The Smithsonian Agreement and Legacy

What Nixon actually does is he sends John Connolly to try and persuade the same trade partners who are feeling so bruised. to renegotiate their exchange rates with the dollar. how did that go down? He basically said it was their problem to figure out. and he told them basically, you guys have to revalue your currencies. they said Why is all the adjustment on our side? And he said basically, it's your fault. We have been subsidizing you left and right in all kinds of ways for twenty five years. You owe us, we are not devaluing. You're going to revalue. And that first meeting ow was a total stalemate Today, in the story of Money, two hundred thirty on Friday the thirteenth. ominous. On august nineteen seventy one. The presidential helicopter, Marine Wan, is preparing to take off from the south lawn of the White House in Washington DC On board is the President of the United States, Richard Millhouse Nixon, along with a select group of his most trusted economic and financial officials They're heading off for a make or break meeting. The agenda, secret. The destination. also secret. In fact, the very existence of this meeting is very secret. So secret that even officials as important as Nixon's own secretary of state didn't know about it at the time. This is a meeting that would asside the future of the U.S dollar. And with it the Brettonwood system which has been in place since World War II knitting together a global economy seemingly so successfully. Get this decision wrong and Nixon risks triggering a collapse of the dollar's value en raging America's closest allies, or worst of all, at least for Nixon losing his re election bed the following year. But if he gets it right and he knows this He could head off an imminent financial crisis cement the dollar's hegemony for years to come and walk away looking like a hero. So Nixon has everything to play for here But there's one thing that we know for sure when he announces the decision made at the secret meeting They're going to shock the world. So that's all in part two of the Nixon shhop. Here on the Story of Money from The Financial Times with me, Gillian Tet. and me Robin Whigglesworth And so we begin this week's episode with a US dollar on the ropes As we heard last week, the greenback is being pummeled by speculators who think probably quite rightly that it's massively overvalued And now it faces a possible knockout blow from foreign central banks some of whom are quietly calling up the U. S Federal Reserve and ask him to exchange some of their dollar hold for gold So for the last twenty seven years, yes, twenty seven years, America Central Bank has faithfully honored a solemn promise madeade by the U.S to its allies at the end of World War II that it will always exchange their dollars for gold at thirty five dollars an ounce But remember that that pledge is the lynchpin within higher. post war monetary order, reallyally the whole international order, when you think of it. Bretton Wood's system as it's called All of America's allies agreed to peg their currencies to the dollar And in return for that The U.S promised to sell them gold on demand But the core problem is that the Fed simply doesn't have enough gold in its vaults anymore to actually honour that promise If you like it's running the financial equivalent of a Patemkin town which looks great on the outside, but doesn't actually have real substance behind it. And as a result, the other central banks who know this are starting to engage in a very slow motion. Bank run. This is a crisis that threatens not only the dollar's future for the entire Breckonwood system And the failure of that can enrage allies and cause unknown economic and financial shocks. This is really one of the signature moments of the post World War II era. So the key question now is will Richard Nixon and his team head off imminent disaster Well to answer that question, we're joined once again by the former financier government adviser and international economist Jeffrey Garton a man who has almost in the room as a junior official in the Nexton administration that time. Jeffrey, welcome back to the show. Thank you Thankk you very much. And we should probably mention your book again because it is the book on the whole Affair. Three days at Camp David. We're finally going to find out what happened those three days because that's where that Marine O helicopter was actually heading that day in August So Imagine the scene. The helicopter's taken off. It's cruising lo through the suburbs in Northern Washington on its way to Camp David in not so glamorous Maryland But Jeffy tell us who else is on board that helicopter Marine One with Richard Nixon, the president. Who are the other key players in the meeting that's about to start Well there was the helicopter and there was also a sedan that was driving up there. So I'll tell you the whole crew. The most important of the people there was John Connolly. who was the secretary of the Treasury and a former governor of Texas and a supreme politician A nationalist Someone who didn't care a whit about the global economy but really wanted a Nixon to emerge as a great statesman and also ensure his election But aside from Connlly The other people there We're really focused on the global economy There was Arthur Burns