Fiat money "conservatism"

The Nixon Shock Heard 'Round the World

By severing the dollar's convertibility to gold in 1971, the president ushered in a decade of inflation and economic stagnation.

By LEWIS E. LEHRMAN

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 (see the nearby graph). Nixon's new economic policy sowed chaos for a decade. The nation and the world reaped the whirlwind.