Nixon Shock: Getting Off Gold III - Advisor Stein and the Politics of the Nixon Shock

The decision in 1971 to take the United States off gold was essentially made by Treasury Secretary John Connally.  Connally was a man without any firm economic beliefs.  Herbert Stein, who became chairman of the White House Council of Economic Advisors in 1972 and was a member of the Council in August 1971, noted that Connally “did not take office with...any preconception in favor of any particular policy.  One of his favorite expressions was: ‘I can play it round or I can play it flat, just tell me how to play it.’”

In his book on Presidential Economics, Stein wrote of Connally: “As Secretary of the Treasury he was primarily responsible for the international financial position of the United States.  That position had been deteriorating for over ten years.  That is, the United States had been running deficits in its balance of payments...the amount of foreign-held dollars outstanding had become far larger than the value of the U.S. gold stock at that price [of $35].  So there was a tacit understanding among foreign treasuries and central banks not to ask for gold lest doing so precipitate a run.”

In his book, Stein does not give any details of the August 13-15 meetings in which he participated.  In Nixon’s memoirs, however, Stein is quoted as remembering: “The tense psychological condition in the country, the remoteness and beauty of the Camp David setting, the orderly and disciplined conduct of the business there, and the surprising and sweeping character of the decisions taken make the August 13-15 meeting one of the most dramatic events in the history of economic policy.”

In Stein’s own book, he justified what was considered and what was decided.  Stein maintained: “The government was becoming greatly exercised over the ‘Japan’ problem.  The United States was running a deficit in its balance of trade with Japan, and, more significant politically, a number of industries were complaining about Japanese competition.  Ideas of quotas or other restraints on Japanese imports were being seriously considered.  To the free market people in the government, closing the gold window and allowing the dollar to decline in value relative to the yen was a much better solution.”

Stein, who was no fan of the gold standard, blamed “Nixon’s personality” as a major reason for the “drastic action” that was agreed on that fateful weekend.  “He had a great longing for the dramatic gesture, for which he found a perfect support in John Connally.  He also tended to worry exceedingly about his reelection prospects and so feel impelled to extreme measures to assure his reelection.”

Extreme measures, indeed.  For the sake of politics, the gold standard was sacrificed.  By 1972, Treasury Secretary Connally resigned – to head “Democrats for Nixon.”

This is the third in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window.  Next: Speechwriter William Safire.

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