who was a renowned conomist and who was then the Chairman of the Federal Reserve There was Paul Volker, who was the undersecretary of the Treasury and someone who really knew everything about the way the global financial system worked There was George Schultz who is head of the Office of Management and Budget Schulzu eventually went on to be one of America's great statesmen There was Peter Peterson, special advisor to the presresident who had been a major figure in the business community. And there was Paul McCracken, who was head of the Council of Economic Advisors plus one or two speech writers. they were all going to camp Cabid So what you've got is really the A team. the only person who iss not there is Henry Kissinger and I understand he was over in Paris negotiating with not Vietnamese at the time, but everyone else is on the helicopter or in a sedan And what's striking is that they were really experienced. both in domestic economic matters and political matters, but also the global economy whichich is a bit different to where we are today with the current administration, isn't it? I think that if you looked at the economic and financial teams President Kennedy, President Johnson, and President Nixon you would find uniformly extremely high quality experienced knowledgeable public servants. It is night and day from what we have today So o, say they land or they arrive at Camp David, this famous presidential retreat in Mirorand And it's a fairly auspicious location to be holding this meeting Jeffrey,' sadly never been invited by any U.S. president to Camp David Do you know what it's like? What kind of a venue is it? Have you ever been there yourself? Well, I've never been there, but for my book, I interviewed a lot of people who had been It's a retreat, really in the Maryland Mountains. It is reminiscent of a summer camp. Soort of log cabins, lots of trees, lots of places to walk It is a place where the presidents went to make really big decisions where presidents entertained their counterparts from other countries Eisenhower invited Khrushchev there It's really a sort of a storied place. where Officials got away from Washington They didn't bring their staffs. So the ideal place to have a very serious discussion and arrive at some decisions. The mostly a summer camp where you play state craft on a global level rather than skip anything like that Let's talk about Nixon's objectives for this meeting because obviously his immediate priority is to stop this drain of bullion from the country. fromrom the United States, the gold is slowly seeping out and bringing the system under strain But he also is facing reelection the next year. So how does that affect how we approach things I think it's fair to say that Nixon didn't care that much about the global financial system His concern was U. S. domestic policy that it was failing and that he didn't want international crisis come on top of that And so he was convinced by John Connolly that the only way he was going to get out of this and get out of it with a big bold stroke was to combine the domestic and the international together in one big package that would say to the world, the U.S economy is going to recover and the global economy is going to be stronger And I, Richard Nixon, President of the United States, plan to do both at the same time But I think Nixon's greatest motivation really was the upcoming reelection in nineteen seventy two, the upcoming election He was very concerned that combination of domestic and international problems on the economic and financial side could really jeopardize his chances of being reelected. Yeah, I mean, it's quite telling that they didn't actually invite any sort of foreign policy types to this meeting, right? is all domestic people really maybe apart from Volka Well, I think that Nixon felt He was the foreign policy. irl First of all, Kissinger was negotiating with the North Vietnamese in Paris. So he couldn't have been there Nixon didn't think very much of Rogers as Secretary of State. But beyond all that, Nixon didn't want some foreign policy person there putting a monkey wrench into these initiatives on the grounds that the Europeans and the Japanese were going to be upset E Nixon felt he could handle that So obviously the immediate task they face is what to do about the dollar. And bringing home just how urgent this job was, just before they headed to Camp David, they'd heard some shocking news from London. Is that right Right, the central bank of made a request to the Federal Reserve to inssure part of its dollar holdings No one was quite sure what this meant and in this fraught environment of crisis There was a misinterpretation that the British asked that all their dollars would be guaranteed in the event that the dollar would be devalued. And this really was a shocker because if Britain was turned down could be a crisis, but if the offer was accepted, obviously everybody else would want that And this was sort of one of the precipitating events of everyone running up to camp, David. that weekend in order to basically get a hold of the situation So if this was a movie, we'd have lots of spooky dramatic music at this point with this cast of characters I don't know if anyone has made a movie about this They should. I'd watch that. Exactly Two of the characters, Paul