The Final Collapse of Gold Convertibility

In nineteen fifty five, for example, the US had one hundred and sixty five percent more gold than it needed to redeem all the dollars outside the U S. But by nineteen seventy, nineteen seventy one, it only had twenty five percent. There was a fear in the US And actually in other countries too, that they would come to the U.S say, here are dollars we want gold and the U.S wouldn't be able to. dem it. Germany alone had more dollars than there was gold in Fort Knox. So, drum roll? I have directed Secretary Connelly to suspend temporarily the convertibility of the dollar into gold . Today on the story of Money. What happens when the Pident of the United States of America makes a shocking unilateral decision to torpedo the entire post war global economic order And Nope, this time we're not talking about Donald Trump. Let us take you back instead to nine PM East Coast Tim on the fifteenth of august nineteen seventy one US. President Richard Milhouse Nixon is making a surprise appearance on the major TV networks elbowing aside a scheduled viewing of Bonanza. That was then the biggest TV show in America at the time. American audiences have actually grown pretty used to these kind of unscheduled addresses Nixon typically used them to explain his latest moves in Vietnam, for example, but this time, he had a very, very different subject on his mind. The time has come for a new economic policy for the United States Its targets are unemployment, inflation, and international speculation Unemployment and inflation are big concerns for American voters These are the early days of nineteen seventies' stagflation Both are on the rise. So Nixon lays out a radical set of new measures to tackle this stagflationary problem That's when inflation is really high and growth is stagnant Andese measures included investment subsidies, wage controls, price controls, almost five billion dollars worth of spending cuts, which was quite a big deal back then So drum roll Then he turns to the international speculation bit of his address In recent weeks, the speculators have been waging an all out war on the American dollar So unknown to his audience that Sunday evening, or indeed, frankly, most of his own government At the end of his address Nixon is about to fire that torpedo that we mentioned I have directed the Secretary of the Treasury to take the action necessary spend the dollar against the speculators I have directed Secretary Connelly to suspend temporarily the convertibility of the dollar into gold or other reserve assets. Now, the dollar's value is tied to gold and every other major currency is tied to the dollar So by cutting that link, Nixon is threatening to set adrift not only his own currency, but all of his allies currencies as well in a chain reaction. This announcement would become known as the Nixon shhot in a single seememingly innocuous sentence Whether he realized it or not The U. S. president had just upended the entire post war global monetary system that underpinned a quarter century of rapid economic growth. And the thing to stress is until that afternoon, nobody knew it was coming. Apart from Nixon and a tiny band of his very closest political allies who just spent the weekend together holed up in a secret meeting in a forest retreat in Maryland. So how did it all come about How did it go down with America's allies What would the consequences be? Not least for the US. dollar And these are questions that keep reverberating through history. And we're going to be talking about this now in the story of Money from the Fancial Times With me, Jillian Tet and me Robin Wigglesworth What happens next in the story of Money? Nuvein has spent over one hundred and twenty five years helping clients answer this question By investing in the growth of businesses, real estate, infrastructure and natural capital, we continue to deepen our expertise across income and alternatives so investors can confidently write the next chapter of their own portfolio stories. Nuine Invest like the Future is Wing. Visit nouine dot com slash future to learn more. Investing involves risk, principal loss is possible So in today's episode, we'll be combining high finance with international monetary policy And the sometimes grubby inner workings of the Nixon administration To tell this amazing story we have the perfect guest Jeffrey Garton Jeffrey, welcome to the show. Thank you. It's a pleasure to be here. We're so pleased to have you Yeah I mean, Jeffrey, you personally embody three different strands of this story because you worked in H finances as a managing director of Lehman long before I went Bus, of course. You worked on sovereign debt restructuring, a subject close to my heart. You worked at the Blacksone Group And you're also an academic economist with a focus on international trade, finance, and business and you're currently dean emeritus at Yale And if that wasn't enough, you've also found time to do a lot of work in the US government. You were under Secretary of commerce under Bill Clinton? Before that, you worked for the Cartter administration the Ford administration and, believe it or not the Nixon administration Is that right? You actually worked for Nixon? I was very young, but I did. And what was he like to work for? Because of course, history hasn't