job. Nixon speechwriter William Safire recalled that at dinner at Camp David on August 13, 1971, ‘the men in the room knew that Volcker was undergoing an especially searing experience. He was schooled in the international monetary system, almost bred to defend it; the Bretton Woods Agreement was sacrosanct to him; all the men he grew up with and dealt with throughout the word trusted each other in crisis to respect the rules and cling to the few constants like the convertibility of gold.”
At the Administration’s super-secret conclave on the afternoon of Friday,August 13, Volcker questioned the policy of his Treasury Department boss, John Connally, who adopted a damn-the-foreign-allies-full-speed-ahead approach, especially on closing the gold window. “I hate to do this, to close the window,” said Volcker to Connally. “All my life I have defended exchange rates, but I think it is needed.”
Volcker pushed for international cooperation: “But don’t let’s close the window and sit – let’s get other governments to negotiate new rates.” Connally’s response was straightforward: “So the other countries don’t like it. So what?”
So what, indeed. “The dollar is the centre of the financial system, convertible into gold, with other countries having a fixed exchange rate against the dollar,” remembered Volcker in a September 2000 interview on PBS. “That whole framework had come under great pressure, and it was clear that something had to be done,” Volcker indicated the desperation of Washington policy-makers in 1971. Faced with a demand from Britain to redeem three billion U.S. dollars for gold, Connally and Nixon decided to act.
Volcker recalled that “most of… us who were involved thought the time had come and some approach had to be taken, and that the only practical move internationally was to suspend gold convertibility, which would lead to a depreciation of the dollar. It was not a permanent solution, in my mind, but it was a necessary transitional step. The president, I think, had become pretty well convinced before he was up there. The surprise to me was the way it was politically shaped, with Mr. Nixon and Mr. Connally presenting it to the world as a great triumph.”
In his 1990 book, Changing Fortunes: The World’s Money and the Threat to American Leaders, Volcker expressed regret for closing the gold window and evinced an understanding that a grave mistake had been made: “Now, 20 years later, I wonder” if it had indeed a triumph. “It was, after all is said and done, in some ways a defeat. The inflationary pressures that helped bring down the system did not abate for long; they got much worse as the controls came off and plagued the country for a decade or more. The monetary system has not been put back together in a way that really seems to satisfy anyone. And somehow we are still complaining about unfair military, aid, and trade burdens.”
Two decades later, those complaints remain.
Writing in his diary several days after the Camp David meeting, Federal Reserve Chairman Arthur Burns concluded: “In the end, those who wanted to end convertibility had their way.” Burns noted: “All this seemed to assume – though nothing was said to this effect – that the dollar would be allowed to float until after the election. When I later pointed this out to Volcker, he became truly frightened and he has been doing penance for his recommendation to close the gold window – ever since.”
The dollar has floated – and the nation itself has paid the price – ever since. Volcker was right to worry.