Volker and John Connolly have turned up with big dossier with them Um what's in that dossier? Oh Voker had been working on a plan deal with the dollar for about two years At first nobody really wanted to look at it Honneley became Secretary of the Treasury in early nineteen seventy one. And commonly, you realize that this crisis bring down the Nixon administration and he started to examine vkers ah, plan And this plan was very, very elaborate. and it had different options. Should the dollar float? Sh the dollar be devalued? And then it had domestic policies that would support whatever we did with the currency Um, and That weekend at Camp David this plan became the blueprint for what Nixon would do. So in terms of what that meant for actually tackling the dollar crisis What was actually the specific elements in that. Well, the main bullet points that was decided at David in that became part of Nixon's shock announcement at the end of the weekend fell into about four categories. The first was ways to get the U S economy going again And that was a series of various tax incentives Plus very importantly The U.S automobile industry had an excise tax And the tax would be removed only on American automobiles, not on foreign automobiles. So it was very discriminatory Um, So that was sort of the first bucket The second was how to restrain prices and thereby get a hold of inflation and they' Nixon did one hundred and eighty degree return from what he had been espousing all along, and he agreed to a wage price freeze. that is all prices and all wages in the US. would be frozen for some indefinite period of time the third element was The dollar Nixon would announce The dollar was no longer redeemable in gold and he would basically say, let currencies fluctuate and let's see where they go once the dollar is not exchangeable into gold. And the assumption was the dollar was overvalued and therefore, it would be the dollar would depreciate And that would make the U. S. exports muchuch more competitive And then the final point was How are we going to get the Europeans and the Japanese to actually listen to us because since all the currencies were actually linked to the dollar If the dollar depreciated We wanted the other currencies to appreciate But we had no way to make them Appreciate And so They came up with an idea of a ten percent tariff on all exports And that tariff was a lever and it would only be removed when the currencies were freely floating against one another. And just to clarify, that was a ten percent tax on their exports coming into America. So ten percent tax on American imports across the board every single country. Again, once again sounds horribly familiar. But the big difference was it was designed to be temporary. and it was It was stipulated that it would be removed as soon as the currencies started to float. Okay, so essentially they are to put maybe in tabloid terms, they've got a gun to the head of the Breton Woods system and using that to sort of threaten and force allies to negotiate, to force them to revalue their currencies play along with the Americans I'm curious. what did the David team makeake of this. Where was everybody happy about suspending the convertibility of gold, for example No, actually there was there were a lot of different views at Camp David And I think one of Nixon's great accomplishments was that he got everybody behind the whole package The first part, the tax incentives There wasn't much debate about that. Wage and price controls George Scholz, the head of OMB was a very free market guy. He had come from the University of Chicago, where he had been the dean of the business school there He really didn't like the idea of wage and price controls. and neither did Nixon but they felt it was the only way they could control prices And they fool themselves into thinking this would just be temporary And it eventually turned out to be much more than that In terms of the suspending the gold, Arthur Byurns, head of the Federal Reserve, he was really against it. He thought that the other measures would be a demonstration to the rest of the world that the U. S was serious. And for the time being, that would be enough. So what about the ten percent tariffs? Wasn't anybody concerned about that? I imagine people like Volka wouldn't have supported paraphrasy, right I think that was very controversial. Honlly was the major proponent of it And he felt that without the tariff, You would have no leverage over other countries to revalue their currencies Volker didn't like it. He thought it was not necessary. Um, and I think that Even Nixon was a little nervous about it. because he was at heart, a free trader At the end of the day, they realized They needed it for leverage. There's one option that doesn't seem to have been on the agenda at Camp David at all And it kind of baffles me. Why not just raise the convertibility price of gold. The US. could just tell countries that, you know, we can't redeem gold at thirty five dollars. Announced that's unsustainable. Every by agreed it was unsustainable. Let's do it at forty or fifty or one hundred dollars Why not just do that. Wh wouldn't that have helped That would have been a formal devaluation success of presidents Kennedy Johnson Nixon himself. had made very public commitments The dollar would always