been that kind to him I was nowhere near him personally. But I was on something called the Council on International Economic Policy which was the equivalent of the National Security Council in the White House And I was at least exposed all of the economic and financial issues of the time But that sounds unbelievably relevant to what we're talking about today. I mean, you also wrote obviously the book on the subject of this episode. It's called Three Days at Camp David David, of course, is the Maryland retreat where the secret meeting took place in nineteen seventy one thrashed out this Nixon shop policy announcement So Jeffrey, I mean, this is a big story. so we're actually going to split it over two episodes with frankly, Jilly and I have been looking forward to this one. and you're going to be our guide through both of them very kindly Well I hope I can do it So let's get started. A Robin mentioned that TV broadcast by Nixon in nineteen seventy one torpedoed the post war global economic order And that post war global economic order, in question, was the same one that we looked at in a previous episode with Ed Conway the so called Brettonwood system As a reminder, back in nineteen forty four in the final months of World War two U. S. organized a massive summit all its allies at the Bretton Woods Rort in New Hampshire And for the US, this conference was actually another front in its emerging post war hegemony So whilst the US military was conquering Germany and Japan on the battlefields of Europe and the Pacific Breton Woods The US dollar finally and comprehensively conquered the British pound to become formally entshrined as the world's leading currency what that meant in practice all of America's trading partners fix their currencies's exchange rate to the dollar And the US in turn pegged the dollar's value to gold. Jeffrereey, The dollar became the lyinchpin. of the global monetary system So can you explain how and why what that really meant in practice to have the dollar as the center of the Bretenwood system Well, the people at Britain wouldood, especially the US and the UK wanted to make a new monetary system that would avoid the problems of the nineteen thirties a time in which there was enormous amount of protectionism And so they decided that there should be one stable currency in the middle of the whole system And that was naturally the dollar because the US currency was so strong and basically everybody wanted it. Yeah. And the US had all the gold at the time as well, right? And the US had aboutbout sixty percent of the world's gold. And the US basically said Anyone who wants to redeem their dollars in gold We will give you thirty five dollars per ounce of gold And the idea was Dollar would be the central stake in the system it would be like the planet around which all the other planets revolved And everybody at that moment had confidence The U. S pull this off in large part because it had so much gold Anyone who wanted to exchange their currency for gold, was given a commitment that the U. S. would do that. And so this was seen as a very, very stable system and the objective was that monetary stability would lead to more trade The whole focus really was on the expansion of trade Well, that's a great point. I mean, one of the consequences of this from what you're saying is that it meant that The system was totally asymmetric. I mean essentially Other countries were dependent on the US promises to convert dollars into gold Is that correct Absolutely. And I think it's hard for us to conceive today the U. S. was so preeminent at that moment It was not only the world's most powerful military machine. But it was the only country in the world that came out of the Second World War. stronger than when it went in. And so the amount of confidence that other countries had and that they could lean on the U. S and that the U. S was their only hope was really palpable And there really was no alternative because the U. S. basically was calling the shots. Okay, so so this is the Montry system that Nixon would eventually inherit a quarter of a century later when he became president in nineteen sixty nine The same system he would go into wreck with that TV announcement in ' seventy one, ending the convertibility of dollars into gold. and of course with everybody asse pegged to the dollar that was a big deal It was kind of surprising because in economic terms, the Breton Woods era seemed to be resounding success, right, Jeff. I mean, those twenty five years before Nixon came to power have been called through a golden age of rapid and stable growth and booming international trade Me the French who like to complain as much as we Brits do they call it the Te Goruse, right How much credit does the Brettonwood system deserve for delivering that economic record It deserves a lot of credit The thing is that the system, it worked But it was under a lot of strain right from the beginning because the task of helping Japan and Europe recover was much, much bigger than anyone envisioned And so it was at first really the US. that supplied all the funds not the International Monetary Fund, which itself was a creation of Breton Woods And if you looked at The Eisenhower administration And then the Kennedy administration and then the Johnson administration There were great strains