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Faculty Viewpoints

How the ‘Nixon Shock’ Remade the World Economy

In a new book, Yale SOM Dean Emeritus Jeffrey Garten explores a moment when the U.S. realized it needed to take a different role on the global stage in response to trade and economic challenges. Richard Nixon’s decision to delink the dollar from gold, announced without warning in August 1971, remade the global monetary system in an instant. We talked with Garten about the three days of drama leading up to the announcement and how it reverberates today.

President Richard Nixon giving a television address

President Richard Nixon announcing a series of economic measures on August 15, 1971. AP Photo/HWG.

Q: What led you to write Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy?

In August 1971, President Nixon took his top economic advisors to Camp David. Over three days, they made the radical and momentous decision to cut the dollar loose from gold. In the process, they unilaterally changed the whole global monetary system.

The cover of "Three Days at Camp David"

They made a very tough decision, which I think was the right one. They had to do this unilaterally, suddenly, and with enormous force that would leave no doubt in the minds of market makers that they were going to get their way. That’s what they did.

I thought the story was worth telling now for what it says about how America’s role in the world had to change then and how it’s going to have to change again in the future.

Q: What was the context for the decision?

At the end of the Second World War, there was literally no functioning global economy, so nations got together to create a new trading system and a new monetary system. That monetary system was devised in a town in New Hampshire called Bretton Woods, so it was called the Bretton Woods Agreement. One of the key elements was that the dollar would be pegged to gold at $35 an ounce. Other central banks could exchange the dollars they held for gold. In that sense, the dollar was as good as gold. Every other currency had a fixed exchange rate to the dollar.

They established the dollar-gold standard to create some predictability and stability for global commerce. For the next 25 years, it was a tremendous success. The dollar became the global currency. Everyone was happy to hold it, in large part because they could exchange it for gold if they had any doubts about its value. It was part of the phenomenal recovery from the war in Europe and Japan. It also created enormous economic prosperity in the U.S., all through the ’50s and ’60s.

When the Nixon administration came into office in 1969, they realize that the world economy had grown very, very big. Everybody wanted dollars, so the Federal Reserve was printing lots of dollars. As a result, there were four times as many dollars in circulation as there was gold in reserves.

The rate of $35 for an ounce of gold was good in 1944, but it hadn’t changed, so by 1971 the dollar was really overvalued. That meant imports were very cheap, and exports were very expensive. We experienced our first trade deficit since the 19th century. We were experiencing employment problems. For the first time, the U.S. started to talk about losing competitiveness.

In the broadest sense, the United States couldn’t uphold all of the responsibilities that it inherited after the Second World War. For decades, the U.S. was so predominant that we could help everybody; we lifted the world economy and didn’t worry about the domestic economy because it was so strong. Nineteen seventy-one was the year the U.S. began to understand the Marshall Plan mentality was over.

On top of all that, there was the beginning of inflation. If it continued long enough, dollars would be worth less than they were before. The Nixon Administration was afraid that other countries were going to ask for gold and the U.S. wouldn’t have it. That would have been an enormous humiliation and a breaking of their commitment to exchange gold for dollars.

What the U.S. really wanted was some way to devalue the dollar, but because it was pegged to gold, the administration couldn’t do that.

Q: The Washington Post journalist and author William Greider described August 15, 1971, as the precise date on which America’s singular dominance of the world economy ended. Why hasn’t it received more attention?

It’s in the nature of international economic issues that only a small group of people understand and appreciate the impact of policy decisions like this. That said, Nixon’s announcement got a lot of attention at the time—but a lot happened that summer. We were pulling troops out of Vietnam. In June the Pentagon Papers were released. In July Nixon shocked the world announcing he planned to visit China after decades of no diplomatic relations. Nixon loved the image the China announcement created. He was beginning to be known for making big, bold decisions that would surprise everyone and do something constructive.

He saw this economic meeting as a similar opportunity. The decision would be made secretly at Camp David. It would be announced with great fanfare and with one stroke, he would modernize the global monetary system and demonstrate to the American people that he knew how to steer the U.S. and the global economy.