be worth certain amount of gold So that thirty five was basically sacros sanct. So it was easier, politically more palatable to end the convertibility than keep the convertibility at a different rate They didn't want to have a formal devaluation What they were basically saying was The dollar is overvalued This is in no one's interest Let's see where the dollar should really be And then we can talk about gold again. The key thing is that they weren't trying to smash up the Bretonwood system per se. They actually thought that they were trying to keep it going But what's very clear is that they had no chance of doing that unless they actually tackled some of the underlying imbalances. which had created all these strains and stresses in the first place. So In the last episode, we talked about how the U.S. government was trying to you know curbit spending and get inflation back under control Pul Volka actually has to offer in terms of ideas about how to actually do that? tax incentives that Nixon proposed was seen as basically U enhancing American growth and competitiveness. There was a tax break, for example. for R and D, which was the first time the US had done something like that. And I think that what Voker's hope was, the U. S. would basically get a hold of its domestic economy And after after Camp David pay much more attention to the international dimension of their policies That's what he had hoped But in private moments, he basically told others, he just didn't think the U. S. was capable of that in large part because So little of the U S. economy relatively speaking was exposed to the international economy. Okay, so in the end, after hours and hours of debate, which look for some people might sound a little reckonite. I would have killed have been a fly in the wall at Camp David that weekend Nixon and his team finally thrat out some sort of agreement And there's only one thing left to do Nixon has to announce that to the world And that took the form of a nationwide TV broadcast the following Sunday night which we heard a few snippers off at the start of last week's episode So Jeffrey, how did Nixon feel about this speech? Because It's a huge moment, right? There's a ton of stuff riding on it I think that he wanted to make it a big big leadership issue. for him. and he had in mind shocking the nation in the same way he had just two months before when he announced that he was going to China Yeah, he loked these big grand announcements and moves and decisions, right Right. He really wanted to shock the nation and to show that he was one of the countries great historic leaders. And so He spent an inordinate amount of time obsessing about how he would approach the country in terms of communications. So I would say that a good part of that weekend was really revolved around not only what he would say, but how he would say it And he was particularly concerned about talking about the currency because he felt that if he gave any indication that America was in retreat Uh, that would be a real negative And so he really wanted to get around the idea of devaluation depreciation of the American currency. And instead he created an enemy the international speculators put all his energy into saying America would not allow this This all sounds so unbelievably familiar in the sense of having a very dominant president who wants to be disruptive and dramatic who wants to look as if he's being decisive as well, who loves to blame other people prearating you know straw men to attack in order to do that and is determined to make this stunning announcement to the nation and to essentially show that he's in charge There was one big difference between Nixon and Trump it comes to communications Nixon's speech was based in large part on this elaborate study that Paul Volker had done. on discussions at Camp David It was fact checked by bureaucracy in Washington There is no comparison between professionalism of giving a talk to the country between Nixon and and Trump The difference between this speech and a tweet is Unimaginable But having put all that work into preparing his speech and broadcasting it to the nation, the question facing Richard Nixon back in nineteen seventy one was, of course, how would it be received How would the voters respond? What about markets? And off course, what would America's allies make of it? We'll talk about that in the next part of the podcast after the break It's Monday, the sixteenth of august nineteen seventy one, the morning after the night before fourth And the big question is how the Nixon Sock announcement has gone down with everyone Eespecially with voters the people that Nix and Frankie really cared about Jeffrey, what did everybody make of it was a smash success in the U S. Stock market jumped, I think one of the most rapid ascensions in one day in American history The business community was delighted because they felt There would be some stability in the international financial system eventually. And in any event, the US had grabbed hold of it. It exumed leadership. It was no longer benign neglect. Labor was happy because of the wage and price controls Um Actually, everybody was happy with the import surcharge because There was a fear about U.S competitiveness generally. But the difference between the domestic reaction and the foreign one was