2. See William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Doubleday and Co., 1975), p. 518. Nixon was answering Peter G. Peterson, at the time serving as an assistant to the president for international economic affairs and executive director of the Council on International Economic Policy. Peterson had said that the State Department wanted to be at this meeting.
3. The following people signed the guest book: John Connally, Paul McCracken, Arthur Burns, Paul Volcker, Herbert Stein, Peter Peterson, H. R. Haldeman, John Ehrlichman, George Shultz, William Safire, Caspar Weinberger, Arnold Weber, Kenneth Dam, Michael Bradfield, and Larry Higby. Source: Bruce Duncombe, ed. Foreign Relations of the United States, 1969–1976, vol. 3, Foreign Economic Policy; International Monetary Policy, 1969–1972 (Washington, DC: Government Printing Office, 2001), p. 466.
4. Based on an interview with Michael Bradfield.
5. The following conversation is based on Volcker’s recollection, supplemented by H. R. Haldeman, The Haldeman Diaries (New York: G. P. Putnam’s Sons, 1994), pp. 340–45, and Safire, Before the Fall, pp. 513–15.
6. Bryan actually ran three times as the Democratic nominee for president: 1896, 1900, and 1908.
7. See Safire, Before the Fall, p. 515.
8. In Tab B of Volcker’s briefing book, in the section entitled “How Large an Exchange Rate Realignment Should the United States Seek,” Volcker writes, “There are major uncertainties here … relevant studies in the U.S. Treasury and in the International Monetary Fund (IMF) produce rather different answers … The Treasury [estimates] slightly over $.5 billion improvement in the U.S. balance of payments position for each one percent exchange rate change … The IMF [estimates] a $.85 billion improvement … Therefore with the most optimistic assumption … the required exchange rate change would be an effective devaluation of 15 percent.” Volcker (Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership [New York: Times Books, 1992], p. 72) mentions a study he asked John Auten, a senior economist at Treasury, to undertake summarizing the academic literature on calculating exchange rate elasticity. That particular analysis has not been found, but numerous academic studies were submitted to the Volcker Group by prominent international economists at the time, including Richard N. Cooper, Paul Wonnacott, and Thomas Willett.
9. See Safire, Before the Fall, p. 520.
10. See the Transcript of the President’s Address, New York Times, August 16, 1971, p. 14.
11. The Dow Jones Industrial Average rose by 3.7 percent, and the S&P 500 increased by 3.2 percent. The daily standard deviation of returns in the S&P 500 from January through July 1971 is 0.51 percent.
12. See “Abreast of the Market” column, Wall Street Journal, August 17, 1971, p. 33, and August 18, 1971, p. 29. GM and Ford did not trade on the sixteenth because of an imbalance of buy orders. The increases reported in the text occurred on the seventeenth.
13. See “Abreast of the Market” column, Wall Street Journal, August 17, 1971, p. 33.
14. Wall Street Journal, August 17, 1971, p. 1.
15. The remaining text of the paragraph is based on ibid., p. 7.
16. See “Nixon: Flair for the Long Ball,” Wall Street Journal, August 17, 1971, p. 14.
17. Ibid., p. 6.
18. Ibid.
19. Belgium, the Netherlands, and France (of course) converted $422 million into gold during the first week of May 1971 (New York Times, May 13, 1971, p. 65).
20. U.S. Treasury Department News, “Statement by Secretary Connally at the Opening of a News Conference and Transcript,” August 16, 1971, Personal Papers of Paul Volcker.
21. New York Times, August 16, 1971, p. 1.
22. U.S. Treasury Department News, “Statement by Secretary Connally at the Opening of a News Conference and Transcript,” August 16, 1971.
23. Ibid.
24. The details of the meeting are recorded in Memorandum of Conversation, August 16, 1971, reprinted in Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, pp. 469–78. The news conference is reported in the New York Times, August 17, 1971, p. 19.
25. Ibid., pp. 469–78.
26. Ibid.
27. New York Times, August 18, 1971, p. 21.
28. See Memorandum of Conversation, August 16, 1971, reprinted in Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, pp. 469–78.
