This is an opinion editorial by Wilbrrr Wrong, Bitcoin pleb and economic history enthusiast.
Aug. 15 marks the anniversary of Richard Nixon’s 1971 decision to sever the link of the U.S. dollar to gold. A recent book by Jeffrey Garten, “Three Days At Camp David,” gives an excellent behind-the-scenes look at the process that led to this decision. The ultimate shape of the policy shift was a mixture of Cold War geopolitics, domestic Republican vs. Democrat jockeying and Nixon’s obsession with his 1972 reelection.
In reading about this time period, it’s hard to escape the conclusion that Bretton Woods was a system of control that was predestined to fail due to an inherently poor incentive structure. The rules of Bretton Woods often required politicians and governments to act against their own interests, and impose economic pain on their own people in favor of other nations and international stability. As this system’s tensions came to a head in 1971, peoples’ lives and businesses became subject to the vagaries and competitions of international power politics.
Bitcoin presents a compelling alternative system in which the selfish incentives of actors strengthen the network and monetary policy is known by all. This certainty allows for long-term planning and stability, especially as power politics and questionable government policies continue in the current day.
The Fraying Of The Postwar Order
For all the valid criticisms that are leveled against the Bretton Woods system, it did provide stability in the aftermath of World War II. The U.S. pledge to convert dollars for gold provided confidence for the world to rebuild after the devastation of 1939-1945. During this period American business and technology reigned supreme.
But as 1971 came, all was not well in the free world. Bretton Woods had established a system of fixed exchange rates between currencies. These rates were no longer realistic, given the remarkable recoveries of West Germany and Japan, among others. Indeed, these static rates had played an important role in the growth of powerful export sectors in these previously war-torn countries. As these export-based economies grew, America’s trade surplus shrank, until in 1971 it made the turn to a trade deficit for the first time since 1893.
The trade deficit gave rise to domestic struggles. Competition from artificially cheap imports increased the power of labor unions, who pushed for higher wages and job security. Labor and management also fought over corporations making investments and sending jobs overseas, a practice which was incentivized by the dollar’s elevated purchasing power.
Added into the mix was fiscal profligacy from the federal government. Deficits were driven by the expansive social programs of the 1960s, but also by the U.S. role as military protector of the West. Along with the Vietnam War, America also bore the expense of its troops stationed in Europe.
A final bit of stress came from trade barriers put up by American allies. These barriers were erected in the 1950s, when allied economies were taking the first steps to recover. In 1971, these countries had made tremendous strides. However, since much of their recoveries were based on exports, they were highly resistant to lowering the trade barriers.
Taken together, the U.S. of 1971 was being shaken from its long period of unquestioned economic prosperity and facing the real rising issues of inflation and unemployment. Nixon held a strong belief that his previous loss in the 1960 presidential election was due to a badly timed recession, so he was highly motivated to keep the economy and jobs growing leading up to 1972.
The Players
Policy discussions in the summer of 1971 featured four key players:
Richard Nixon
Nixon was born to a poor family in California and worked his way to Duke University through a combination of grit and ambition. He started his political career by unseating a three-time incumbent in the House of Representatives and made a fast impression as an effective soldier in pushing Republican legislative priorities.
Nixon was chosen as vice president in 1952 because Dwight Eisenhower, a universally revered military legend, wanted to stay “above the fray,” and he wanted someone on his team who was willing to do the dirty work to fight political battles.
During the 1950s, Nixon built impressive foreign policy credentials, and became respected as a gifted geopolitical thinker. As president, he would concentrate on grand, unexpected initiatives that changed the rules of the game. One of his most proud achievements was his 1972 visit to Beijing, meant to split China off as a solid Soviet ally.
This diplomatic coup was announced on July 15, 1971, exactly one month before he closed the gold window.
Nixon’s main interests were in geopolitical strategy and the Cold War. When it came to economics, his primary concern was his fundamental belief that recessions are what causes politicians to be voted out. Garten explains in his book that Nixon’s biographer wrote, “Nixon repeatedly interrupted Cabinet meetings to go over the history of Republican defeats when the economy was in slow growth or decline.”