The days leading up to the announcement were critical because, at all costs, Nixon needed unanimity. He needed the U.S. to speak with one voice because he didn’t know how other countries or international markets would react. He didn’t want to create a market crisis because there wasn’t consensus within his own economic cabinet. Like any good team leader, he wanted everybody to buy in.

Q: There was a real tension emerging from the different perspectives of the people at Camp David. Who did Nixon bring with him and why?

Most of the people around Nixon were great technocrats, highly respected, but not politicians. John Connally, the secretary of the treasury, had been at the right hand of Lyndon Johnson and a three-term governor of Texas, so he was a really experienced political operator.

Most people in that period were very sympathetic to the existing global financial system. It had been extremely successful. Most people would have been very hesitant to take a sledgehammer to it. Connally had no hesitation to sever the link between the dollar and gold. He had no hesitation doing anything if he thought it would benefit the U.S. He just didn’t care about the rest of the world and Nixon knew that. Nixon was more sensitive about international implications, but he understood Connally was the perfect battering ram.

Connally’s unknown undersecretary of the treasury was Paul Volcker, who became one of the most significant chairman of the Federal Reserve that we’ve ever had, but at the time, he was a technocrat who understood the international monetary system down to the plumbing. Though Volcker was an internationalist, Connally respected his technical acumen. They became a close and very effective team. Nixon tolerated Volcker only because Connally needed him.

Also attending was George Shultz, who became one of the great statesmen of the 20th century. At the time, he was the head of the Office of Management and Budget. He had been the dean of the business school at the University of Chicago. He was a free-market acolyte of Milton Friedman.

Shultz didn’t want the dollar devalued so much as he wanted a free-market system of currencies where every currency floats against every other currency. It’s the system we have today, but Nixon and Connally wanted to devalue the dollar and then return to fixed exchange rates.

Q: So many of these people became major figures. And in the discussions, they raised issues that proved prescient years or decades later—Shultz with floating exchange rates and Peter Petersen on competitiveness.

Every one of the people there was signaling something that we will see in the future. Peter Peterson was the coordinator for international economic policy. He was the only person there from industry. He had been CEO of Bell & Howell and eventually co-founded the Blackstone Group. He was the only one arguing that American competitiveness was about much more than exchange rates and trade negotiations. He believed what the U.S. really needed was more investment in the workforce and in high technology. It’s the very debate that we’re having today, but it was too early to get major political attention.

Q: And finally, there’s Arthur Burns, the chairman of the Federal Reserve. Why was the head of the independent central bank willing to take part?

Arthur Burns understood the importance of the Fed’s independence, but he had known Nixon for a long time and was desperate to be a friend and to be close to the president. Nixon was worried that if Burns questioned his decisions, global markets would go berserk, so he brought Burns into the fold. It was a good political move by Nixon; it was really bad for the Fed’s reputation.

When you look at the whole team, it had so many different viewpoints. It’s a tribute to Nixon to come away with a strong consensus.

Q: The decisions they made fundamentally changed global monetary policy, yet no one with a foreign policy focus attended.

Nixon was a foreign policy president. He had an enormous amount of experience stemming from having been Eisenhower’s vice president. He didn’t have much confidence in the secretary of state [William P. Rogers], so he cut him out. He had a lot of confidence in Henry Kissinger, his national security advisor, but Kissinger was in Paris negotiating with the North Vietnamese and literally couldn’t make it to the meeting.

Probably, too, Nixon was worried that anyone really focused on foreign policy would try to slow the decision down, maybe push for consultations with other countries. Nixon wanted it to be a shock.

Q: And it was. He delivered what came to be called the “Nixon Shock” in a televised speech that preempted Bonanza. What did he say?

Sunday night, Nixon went on television and very clearly articulated what had been decided. The dollar would not be backed by gold anymore. There would be a 90-day wage-price freeze in the U.S. to put down inflation. And he imposed a 10% tariff on all imports, which would be removed only after there was a new international monetary agreement. That put a gun to the head of all other countries. Not only was it done unilaterally, but it was done with enormous force. The United States could never get away with that again—it was a singular moment. These policy changes had enormous implications. It’s hard to think of a bigger economic package announced all at one time.