29. On May 4, 1971, the dollar-mark exchange rate was 3.63 marks per dollar, and on August 13, 1971, the exchange rate was 3.388.
30. See chapter 4.
31. Guardian, August 29, 1971, p. 1.
32. See “Economic Poker Game,” New York Times, September 15, 1971, p. 61.
33. New York Times, August 18, 1971, p. 21.
34. New York Times, November 29, 1971, p. 65 continued.
35. Financial Times, August 21, 1971.
36. New York Times, August 22, 1971, section 3, p. 1.
37. See Safire, Before the Fall, p. 515.
38. Ibid., p. 518.
39. Data for the afternoon gold fixing from August 17 through August 20 are $43.05; $43.15; $43.30; $43.30. On August 31 the fixing was $40.65.
40. Newsweek, January 27, 1997, p. 86.
41. The prices of precious metals often reflect their use as the monetary standard. For example, in analyzing the consequences of the demonetization of silver in 1873, Milton Friedman argues, “The most obvious, but by no means most important consequence of the U.S. return to gold rather than to a bimetallic standard was the sharp rise in the gold-silver price ratio.” See “The Crime of 1973,” in Money Mischief: Episodes in Monetary History (New York: Harcourt Brace and Company, 1992), p. 68.
42. The conversation is based on Telephone Logs of Paul Volcker, September 11, 1971, Federal Reserve Bank of New York Archives, Box 0108480.
43. A story with a similar theme is John Taintor Foote’s A Wedding Gift: A Fishing Story (London: D. Appleton-Century Co., 1924). Volcker keeps a copy in his bookshelf at home.
44. New York Times, September 6, 1971, p. 24.
45. Between May 4, 1971, and August 13, 1971, the German mark appreciated from 3.63 marks per dollar to 3.38, an increase of 6.9 percent. By the end of November 1971 the mark had appreciated another 2.1 percent, to 3.31 marks per dollar. The Japanese kept the yen fixed at the official 360 per dollar until the end of August, when they allowed the yen to appreciate to 336 yen per dollar, just about matching the percentage increase in the mark. By the end of November the Japanese allowed the yen to appreciate to 327.25 yen per dollar, again almost matching the increase in the mark. The French franc remained fixed at 5.52 francs per dollar throughout this period. Unlike the Germans and the Japanese, the French could continue buying dollars to prevent their currency from appreciating without worrying so much about the inflationary consequences because the dollar inflows to France were much smaller. France also increased controls on capital inflows.
46. PIPAV.
47. See Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969–1974, edited by Robert H. Ferrell (Lawrence: University Press of Kansas, 2010), p. 65.
48. In 1971 the G-10 consisted of Britain, Canada, Japan, Sweden, the United States, and five of the six Common Market countries: Belgium, France, Italy, the Netherlands, and West Germany (New York Times, November 29, 1971, p. 65 continued).
49. New York Times, December 2, 1971, p. 73.
50. Letter from Burns to Nixon, October 14, 1971, reprinted in Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, p. 516.
51. See the discussion of the meeting between Nixon, Connolly, and Burns of November 24, 1971, in ibid., pp. 565–66.
52. In August 1971 Switzerland and France held 65 and 55 percent, respectively, of their foreign exchange reserves in the form of gold. Japan held slightly less than 6 percent in gold (see the Economist, August 21, 1971, p. 54).
53. Volcker had written an outline of U.S. proposals p
rior to the G-10 meeting and had distributed it to the participants. It says that the United States would eliminate the 10 percent surcharge in exchange for an average 11 percent depreciation of the dollar against the major currencies. The document assumes continuation of suspension of convertibility and assumes no change in the dollar price of gold. A draft of the document is in the Personal Papers of Paul Volcker, and a version that John Connally sent to the White House appears in Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, pp. 580–81.
54. The following quotes are from Volcker and Gyohten, Changing Fortunes, p. 86.
55. See Hubert Zimmerman, Money and Security, 1950–1971 (Cambridge: Cambridge University Press, 2002), p. 226. The Blessing letter also helps explain why the suspension of convertibility had a relatively benign impact. Convertibility had been circumscribed in practice by the Blessing letter and by Japan’s willingness to hold dollars rather than gold as reserves.
