David Westin’s “Balance of Power” show on Bloomberg is often insightful. Today I learned of Jeffrey Garten’s new book Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy. It is a bout President Nixon’s decision to take the US off the gold standard, under which gold had been pegged at $35 per ounce.
It was a momentous decision by Nixon, but one that has received less attention than other momentous Nixon decisions: the opening to China, pursuit of the Vietnam War, creation of the Environmental Protection Agency, and of course Watergate.
I haven’t read the book, but I should because it’s time someone recognized how important that 1971 decision was. It changed the way the world economy worked. It opened up the global financial system but also made it more unstable. Jimmy Carter got a lot of grief for the high inflation that took place during his administration. I think at least part of it was due to Richard Nixon taking the US off the gold standard, making it much easier for inflation to take place. Markets were adapting to the new reality of depending on the Federal Reserve, rather than the gold in Fort Knox to control the value of the dollar. Central banks around the world became more important.
Despite being on the gold standard, Nixon was faced with inflation of over 5%, as well as high unemployment. He was under pressure to devalue the dollar’s price against gold. Wikipedia says that Nixon conferred with recently appointed Treasury Secretary Connelly, Fed chair Arthur Burns, Treasury Under Secretary Paul Volker (later to be Fed chair under Jimmy Carter), and others, probably including OMB chair George Shultz (later to be Secretary of State under Reagan). A Wall Street Journal article said that Fed chair Arthur Burns played only a minor role there and that Henry Kissinger, who may have been preoccupied with China, was not there.
Garten says Nixon’s decision showed that the US could no longer support the world economy alone. To Nixon’s credit, he took the initiative, rather than waiting for a crisis when the world came calling all at once to collect gold for dollars and there was not enough gold to pay everybody. Taking preemptive action was the right decision, even if it left Jimmy Carter holding the bag a few years later. Whether it was exactly the right action is debatable, but the United States and the world have prospered in the fifty years since then.
In his interview on Bloomberg, Garten mentioned that there are some similarities between 1971 and today. Financial conditions are unsettled today and there is a potential big change in the offing, in the form of cybercurrencies. I don’t think that Bitcoin is necessarily the future of cybercurrencies, but I think some new form of it may be, probably a currency connected in some way to a central national bank, or maybe several central banks. It may use blockchain, or some new improvement for authenticating transactions that uses less energy. Will Bitcoin be to the new cybercurrency what gold is to the dollar? I doubt it, but it could be. Many people are betting that it will be.
Will a new international conference set up a new system, as Bretton Woods did after World War II? Or will individual nations set up their own mechanisms as Nixon did in 1971?