John Connally, Secretary Of The Treasury
Connally, a Democrat, was former governor of Texas. He was a charismatic and ruthless politician. He was nominated by Nixon at the start of 1971 to shake up his economic team and create allies in Congress.
An unabashed American nationalist, Connally saw the European allies and Japan as ungrateful for putting up trade barriers after the U.S. had provided for their military defense in the 1950s and 60’s. In describing the gold window decision, he told a group of distinguished economists, “It’s simple. I want to screw the foreigners before they screw us.”
Connally did not have a finance background, but he was a quick study and would come to rely on Paul Volcker to back him up on the details. His large personality would give him outsized influence leading up to August 1971 and he would aggressively lead political and international negotiations following Nixon’s announcement.
Arthur Burns, Chairman Of The Fed
Arthur Burns is remembered as the Fed chairman who failed to contain the inflation of the 1970s, but in 1971, he was one of the most respected economists in the nation, with experience across academia and government and he had many relationships with business leaders.
Burns came to the White House in 1968 as Nixon’s economic counselor and one of his most trusted confidants. In appointing Burns as Fed chairman in 1970, Nixon’s goal was to have an ally who would keep the economy strong, and bluntly, do what the administration told him to do. Nixon made many private remarks disparaging the “supposed” independence of the Fed.
The former allies would come into almost immediate conflict. Nixon strongly preferred lower interest rates and an increase in the money supply. Burns wanted to defend the dollar and refused to budge on interest rates.
Another point of contention was wage and price controls. Congress had recently passed a bill to give the president legal authority for these controls, however they went strongly against Nixon’s free-market philosophy. Burns angered Nixon with repeated speeches advocating for the extensive use of wage and price controls to keep inflation in check.
As the Camp David weekend approached in 1971, Nixon’s team realized they had to bring Burns on board with the administration’s new economic package. Closing the gold window was a dramatic new direction, and Fed opposition would fundamentally undermine the initiative.
Paul Volcker, Treasury Undersecretary For Monetary Affairs
Paul Volcker was relatively unknown in 1971, however over the following decades he would come to be known as one of America’s most trusted public servants. He cultivated allies across Congress and several presidential administrations through honest discussions, unimpeachable integrity and deep knowledge of the monetary system. Volcker and Connally would establish a close working relationship, despite disagreement on several issues.
Volcker’s personal notes from this time period contain an interesting passage, which can be contrasted with Satoshi Nakamoto’s famous passage from the white paper. Volcker wrote:
“Price stability belongs to the social contract. We give government the right to print money because we trust elected officials not to abuse that right, not to debase that currency by inflating. Foreigners hold our dollars because they trust our pledge that these dollars are equivalent to gold. And trust is everything.”
This is a high-minded sentiment, and it reflected Volcker’s personality well. However, Satoshi clearly believed that public officials would always break that trust eventually, since their incentives are often skewed heavily toward debasement. Certainly Nixon had a marked skew toward money printing.
Currency Turbulence In The Summer Of 1971
As early as 1969, Volcker made presentations to Nixon and others on potential modifications of Bretton Woods. Volcker put together a report which described four options. This report would shape the broad outlines of policy discussions leading up to August 1971.
Option 1: Unmodified Bretton Woods
This was presented for completeness’ sake, however it was not seriously considered. Tensions were rising, and officials could see a crisis on the horizon.
A simple reason for this option’s lack of feasibility was that the U.S. did not have the gold to pay for all dollars outstanding. U.S. gold holdings were $11.2 billion, but foreigners held $40 billion. At any moment there could be a run on gold.
A 1967 incident shows the high-level strains at the time. America and Britain threatened to withdraw troops in retaliation if West Germany demanded conversion of their dollars to gold. Bundesbank chairman Karl Blessing responded with the “Bundesbank Blessing letter” to assure the U.S. that West Germany would not seek gold…
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2022-08-15 19:06:39