56. This and the following quotes are from Volcker and Gyohten, Changing Fortunes, p. 86.
57. The agenda for Pompidou’s meeting with Nixon appeared in the New York Times, November 24, 1971, p. 5, and November 25, 1971, p. 1.
58. See Volcker and Gyohten, Changing Fortunes, p. 87.
59. New York Times, December 14, 1971, p. 1.
60. See “A Framework for Monetary and Trade Settlement,” in Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, pp. 597–99.
61. Under the new system, exchange rates could vary 2¼ percent on either side of parity compared with the 1 percent margins permitted under Bretton Woods.
62. See point 5 in “A Framework for Monetary and Trade Settlement,” in Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, p. 598.
63. New York Times, December 15, 1971, p. 91.
64. The exchange rates are the new central values of the dollar compared with the par values prior to the May 1971 crisis. See Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, p. 601.
65. Recall that fixed exchange rates under Bretton Woods were not quite fixed (just as fat-free muffins are not quite fat-free). Central bankers could allow the exchange rate to fluctuate 1 percent on either side of “parity.” For example, the Bank of Japan could permit the yen, with a “par value” of 360 yen per dollar, to fluctuate between 363.3 and 356.4 before intervening in the marketplace. After the Smithsonian realignment the yen had a central value of 308 yen per dollar and could vary between 314.93 and 301.07.
66. New York Times, December 19, 1971, p. 1.
67. Volcker and Gyohten, Changing Fortunes, p. 90.
68. According to Volcker (ibid., p. 89), “The trade weighted depreciation of the dollar amounted to a little under 8 percent … Without Canada … the figure was 12 percent … Either way it was well short of what we felt we needed to restore solid equilibrium in our external payments.”
6. Compromise
1. Letter from Pompidou to Nixon, dated February 4, 1972, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473, with response of Nixon to Pompidou, dated February 10, 1972, marked “PAV draft” in pencil.
2. The New York Times, February 3, 1972, p. 1, reports that gold touched fifty dollars an ounce during trading hours on February 2, 1972.
3. This quote and the remaining quotes are from the letter from Pompidou to Nixon dated February 4, 1972, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473.
4. On December 20, the day after the Smithsonian news conference, the overnight federal funds rate was 3.75 percent, the three-month Treasury bill rate was 4.12 percent, and the dollar bought 3.258 marks. On February 2, 1972, the funds rate had declined to 3.13 percent, the bill rate had dropped to 3.4 percent, and the dollar bought only 3.185 marks.
5. Quotes in this paragraph and in the two that follow are from Burton Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” Journal of Economic Perspectives 20, no. 4 (Fall 2006): 180–84.
6. The quotes are from Abrams (see ibid.). Shultz may have been referring to unconfirmed reports that Nixon had threatened to double the size of the Federal Reserve Board as a way to gain more control. See William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Doubleday and Co., 1975), p. 492.
7. See February 4, 1972, Letter from Pompidou to Nixon, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473.
8. See Memorandum of Conversation, August 16, 1971, reprinted in Bruce Duncombe, ed., Foreign Relations of the United States, 1969–1976, vol. 3, Foreign Economic Policy, 1969–1972; International Monetary Policy, 1969–1972, p. 472.
9. New York Times, May 13, 1972, p. 43.
10. See Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 84.
11. PIPAV.
12. New York Times, May 13, 1972, pp. 1, 43.
13. See New York Times, May 17, 1972, p. 63.
14. Washington Post, May 13, 1972, p. A1 continued.
15. Washington Post, May 17, 1972, p. A1.
16. New York Times, May 17, 1972, p. 47.
17. Connally writes in his autobiography, In History’s Shadow: An American Odyssey (New York: Hyperion, 1993), p. 233, that he resigned because of interference by White House staffer John Ehrlichman in tax policy without clearing it with Connally.