on Breton Woods And the strains got bigger and bigger but it held until the next administration Let's discuss those strains. What were they? What were the mains of fault lines on the financial side of things then Well, the key strain was this that the whole system depended on country is outside the U.S accepting the dollar using the dollar and knowing that if they ever wanted to, they could take the dollars they were using and exchange it for gold at a fixed rate At first, nobody denied that the US had enough gold. In nineteen fifty five, for example middle of the Eisenhower administration A calculation was made that The U.S had one hundred and sixty five percent more gold than it needed. to redeem all the dollars outside the US By nineteen seventy, nineteen seventy one It only had twenty five percent So over the period, it became clearer and clearer Basic commitment of exchanging The dollar for gold. uh was not credible and A big strain came because there were so many dollars in circulation countountries They didn't need all those dollars. And also, they were very worried about the way the U. S managed its economy And they were afraid that inflation in the U S would actually reduce the value of the dollars they were holding. So all through this period, there was a fear in the US And actually in other countries too, they would come to the U. S. say, here are dollars we want gold and the U.S. wouldn't be able to Rdeem it At this stage, I think even Germany alone had more dollars than there was gold in Fort Knox, right That's probably true. the amount of gold relative to dollars outside the US became lower and lower and lower and It wasn't that people didn't know this because the U.S published the statistics. U They simply didn't want to abandon the system. Britainwood system for fear that they didn't know what was on the other end Okay, let's pause and unpick that a little bit Because these dollars were flowing out of the US because it had switched from having a gargantran trade surplus after World War two actually having a trade deficit by nineteen seventy one And partially that was because the Kennedy and the Johnson administrations in the nineteen sixties had brought in all these new welfare benefits, the so called great society programs Things like Medicare. Medicaid food stamps. Great stuff, right all things that we think of now. But all this government spending helped push the US economy into a trade deficit And then on top of that The US government was also spending ton of money on the Vietnam War as well So you suddenly had a country with a big trade deficit budget deficit, more and more government debt and more and more dollars flowing out of the country suddenly. The U.S was not managing its economy well It trade competitiveness was declining as pan and and Germany and other European countries were recovering And so there were more and more dollars in circulation. So in practical terms, that meant the dollar was massively overvalued peopleeople could see that or sense it Of course, one of the big problems is that when you have governments that are trying to manage The value of a currency what's happening with inflation matters enormously And that was starting to go wrong as well, wasn't it, Jeff? Yeah, the thing is that all the trade or the United States exports and imports was only about seeven or eight percent of the GDP So fromrom an American standpoint They simply couldn't manage their economy to satisfy international requirements It was a domestically based economy. But from the standpoint of other countries, They were very, very concerned because U. S. economic management was so domestically oriented And Julian, as you said, it led to a lot of inflation. It meant that the fiscal and monetary policies We're all about the U. S and U.S. growth. and rest of the world was a secondary consideration Well all of this has start't sound horribly familiar, I must say, but yes there was or also the argument that was put forward by Robert Triffin in nineteen fifty nine, that it was actually the international demand dollars that was the key factor driving things, wasn't it? What was the so called Tiff and dilemma that lots of economic students have to study? Basically what Tiffin said was If the dollar is going to be in the international currency You would need more and more dollars to finance what was an ever growing global economy There was more and more trade, more and more need for dollars that meant that The U. S. had to run deficits in order to supply those dollars And at some point The size of the deficits would be so great that it would cast doubt on whether or not ese dollars were worth what everybody thought they should be. and certainly It meant that The dollars could not be redeemed in gold I don't think anybody anticipated how quickly Europe and Japan recovered and how much the dollar was in demand until it wasn't So you take the nineteen fifties People talked about a dollar shortage There wasn't enough dollars to finance all the increase in global trade But the nineteen sixties they talked about a dollar glut. too many dollars And so Tpin The trip and dilemma was basically indicating that at some point This system had to be totally restructured And of course, that shows once again, in a way that's very relevant today that things can seem