I have posted twice this month about articles discussing the massive economic and monetary changes instituted by President Nixon in August 1971 and their continuing relevance for today. Monday marked the fortieth anniversary of the speech in which RN announced the end of the Bretton Woods system and the 90-day wage-prize freeze to a startled nation, and all through this week dozens of articles and hundreds of blogposts have pondered the significance of the decision to untether the dollar from US gold reserves.
A good many of the articles, especially in conservative sites and newspapers, have characterized RN’s actions of that month as an unmitigated mistake. Typical of these are two articles appearing in the Wall Street Journal. One is by Lewis Lehrman, the former head of the Rite Aid drugstore chain best known as the Republican candidate who came very close to defeating Mario Cuomo for the New York governorship in 1982. He is also famed for often arguing that the US should return to the gold standard – indeed, in 1982 he co-authored the book The Case For Gold with the man who is still the metal’s leading champion on Capitol Hill and the GOP presidential primary circuit, Rep. Ron Paul. (As it happens, Lehrman is an authority on the career of Abraham Lincoln, who substituted a silver standard for the gold one to help generate money to fight the Civil War.)
In his article, Lehrman mostly just recounts the meetings that led up to RN’s decision to abandon Bretton Woods, and seems to take it for granted that readers share his view that the action was harmful to the American economy. Another article by Detlev Schlichter, in the WSJ’s European edition, places the decision in the context of decisions by governments over the ages to rely on paper money, always (according to Schlichter) with the result of inflation either producing social collapse of a return to hard currency.
But a more balanced examination of the “Nixon Shock” can be found in the blog of the Toronto Globe and Mail, by Kevin Carmichael. He points out that Nixon’s decision to adopt the policies championed by Treasury Secretary John Connally (and, more reluctantly, accepted by Federal Reserve chairman Arthur Burns) was partly forced, as are a good many of today’s economic decisions in Washington, by events in Europe. In fact, the reason the President chose August 15, Sunday night, to announce the end of the dollar’s connection to gold, was because the next day Britain was planning to call in American obligations in gold to its treasury in an attempt to prevent another devaluation of the British pound, and other European countries were moving toward similar action. As George Shultz, who was Director of the Office of Management and Budget in August 1971, points out at Forbes.com, had this not been an imminent threat, the President would have instituted the end of Bretton Woods the following month, which might have given the world’s financial structure more time to prepare for changes on so vast a scale.
Carmichael notes that some of the events that resulted in the weakening of American currency and economic performance in this decade could not have been anticipated in 1971 – for example, China’s rapid rise to economic superpower status. He links to several thoughtful articles examining the lessons of 1971 and dealing with the question of how, or if, there should be an effort to re-create something equivalent to Bretton Woods today. His post concludes:
A year ago, there was talk of replacing the dollar with a new international currency, perhaps the IMF’s special drawing right. But that talk has died off. Tweaks to the current order appear to be the best the G20 will achieve, and that could even prove a stretch.
The world economy has changed dramatically over the past four decades, but one thing has remained constant: national interests still trump the global good. Examples abound: the U.S. debt-ceiling crisis, China’s refusal to allow faster appreciation of the yuan and the efforts of Japan and Switzerald to curb the ascent of their currencies.
“It may not be polite to speak ill of the dead, but Bretton Woods has been romanticized,” Mr.[Marc] Chandler [of Brown Brothers Harriman] said. “On the 40th anniversary of its death, the conditions do not exist for a new international economic order. The recent policy responses confirm that domestic considerations remain primary.”