18. PIPAV.
19. Guardian, June 13, 1972, p. 12.
20. New York Times, May 17, 1972, p. 46.
21. Washington Post, May 17, 1972, p. A1 continued.
22. Washington Post, May 18, 1972, p. A23.
23. The close on May 16 in the afternoon fixing in London (approximately 10:00 A.M. New York time) was $54.60. The opening in the morning fixing in London on May 17 (approximately 5:30 A.M. New York time) was $57.50. The announcement was made during the day on May 16, 1972, and the increase of 5 percent is statistically significant. The standard deviation of returns during the first four months of 1972 was .62 percent per day.
24. See Wall Street Journal, May 18, 1972, p. 5. The Journal reports that a contributing factor to the price jump was an announcement by South Africa that it would curtail gold sales.
25. New York Times, June 23, 1972, p. 47.
26. Ibid.
27. New York Times, June 24, 1972, p. 1.
28. PIPAV.
29. The remaining quotes in this paragraph are from a transcript of the June 23, 1972, Nixon Tapes, available at www.nixonlibrary.gov/forresearchers/find/tapes/watergate/wspf/741-002.pdf. Also available in Time, August 19, 1974.
30. The so-called smoking howitzer tape that forced Nixon’s resignation recorded the conversation with Haldeman on the morning of June 23, 1972, the same day of the British devaluation. No wonder so few people remember the devaluation.
31. See George Willis, August 7, 1972, “The White Plan for an International Stabilization Fund: A Chronology,” Personal Papers of Paul Volcker. According to the Washington Post, July 26, 1992, p. B5, Willis took a leave from Treasury in 1942 and served in the navy during the war, so he probably did not work on the design of Bretton Woods.
32. Memorandum from Willis to Volcker, Personal Papers of Paul Volcker, January 11, 1972.
33. The conversation is based on Volcker’s recollection.
34. Ibid.
35. PIPAV.
36. See the interview with Shultz in SFGate.com, July 9, 2006.
37. The details that follow are from a series of memos from George Willis to Paul Volcker entitled “Main Principles of Plan X,” August 1, 1972. See Plan X Folder, Personal Papers of Paul Volcker.
38. See Robert Solomon, The International Monetary System, 1945–1981 (New York: Harper & Row, 1982), pp. 242–43.
39. New York Times, September 27, 1972, p. 70.
40. Ibid.
41. Shultz met with Friedman on September 21, 1972, and had left
a telephone message for Volcker to join them (Telephone Logs of Paul Volcker, September 21, 1972, Federal Reserve Bank of New York Archives, Box 0108480). There is no record that a meeting ever took place.
42. Speculation against the dollar began on January 23, 1973, when the Swiss National Bank announced that it would allow the Swiss franc to float. The New York Times (January 24, 1973, p. 51) reported, “The dollar was ‘hit’ in the belief that other ‘strong’ currencies such as the West German mark would follow the franc’s lead.”
43. Cable from Brandt to Nixon via U.S. embassy in Washington, February 9, 1973, provisional translation, Hans Noebel, Chargé d’Affaires, Nixon Papers, Letters from German Embassy, National Archives II, College Park, MD.
44. Ibid. Germany had born the entire burden of keeping dollar-mark within the bands mandated by the Smithsonian Agreement. See the Washington Post, February 11, 1973, p. A1 continued, “In an effort to prevent the mark from rising … the West German central bank bought $6 billion with about 20 billion marks.”
45. Message from Nixon to Brandt, February 10, 1973, via the State Department, Nixon Papers, Letters from German Embassy, National Archives II, College Park, MD.
46. On January 31, 1973, only days before Nixon’s correspondence on the foreign exchange crisis, the front page of the New York Times featured an article on the guilty verdict against G. Gordon Liddy and James W. McCord in the Watergate burglary trial and one outlining American proposals for international monetary reform.
47. Message from Nixon to Tanaka, February 3, 1973, via John Ehrlichman, Nixon Papers, National Archives II, College Park, MD.
48. The following quotes are from the Memorandum of Conversation, February 8, 1973 (prepared by Sam Cross), Personal Papers of Paul Volcker.
49. Telephone Memorandum, February 10, 1973 (9:15 A.M.), from Ingersoll to Volcker through Jack Bennett, Volcker’s deputy at Treasury, Personal Papers of Paul Volcker.
Volcker Page 38