Q: How was it received?

Domestically, it was received with enormous approval. It had the effect that Nixon wanted. Politically, he was seen to have grabbed control of a situation that had been deteriorating—namely, increasing inflation and growing trade imbalance.

A wage-price freeze had never been done in peacetime. It was very controversial. He knew that 90 days wouldn’t be the end of it, but it was a way of saying, the U.S. is willing to take drastic steps to get a handle on its inflation.

That tough domestic measure gave the U.S. credibility with other countries. Which was important because markets abroad really went into chaos. But then the U.S. sent Paul Volcker, and eventually John Connally, to all the key countries for negotiations. People settled down because they understood the changes had to happen. It took two months of very intense negotiations to come up with a new agreement about what the dollar and other currencies would be worth.

That agreement on a new set of fixed exchange rates didn’t last. There was the OPEC oil embargo. There were food shortages. A huge number of disturbances in the international economy eventually made it clear the fixed system couldn’t last. In 1976, the IMF blessed floating exchange rates. The arrangement had actually been in effect for some time, but it took a while for countries to get comfortable with it as the best possible option.

Q: Bretton Woods was a successful international monetary agreement that emerged from negotiation. Why didn’t Nixon want to negotiate an update?

Some of Nixon’s advisors would have preferred negotiation. Nixon and Connally had concluded that holding negotiations would cause market crises. Every time there was an announcement about the negotiations, every time somebody blinked, there’d be 20 interpretations and a continual economic crisis.

“Nixon masterfully created a situation where suddenly countries understood that they needed coordinated policies to deal with finance, trade, energy, and food. We entered a period of enormous international cooperation.”

If anyone had said that the outcome of this unilateral decision would be greater international cooperation, no one would have believed it. I’m not sure that Nixon would have believed it. But Nixon masterfully created a situation where suddenly countries understood that they needed coordinated policies to deal with finance, trade, energy, and food. We entered a period of enormous international cooperation on the heels of this very tough decision that Nixon made at Camp David.

Q: You note in the book that when Nixon delivered the speech his economic advisors had a plan for the next day, but they didn’t have a plan for much more than that.

I tried to write something which shows how governments really work. Often, they can make a decision, but they can’t really envision what the collateral impact is going to be. They try. They have lots of scenarios. It’s like planning for a war—when the first shot is fired, all the plans go awry. That’s what happened.

But these guys were smart and resilient, and they were on the same team. Even though they had very different viewpoints, Nixon kept them in harness. They were able to adjust to big changes in the global economy that they never envisioned.

Q: Did writing the book change your view of Nixon?

I came away with a lot more respect. Before writing the book, my perspective was almost all Watergate and the opening to China.

Some people think this whole episode was only about his reelection. I can’t prove it wasn’t, but this was Nixon before Watergate: he was actually quite a skilled, effective political figure. He felt that if he didn’t get a handle on the economic issues, his foreign policy accomplishments would be ignored. And I think he was worried that these monetary issues would affect foreign policy.

Q: Fifty years on, what can we learn from looking at that moment?

International and domestic issues are even more joined today than they were then. We have to be very careful in taking domestic decisions that have international repercussions. And a really good example of that is President Biden, who I have enormous respect for, talking about an industrial policy, what they call the Buy American Provision, which means that they are going to block the purchase of foreign goods in favor of American goods. This is dangerous policy because other countries can play that game too.

There are a lot of similarities between what’s going on now and what was going on in 1971. There’s inflation and big trade deficits. There are challenges to the dollar. On the horizon, we can see there will be challenges with regard to China because of the scale of its economy and from central bank digital currencies. There are going to be real problems on the currency front. I think we are on the cusp of having to make some really big decisions about another change in the global financial system.

History is good to understand for context. We can look back on how they did it, what went right and what went wrong. We’re not going to repeat what they did. We don’t have the unilateral capabilities that we had then. But Nixon had around him some really skillful people. Biden could do worse than to try to emulate that. Not everybody had the same view. Sometimes you say the team works well, but they all think the same, they have the same instincts. Nixon did something very different. I think that was very powerful.

Department: Faculty Viewpoints