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 conversion as a contribution to “international monetary cooperation.”
Option 2: Modified Bretton Woods
Favored by Volcker, this option would keep the fundamental structure of Bretton Woods, but it would make several modifications to address shortcomings:
- Pressure West Germany and Japan to revalue their currencies.
- Introduce a mechanism to give more flexibility in adjusting currency exchange rates, within limits.
- Aggressively negotiate for allied countries to lower trade barriers to U.S. exports.
- Make new agreements with allies to share the burden of defense costs.
This strategy may have worked, however without an impetus to force negotiations, it would be a slow and grinding process, and there could be a crisis in financial markets before tangible progress was made.
Option 3: Close The Gold Window
This is obviously the way things went, but it was seen as radical in 1969, and it did not come without risks. It was meant as a shock treatment to force allies to the negotiating table, but at the height of the Cold War, the West needed to maintain a unified front against the Soviet Union. In 1972 especially, Nixon was preparing for his Beijing trip and he did not want ongoing squabbles with his allies.
In addition, the competitive currency debasements of the 1930s were fresh in recent memory. The shock of this option carried the risks of capital controls, protectionism and the use of exchange rates as economic weapons.
Option 4: Devalue The U.S. Dollar Against Gold
In this case, the U.S. would unilaterally adjust the dollar-to-gold exchange rate, for example from $35 to $38 per ounce of gold. This option was also presented for completeness, but it was not given much consideration. Since exchange rates were fixed, foreign currencies would simultaneously be devalued against gold, and no advantage would be gained.
As with other options, this would require negotiations for an exchange rate realignment, and could lead to competitive devaluation. It would also effectively steal some of the wealth of American allies, since they had large dollar holdings. And it would give an advantage to the Soviet Union, with its large gold mines.
Nixon’s economic team continued to refine and debate options, however in May of 1971 financial markets forced the issue. A prominent group of West German economists called for a revaluation of the deutsche mark, which caused unsettlingly large amounts of money to start to flow out of the dollar into other currencies, anticipating a realignment of values. West Germany was forced to let the deutsche mark float, essentially abandoning its fixed exchange rate obligation. France, Belgium and the Netherlands demanded dollar-gold conversion, in amounts large enough to stoke fears of an uncontrolled run on gold. This period was described as “the death watch for Bretton Woods.”
The world looked to the U.S. for leadership on a response, but frankly, the Nixon administration did not have its act together. Officials tried to project stability, and reaffirmed the U.S. commitment to convert gold at $35/ounce. But internally, Nixon’s team had a fractious meeting at Camp David on June 26 — prior to the famous August meeting — which produced only conflict and competing views. In the following week, Nixon berated a meeting of his Cabinet. Paraphrased by his chief of staff, Nixon’s message was: “We have a plan, we will follow it, we have confidence in it … If you can't follow the rule, or if you can't get along with the Administration's decisions, then get out.”
The Final Plan Takes Shape
Nixon designated Treasury Secretary Connally as the sole point of contact for the press. Throughout July, Connally spoke of calm and “steady as she goes,” while internally, he worked with Volcker and others on fundamental changes to the structure of the postwar economic order. Several Congressmen started proposing their own plans, and Connally urged Nixon to take the initiative. He told Nixon, “If we don't propose a responsible new program … Congress will make an irresponsible one on your desk within a month.”
As the weekend of Aug. 13-15 approached, a serious new rumor reached Volcker’s desk. The U.K. had asked for “cover” for $3 billion of their reserves — a guarantee of the value of their holdings in gold terms, in case the dollar was devalued. This was actually a miscommunication — they had asked for a much smaller amount, less than $1 million. But the specter of a run on gold appeared very real as Nixon’s team reconvened at Camp David.
By this point Volcker’s original options had been fleshed out as a comprehensive program, with features meant to appeal to both capital and labor, and others to force the allies to the negotiating table. The main points were:
- Closing the gold window.
- 10% tariff on all imports.
- Wage and price controls.
- Removal of the excise tax on autos, to stimulate car sales.
- Resumption of the investment tax credit, to stimulate investment and growth.
- Federal budget cuts, to help control domestic inflation.
The main points were essentially decided before the Aug. 13-15 weekend. Nixon used the meeting to let all his advisors air their views, and feel as though they had been heard. The most contentious issues were the gold window, and wage and price controls. Interestingly, Arthur Burns argued strongly against closing the gold window, and almost succeeded in convincing Nixon of his view. Once the plan was set, though, the main substance of the weekend was in figuring implementation details, and planning the speech to present the plan to the nation.
The Aftermath
The domestic reaction to Nixon’s Sunday night televised speech was almost unanimously positive — from the stock markets to business and labor leaders. There was some criticism that wage and price controls would favor business over labor, but the import tariff placated labor, as protection against cheap imports. Democrats were caught off guard that Nixon had taken several of their ideas as part of his plan, thus grabbing the credit for them. But overall, the total plan was seen as a bold new direction which seized the economic initiative in charting a path forward.
The real test of Nixon’s plan would come with America’s allies. They were furious at not being warned in advance, and the tariff and exchange rate realignment would pose serious challenges for their economies. Tense negotiations would follow, with regular threats of retaliatory measures.
In December 1971 new fixed exchange rate levels were agreed, and the import tariff removed. However, most countries would not follow through on their commitments, and in 1973 a fully free-floating environment was established. The dollar would retain its global preeminence, especially with the advent of the petrodollar.
The U.S. economy was strong in 1972, and Nixon triumphed in the diplomatic arena, with trips to Beijing and Moscow. Nixon won a landslide reelection, and he and his wife topped a Gallup poll of “Most Admired Men and Women in the World.” Only later would he fall from the presidency through the disgrace of the Watergate scandal.
Wage and price controls were initially very popular, and appeared to be keeping inflation in check. However, they led to a large and unwieldy federal bureaucracy, and these controls were eventually scrapped in 1974. The resulting pent-up inflation would come to define much of the American economy through the 1970s.
Wen Stability?
What’s striking in reading through the history of high-stakes currency policy is that countries always seem to be riding the ragged edge of disaster. Following the Nixon shock of 1971, there were a regular series of crises. There was a dollar “rescue” in the Carter administration, followed by the Plaza Accords, Long-Term Capital Management (LTCM), 2008 and on and on.
Bitcoin is often criticized for its “volatility,” but national fiat currencies do not have the best track record in this respect. By contrast, Bitcoin’s network operation is stable and robust, and its value proposition is unambiguous. Temporary shocks like 3AC and Celsius pose no danger to Bitcoin itself, unlike the latest “threat to capitalism” from Lehman, Greece or whatever else is the current insolvent organization.
Bitcoin is a bottom-up system which allows regular plebs to store their own economic value, without having to rely on far-off political negotiations. As we stay humble and stack sats, Bitcoin provides stability for long-term planning and a high degree of certainty during crazy times.
This is a guest post by Wilbrrr Wrong. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