incredibly stable and secure and fixed and permanent until suddenly they're not Exactly There's just one other thing from that Nixon announcement in August of nineteen seventy one that I'm really curious to hear your thoughts on. He talks about these international speculators in the TV address and it's kind of very vague and oblique as it were. Who were these speculators? What were they getting up to and why was Nixon so angry at them But if I could take one moment for history During the Bretnton Woods discussions, it was all about stable exchange rates and the expansion of trade. And there was no contemplation of private capital and its importance In fact Breadwood's officials They didn't like private capital crossing borders. They thought that was one of the reasons why. There was such a collapse in finance in the nineteen thirties But capital will come when it comes and it will go where it goes And by the late fifties, early sixties It was clear that private capital was moving across borders in ever greater amounts and with ever greater speed And there emerged a capital market in Europe called the Eurod dollar market These were dollars in European banks that were not regulated by either the Europeans or by the U.S And so what Nixon was talking about was There was a massive amount of capital that was available for speculation and He attributed this speculation to a lot of the financial crises that occurred in the sixties. the evaluation of the British pound. revaluation of the German Mark He called them financial speculators because he was trying to them the enemy and therefore justify all the other measures he was talking about on august fifteenth Well, I have Jeff and Julian, I have a confession to make. I've actually visited previously Soviet run bank in Paris that apparently gave the name to Eurodllars So this was a state run bank from the Soviet Union in Paris on the Hausman Boulevard And its telegram name or address was Eurobank And apparently a lot of dollars that the Soviet owned bank had accumulated through exports and were held there sort of away from seizure from the Americans. And that's how Eurod dollars became known as Eurod dollars. It's a very geeky thing but I visited that banker took her selfie outsideer because I thought it was quite a cool little moment of financial history It was a big thing. It was a big thing in the fifties and sixties, and it was something never contemplated at Breton Woods. Exactly. Well, I would say that the beginning of the dollar crisis, the very beginning, was actually I guess it was nineteen sixty, very end of the Eisenhower administration The Secretary of the Treasury made a trip to Germany twisted Germany's arms first of all not to redeem dollars into gold but also to accelerate They repayments of the Marshall planl pay more for the American troops in Germany and that was the beginning of the recognition that there had to be a big change and all through the Kennedy administration there were efforts to control the outflalo of dollars from the U.S. And those efforts got more intense during the Johnson administration and along the way Britain, devalued C canan't remember how many times I think it was twice And that created shivers through the system because the Bound Sterling was seen as a major currency And it made others look at the dollar and say, arere you next? So by the time Johnson came in he put real controls on outflows of dollars but it still didn't work So the crisis just got bigger and bigger And when Nixon was elected It was about to burst open And we are going to find out just how much peril the dollar was in and what kind of difference this newly elected Pident Nixon was going to make. after the break The future of fixed income investing will continue to blur the lines between public and private markets NuM's credit platform was built to navigate this shifting landscape, channeeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today Nuine. Invest like the future is watching. Visit nouine d. com slash future to learn more. Investing involves risk, principal loss is possible Well, welcome back So just a recap, it's nineteen sixty nine The dollar's position is beginning to look decidably wobbly The dollar's reserves piling up in the foreign central banks are already worth two to three times the value of US Federal Reserve's entire gold reserves So the question is, Will the US be able to honor its pledges O is something going to crack? And this was the moment that Richard Nixon stepped onto the stage. He won the nineteen sixty eight election endnding eight years of democratic rule. So Jeffrey, these days, the Nixon presidency is obviously overshadowed and severely tarnished by the Watergate scandal that came later. But can you tell us a bit more about the man that was inaugurated as president that January in nineteen sixty nine when Watergate was frankly still just an ugly hotel in Washington What was Nixon's background? What kind of values did Nixon bring to the Wall House at the time? And what was he like to work for The Nixon that actually took office was u a respected Eperienced public figure. He had been the vice president for President Eisenhower for eight years He was acknowledged to be very sophisticated strategist when it came to foreign policy and international affairs. He was welcomed because