quite traumatic. I can imagine. The evening after the speech, I think it must have been about eleven or twelve o'clock at night Paul Voler was dispatched to go to Europe and to meet with his European counterparts The very next day because they were in a state of shock They were fearful Because for the previous twenty five years, they had lived with this idea that the dollars were exchangeable into gold And so there was enormous fear, well, What does this actually mean I think that thing that got them the most was the import surcharge They had identified the U S as being a free trader The U. S. had leaned on all these countries to open their markets further And here it was putting on an import surcharge. So there was very, very greatreat dismay and they focused on that. They wanted that removed right away before they would even talk about the rest of the stuff Right. I mean this again sounds very familiar. I mean, what Nixon actually does is he sends John Connolly, his treasury seecretary out to try and persuade the same trade partners who are feeling so bruised to renegotiate their exchange rates with the dollar. How did Connlly handle things and how did that go down He took a very hard line He basically said it was their problem to figure out to do And he told them basically You guys have to revalue your currencies. And they said Why is all the adjustment on our side And he said, basically it's your fault And this is echoes it today, of course. We have been subsidizing you left and right in all kinds of ways for twenty five years. You owe us We are not devaluing you're going to revalue And I think it's fair to say they were extremely angry and extremely upset And that first meeting was a total stalemate. Did Connlly manage to break that deadlock at all Well, the deadlock wasn't broken until twoo months later The Europeans were screaming all along the way. and uh Henry Kissinger finally emerged from the shadows. in November and he was really afraid the anger among the Europeans would spill over into political and military relationships and that the alliance would come apart And he went to Connlly He said You, John Connolly, have done something no politician would ever have done. You had the courage basically force a change in the system that the country will be We' ever indebted to you. But a time comes when you really need to be a statesman And we've got to bring this to to some conclusion. And Kissinger basically told that to Nixon So Nixon called Kissinger and Connnelly together. and Cony sensed how the winds were blowing And he said, I'm going to meet with the finance ministers again. This was now in November. and I think I can solve this problem by opening the door a little bit. to a U. S the evaluation So they realize we're going to do something on our part and to tell them The end is in sight for the import surcharge. So essentially, the US blinked a bit Cisseningger forced the US to blink on foreign policy grounds A bit, yes And so they ended up with some kind of big summit in the Azores, didn't they with the French President Pompitu Yeah, so it was quite interesting. Nixon was meeting with Pompy Dew It was a meeting that had been schedule a long time in advance And he said to Pompidu, the seea can't iron out the exchange rate issue and um It was a funny thing. what happened was that Pompey Dou's finance minister, Jcard D Stang was also a political rival of Pompydew He didn't want you scarred in the room So if sheiscard couldn't be in the room Fally couldn't be in the room for protocol But nothing stopped Kissinger from being in the room So Conlly was feeding Kissinger with information and Kissinger actually negotiated with Pompy Doo that the US would devalue And they came up with a number of around between eightcent and nine percent. And that led to a big summit meeting in Washington in which the whole thing was settled. So this is the Smithsonian agreement of december nineteen seventy one, right? Right And at that meeting Um finally managed to get The Germans to revalue I think it was about twelve percent The Japanese too wevalue. close to seventeen percent. And when all the exchange rates were finally pegged to different values the US had dvaled by eight percent And at that time, they removed the import surcharge. And so a lot of issues were not handled. The future of gold, what would happen to floating exchange rates? All of that stuff was put off for another time. but they declared success and I think it's fair to say They went away feeling pretty good. So you know, problem solved Hazar, Bretton Woods is saved. They can have a round of Harvey woolbangers or glasses of wine if you're French. but We of course, like you say, we know the Breton Wood system does unravel finally The Smithsonian agreement didn't stick So I'm curious what you think went wrong? Why couldn't they adhere to the Smithsony agreement. Why are we now talking past tense about the Breton Wood system The major reason why The Smithsonian didn't stick was that the U.S. didn't enforce its own obligations. It was really obliged to keep inflation under control And it didn't. becausecause once the wage and price controls ended. The prices soared back up to where they were All the critics of wage and price controls were right There was no way to do this temporarily without just building