Dirk Ehnts reviews Jeffery E. Garten’s book Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy.

In 1971, Richard Nixon summoned his advisors to discuss changes in economic policy. The most prominent of the subsequent reforms was that the US administration closed the gold window. This was a significant event since it untied the dollar from gold. The international monetary system, which was built on a promise to exchange dollars for gold at the Federal Reserve Bank, came to an end. Its heyday lasted roughly from 1871 to 1971.

Therefore, the secret meeting held at Camp David on August 13-15, 1971, is interesting as a turning point in monetary history. Removing the link between gold and dollar meant that all other currencies, which before were tied to the dollar, were now free to float.

While today, half a century later, it is normal that exchange rates are determined on foreign exchange markets, back in 1971 it was a step into the dark. The resulting international monetary non-system is still with us.

Running out of gold in the Bretton Woods System
Since the dollar was convertible, foreign central banks could choose to convert their dollar holdings into gold. A run on the dollar would result. The US ran a trade account deficit, which was ridiculously small compared to1 the US situation in past decades. The US government feared that foreign central banks would expect the dollar’s exchange rate to fall, since Americans imported more than they exported. That meant that there was more demand for foreign currency (to pay for imports from the rest of the world) than for dollars (to pay for imports from the US). The way situations like this played out under the rules of the Bretton Woods system was that the US would devalue its currency or ask other countries to revalue theirs. The result would be a loss for foreigners holding dollars.

Jeffrey Garten’s book focuses very much on the persons present during those three days at Camp David. The book’s natural audience will have an economics background; the topic is not of general interest. That does not mean that it is not interesting, but Garten’s book suffers from the problem that the weekend in question was rather uneventful. In short, Nixon had to deal with a variety of economic problems and wanted a big solution, which his staff had prepared before the meeting.

One very relevant question about the US closing the gold window in 1971 would be whether it was strictly necessary.

The most pressing financial problem was that the US felt it was running out of gold. One way to stop the loss of gold would be to devalue the dollar against other currencies so that the US would run trade surpluses, which would create net liabilities instead of claims on the dollar and therefore gold for the rest of the world. Since central banks held significant amounts of US dollars, a devaluation of the dollar would create losses.

Garten ends his discussion at that point, which means that he misses some important points.

Central banks cannot run out of their own money and they also cannot go bankrupt. That means that they can shoulder unlimited financial losses without losing their position as monopoly issuer of domestic currency. One very relevant question about the US closing the gold window in 1971 would be whether it was strictly necessary. Why did the US government not tell other governments to just stomach the losses when the dollar devalued? Why did it not tell them informally that they cannot swap dollars into gold anymore?

Garten shows Nixon as a politician interested in how the public perceives him. He is not married to ideological views about the economy or society. Given that the US had rising inflation rates and also rising unemployment rates Nixon wanted to act big. He worried about the mid-term elections and was particularly interested in economic policy. It was clear to him that the economy mattered for the election and he wanted the Fed to continue its policy of low interest rates. He also wanted to increase government spending to create more employment. Nixon, just as Garten, thought that inflation could only be fought by rising interest rates, which would cause unemployment and hence cost Nixon votes. That is why he preferred fiscal policy.

The book provides a panorama but suffers from being weak on economic theory.

The book starts with three chapters setting the stage. Then, the actors are introduced. In the third part, Garten walks us through that weekend. In the concluding chapters he discussed the consequences of the US going “off gold”. This setup is interesting for those who are interested in how economic policy is actually made. Since there is a lot of harmony and not a lot of conflict during that weekend, not much can be learned though.

The book provides a panorama but suffers from being weak on economic theory. For instance, the author thinks that the dollar, as the world’s safe asset, would allow the US “to finance its deficits with considerable ease and at low interest rates”. While this is a common textbook view, the trade deficit is nevertheless the result of payments that lie in the past. Therefore, a trade deficit cannot be “financed”. Also, Garten writes that in 1971 “the world entered an era of fiat currencies”. However, the Bretton Woods system and the gold standard tied existing fiat currencies to gold, an oft-betrayed promise.

The book is most interesting when it comes to the lack of a long-term plan. The US government just cut the link to gold unilaterally. It was clear that the rest of the world would be taken by surprise, but Nixon wanted to appear strong.

In the background, there was a developing debate in the US policy circles about the lack of competitiveness in the US economy, which recorded its first deficit in the trade account just prior to 1971. With hindsight, it is noteworthy that the US initially fought the trade account deficit by changing economic policies. Nixon’s new economic policy pushed through on that weekend included a 10% tariff across the board, price and wage controls and the expectations that other countries would revalue their currencies.

This is a far cry from today’s world, where the US trade account is always in the red and the US allowed China to fix its exchange rate to the dollar below what would have been considered competitive. Peter Peterson was framing the debate in terms of competitiveness, which is what many commentators do today. Peterson argued for industrial policy just as that happened in Japan and Germany at the time. Nixon bought into these arguments, stating on June 29, 1971: “It’s terribly important that we be Number One economically [in the world], because otherwise we can’t be Number One diplomatically or militarily.”

The US went on to allow a large part of its industrial capacity to dissolve, which destroyed manufacturing jobs and led to political change. Garten’s book might have benefited from putting the single weekend it described into a larger context with more focus on economic policy and how it affects US citizens. The focus on those present at Camp David is too narrow to allow the reader to appreciate the significance of these events.

Since sometime in the early 1970s, wages of American workers stopped growing with productivity. Is it because the US accepted an overvalued currency after floating the dollar? That seems to be an obvious question connected to the end of the Bretton Woods system.

Garten conducted a lot of research and the book is readable. However, I was left with the impression that the event itself was not impressive enough to deserve a book about it. The book made clear that competitiveness was an issue when the Bretton Woods System ended. With a view towards the so-called “macroeconomic imbalances” it will be interesting to see how economic policy will deal with those inside the Eurozone and those of the US with countries like China in this decade.

Dirk Ehnts

Dirk is an economist based in Berlin. He is the speaker of the board of the Pufendorf Society for Political Economy and author of Modern Monetary Theory and European Macroeconomics.

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One Comment on “An exchange of views”

  1. Relevant to today as central banks think about their power as domestic currency issuers with respect to cryptocurrencies.

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