after JFK and the Johnson administrationss There had been so much spending on social programs. and a Republican administration coming in was seen as really necessary par back these very, very lofty ambitions many of which didn't really pan out. Nixon also surrounded himself with An extraordinary group of people, particularly in the fininance and economic ground So I think that in nineteen seventy when he took office. There were really high hopes that he was the right person. Do you see any similarities between Richard Nixon and today, Donald Trump When they both saw themselves as political outsiders. they despise the East Coast elites. They had these incredible political comebacks after they've been written off And obviously they were both more sort of nationalistic figures, if I can use that phrase than their democraatic predecessors had been. I wondered how long it was going to take you to get to the T word, the Trump word. Yes It is indeed the question I think many people would ask immediately First, let me let me talk about the distinctions. Nixon was very experienced as a public figure It was a political heavyweay, right He was a political heavyweight. He had been in the Congress He had been vice president, I as I said He had traveled the world. He knew A lot of statesmen And actually, he also had a very deep knowledge of public policy. He was into budgets. He also did things that were not expected of him, for example Conservative administration set up the Environmental Protection Agency And so for all those reasons, I think he is very distinguishable from from chop. whereere they sound very similar is They both very A revengeful They are lookingoo for the big grand gesture The height of Nixon's Fame was really Nixon going to China Nixon, who had been very highly anti communist public figure going to China. That was a big big move and Nixon just delighted and shocking his You know, shocking the audience He was not a nationalist in the way that Trump is In fact One of the major things about the Nixon shock is that It was designed to make an adjustment in Bretton Woods But in no way was it designed to wreck Breton Woods. In fact, Nixon kept emphasizing that he believed in free trade, he believed in free flows of capital that there had to be an adjustment so that the system could Endure It was no No question about the Nixon administration's wanting the spirit of Breton Woods, the multilateralism, you know, the economic liberalism They wanted all that to continue. They just said there was an imbalance at the center Whereas basically has toottally disrupted the global economy and no I don't think anybody can say that he has a vision for where it should go other than that the U. S. should be The harm the big beast in the jungle But obviously, Nixon was quite different from some of his democratic predecessors, right? How quickly did America's allies realize they were dealing with somebody fundamentally different in the White House. someomeone who well Maybe not intending to shatter the Bretonwood system was at least willing to take radical steps that could put it at risk. When did the rest of the world realize that something was afoot? Well, I think what really disturbed other countries was that the strains on Britain were getting Bigger and bigger And when the Nixon administration came in, Nixon had a policy of what was called at the time Benign neglect They just didn't want to deal with it And this infuriated the Europeans and the Japanese because They at least wanted the U. S. to be trying. And so as these strains built up And as Washington basically said to the rest of the world In fact, the Secretary of the Treasury, John Connlly said this It's our dollar, but it's your problem This really got other countries worried that the U. S. was going to allow the system to collapse and not do anything about it. So when Nixon announced his series of measures in august nineteen seventy one, but it came as a great surprise. Nixon may have shown benign neglect, as you put it, towards the international monetary system But he wasn't afraid to take an aggressive stance towards US. allies and other foreign policy domains I mean, there was the Nixon doctrine, of course. Well, the Nixon doctrine was very important because what Nixon basically said there nineteen sixty nine He was really talking about Vietnam. But he said that the U. S would no longer supply soldiers and weapons to every country that was fighting communism they would only do this for their close allies. the Nixon doctrine was interpreted as meaning the U. S. cannot shoulder all these burdens And in fact, that's exactly what was happening in the financial arena Nixon was saying We need more burden sharing term we hear a lot about today We need other countries to expand their defense budgets. We need other countries to contribute more to the World Bank and the IMF just couldn't afford to do it all and this Qion about the dollar in gold. was really a major part of that. Just to recap, you've got a dollar that's looking increasingly overvalued. And you've also got these swelling trade imbalances whereere essentially Japan and West Germany are running huge trade surpluses getting loads of dollars as a result And the whole system's looking more and more potentially strained, if not unstable As I understand it, one