up all kinds of price pressures And at the same time Nixon wanted the U. S. economy to grow very fast. He leaned on the Fed Arthur Burns was as concerned about being a friend of Nixon as he was Chairman of the Fed. He did not raise interest rates. And as a result Inflation in the US. just got way out of hand And that distorted the dollar and other currencies And then there was the OPEC embargo and the price increases which basically through the entire global economy into a Tizzy. And I think it became obvious that Countries needed to focus much more on their domestic policies, they were all in different positions and the notion of itharing of gearing their domestic policies to In international agreement, it just became unpalatable And by nineteen seventy six, we entered a new kind of international monetitary system. in which gold was no longer an issue and all the exchange rates started floating against each other. Cross of Gld, the infamous Cross of Gld would finally been shattered, essentially. Yes. So how did Brettonwoods actually finally die? In my view, and I wouldn't say it died because I think in the spirit of Breton Woods, which was international cooperation More trade All of that was sustained. actuallyctually Trade really started to increase There were more trade negotiations. There was the Tokyo round, there was the Uruguay round. The G seven, the G twenty All of those really came into their own. so that Nixon didn't smash the Bretton Wood system. It was just part of it But what was really important about Breton Woods, I think, was the overall framework for international finance and international trade and international cooperation And actually after the shock All of that was sustained. Jeffrey, you wrote the literal book on this episode and you actually lived and worked through it all as a junior official in the administration then Um When you look back at that period today What do you see as the major lessons for our modern world from the Nits and Shock and the challenge to Bretton Woods I mean, doC parallel with the importantb era. Well, the modern era is much more complicated I don't think there would be a scenario in which the U. S. be able to call the shots the way it did then think that power is much more distributed And while the dollar is still the preeminent currency, there's a lot of nibbling at the edges. So I don't think we can take a lesson about how you make change from what Nixon did I think the second thing that's really important though, is that the quality of public service is really important h, when you think about the August fifteenth, decisions and the kind of people that were behind them, the Arthur Byurns, the John Conollys, the Paul Volers All of these people were extremely capable, and they were really dedicated to the public interest And I think that is really crucial or else we're going We're going to fester in the kind of confusion that exists right now. Absolutely. I mean, I knew Paul Voolerwell and just before he died, I remember him telling me with a sense of absolute heartbreak We needed more public servants with a very strong sense of public interest. And the current system educationally and societally just simply wasn't producing the kind of reverence for public service evenven one might say the awareness of the international role of the U. S and respecting that But I'm curious because one of the things that emerges from this whole saga is the rise of this America firstirst attitude on the part of Brit Nixon which is so similar to what we're seeing today in President Trump in some ways, even more so Um, And the other thing we're seeing is also that The system, Btwood's system seemed very strong and everyone assumed it was going to last forever until suddenly it cracked Do you think we can imagine a world today where America firstirst nationalism leads to a serious unraveling of the dollar as a reserve currency ' one of the real danger points that we have now did not exist in nineteen seventy one is the denigration of the institutions on which the dollar is based The disregard for public gathering of statistics, the attacks on the Fed The reason the dollar stayed strong even after august nineteen seventy one is that it was really based on international confidence in U. S. institutions and in the U S. rule of law All of that is under great threat right now And unless that changes, I would say that that in conjunction with the overuse of American sanctions uh, and the, uh, disregard for relationships with allies and partners, and then the new technology as well that underlies stuff like Stablecoin The rise of China and alternative settlement systems All of this is going to put enormous amount of pressure on the dollar It won't disappear as a major currency, but I would be very surprised if it was five or ten years from now If the dollar is anywhere near as central as it is today. And that of course, is one reason why talking about this history is so potent when trying to make sense for the current situation we're in. So thank you very much indeed, Professor Garten, for joining us today. Well, I've really appreciated it. So thanks for coming on, Jeff. Aleasure. twwice, in fact And that's it for the episode of The Story of Money with me, Gillian Tet, and me Robin Wigglesworth. And we will meet again here next week.