of the things that Nixon complained a lot about was the idea that Germany and Japan weren't opening up their markets enough and that was very unfair. Again, that's got echoes of today I'm curious from the perspective of Germany and Japan though, or West Germany as it was then Who did they blame for the system coming under strain So they certainly the U. S. was mismanaging its economy U and they felt that there was too much inflation in the U S for example We had a lot of collective bargaining between labor and business driving up wages and driving up prices. But I think, you know, looking at it, looking at it dispassionately. Everybody was to blame. The Germans were mercantilistic The Japanese were really mercantilistic They were super, super competitive. I'll give you just one one number Between nineteen sixty five and nineteen seventy America's exports of goods increased one hundred percent Germany's increased two hundred percent Pans increased four hundred percent. So the whole system was under great strain and the U. S basically was confronting A lack of competitiveness, a lot of the same issues that we have now. Okay, so we are now in a situation where the US economy is huge and dominant. but maybe a little bit less dominant than it had been. The Bundus Bank in West Germany, the Bank of Japan in Tokyo All these foreign central banks are accumulating massive haolds of dollars. But they're becoming quite more and more concerned about how convertible these dollars will be into gold because the system was just not looking as sustainable. The US dollar reserves just weren't what they once were Of course, everybody wanted to keep the Brettonwood system alive I mean, even Nixon, as you said, Jeffrey, didn't actually want to demolish it But of course, you also have these speculators to contend with These evil money men, right Ual is sloshing around, capitalizing on the devaluations of the pound, the franc in the nineteen sixties And by may nineteen seventy one Things really start coming to a head for the dollar, right? Tell us what happened that month The dollars started to flow into Germany. there was a sense that Germany was going to have to revalue its currency and the speculators were betting that it would and so they wanted to get in early And massive amounts of dollars flowed into Germany such that it had to basically Stop accepting dollars altogether And it was really clear, the U. S was petrified that now countries were going to come with all these dollars and ask for the gold And there wasn't enough gold And so if there had been this gold rush, so to speak the U. S would have de facto defaulted on a treaty commitment And they were not only worried that this would be disastrous for the global financial system but that it would call into question all other U.S commitments on the on the security side. So by the end of May Nixon and his close advisors really began to think through what they had to do Apparently, in the newspapers at the time, there was fear of the French. So the French had been pulling their physical gold out of the United States for a while and keeping it in Paris. But in the summer of ' seventy one, President Pompoudu sent a battleship to collect the last remaining French gold that was held at the New York Federal Reserve And that made headlines. And obviously it was just physically moving gold from one place to the next. It was Franis gold, but that apparently was part of this general feeling that thingsings were fraying and maybe about to unravel at that time Probably so Countries were holding off for the most part because Uh The Breadenwood system had been so successful There was enormous fear about what would happen the system cracked And so The central banks We're actually in very close coordination They were not going to make the decision to take their currencies and exchange it for gold But they didn't have control over their governments Wh might do that They also, I think there was a fear, especially Germany and Japan And here's where the foreign policy stuff comes in again The U.S. was their protector The U.S was country that was basically supplying the military protection. And so while on economic and financial terms, they might want to exchange their currency for gold They were quite uncertain about what the United States reaction would be in the foreign policy and defense arenas. So There was kind of a standstill Except every once in a while, France would come in and want some gold. Belgium would do that. They were not great amounts, but they were enough to really worry the U. S. What if What if Germany and Japan actually changed their mind because U. S. policies were failing. As Jillian said, there was more inflation There was more unemployment the bargaining system was out of whack balance of payments deficit was getting bigger Robin, I think you alluded to this that in nineteen seventy one, for the first time Since eighteen ninety three The U. S. ran a deficit on the merchandise trade balance That was a real shocker because up until then There were sufficient trade surpluses to pay for a lot of America's overseas expenses But when the balance of trade turned negative, It really appeared that the game was up So the press of the building Things are looking increasingly unsustainable somethingomething's going to have to give