On April 10 the U.S. team crossed from Hong Kong to the border station of Lo Wu via a short, steel-trussed bridge and continued on over another, tin-roofed bridge to the Chinese city of Shumchun. There smiling Communist officials led them to an immaculate cream and blue train. Their first destination was Canton, which since the rupture between Washington and Peking twenty-one years earlier had been rechristened Kwangchow. Along the twenty-three-mile journey there they saw banana groves, lichee trees, rice paddies, and, at strategic intervals, gigantic billboards bearing pictures of Mao. At Canton’s new airport they boarded a Soviet-built Ilyushin-18 airliner while loudspeakers blared military marches and quotations from The Thoughts of Chairman Mao. An exhortatory sign in the terminal read PEOPLE OF THE WORLD UNITE AND DEFEAT THE U.S. AGGRESSORS AND THEIR RUNNING DOGS. It wasn’t meant as an insult to the visitors. Mao’s government at that point was drawing a fine line between the American people, whose friendship it wanted, and its government, which Peking Radio continued to excoriate as a conspiracy of “bloodthirsty gangsters.”
Even in April Peking’s climate retains the bite of winter, but apart from that the capital’s reception for the U.S. ping-pong group was all hospitality. Quartered in the elegant Hsinchiao Hotel, they were entertained at banquets and taken on a tour of the nineteenth-century summer palace of the Manchu emperors and the Great Hall of the People. They saw a “revolutionary ballet,” The Red Detachment of Women, and heard an opera celebrating the victory of Communism over capitalism, Taking Tiger Mountain by Strategy. Arriving at Peking’s Indoor Stadium for an exhibition match with members of the Chinese team, they were greeted by 18,000 cheering fans and a huge banner reading WELCOME TO THE TABLE TENNIS TEAM FROM THE UNITED STATES. A band struck up the stirring strains of “Sailing the Seas Depends on the Helmsman, Making Revolution Depends on the Thought of Mao Tse-tung.” Cowan did the frug.
Chinese tact continued in the table tennis competition. Holding back their first team, which could have crushed the Americans, they sent in second-string players who only won the men’s matches 5–3 and the women’s 5–4. The hosts called the contests “friendly games.” They were not the most striking act of friendship. The following day Chou En-lai met China’s ping-pong guests in the red-carpeted reception room of the Great Hall. The members of the United States delegation weren’t the only table tennis visitors that week, and since Chinese protocol is rigidly alphabetical, they were preceded by players from Canada, Colombia, England, and Nigeria. But Chou spent most of his time—one and three-quarter hours—with them. He told them, “We have opened a new page in the relations of the Chinese and the American people.” To the U.S. newsmen he said that now American correspondents could “come in batches.”
That same day, as the Americans left for Hong Kong, President Nixon eased the twenty-year U.S. embargo on trade with China and Peking resumed telephone contact with Washington and London. There was a lot to talk about; less than two weeks later a presidential commission headed by Henry Cabot Lodge recommended that the People’s Republic be admitted to the United Nations provided a way could be found for Nationalist China to retain its seat. Already plans were being laid for a secret visit to Peking by National Security Adviser Henry Kissinger at which the chief topic of conversation would be a state visit by the President himself.
Early in July Kissinger flew to Asia, officially for conferences in Saigon, Thailand, India, and Pakistan. After a ninety-minute talk with Pakistani President Agha Muhommad Yahya Khan, Kissinger announced a change in his schedule; he would spend a brief working holiday in the mountain resort of Nathia Gali, thirty-eight miles north of Rawalpindi. The trip wasn’t turning out to be particularly newsworthy, and the curiosity of newsmen covering it was unstirred when the Yahya Khan government announced that Kissinger would have to spend an additional day in the resort because of a slight indisposition. He was thought to be suffering from Asian dysentery—“Delhi belly”—and the U.S. embassy encouraged the assumption by putting out word that a doctor had been dispatched to examine him. A correspondent suggested that the presidential adviser would be more comfortable in an air-conditioned Rawalpindi hotel. The embassy spokesman replied that the visitor did not want to embarrass anyone in the capital by his illness.
Actually Kissinger had driven to the Rawalpindi airport with three aides and boarded a Pakistan International Airlines plane for Peking. At noon on July 9 they landed on a deserted field outside the Chinese capital. Driven to a villa on a nearby lake, they lunched and were then joined, at midafternoon, by Chou En-lai. Chou and Kissinger conferred late that Friday night, Saturday evening, and Sunday morning. Five pounds heavier because of Chinese hospitality, the presidential adviser—who was still believed to be laid low by a stomach ailment—flew back to Pakistan and rejoined his party after a two-and-a-half day absence. Nothing more was heard from Peking Radio about American officials being gangsters or running dogs. Five days after the Kissinger mission President Nixon flew by helicopter from San Clemente to a Burbank television studio and delivered a four-minute address which astounded the world. He had been invited to visit Red China, he announced, and he was accepting with pleasure. He said: “I have taken this action because of my profound conviction that all nations will gain from a reduction of tensions and a better relationship between the United States and the People’s Republic of China.” In a reference to Nationalist China the President added that “seeking a new relationship” with Peking would not be “at the expense of our old friends.”
It was a promise he could not keep. His plan to seat both Chinas in the United Nations was doomed. Each year the U.N. had come closer to expelling the Taiwan delegation, and this was enough to put it over the top. On October 25 the General Assembly voted Peking in and Chiang Kai-shek’s representatives out. American conservatives watching television that day beheld a spectacle of humiliation which would have been unbelievable in the days when Dean Acheson and John Foster Dulles ran U.S. foreign policy; the Algerians and the Albanians embraced, and the Tanzanians danced a jig in the aisles. The reaction in Washington was sharp and angry. Barry Goldwater demanded that the United States quit the U.N. and consign the General Assembly to “some place like Moscow or Peking.” Hugh Scott of Pennsylvania spoke contemptuously of “hot-pants principalities” like Tanzania, and presidential press secretary Ronald Ziegler condemned “the shocking demonstration and undisguised glee among some of the delegates following the vote.” But these were mere political rituals. The fact was that Chiang’s continuing pretensions to great-power status had been doomed from the moment of the first conciliatory gesture toward Glenn Cowan in Nagoya.
***
One month to the day after his telecast announcing that he would be flying to Peking, Nixon went on the air again with news of another momentous step, this one to rescue the American economy. It badly needed help. The country was sliding into its worst money crisis since the Depression. Then the nation’s crippled finances had been further hobbled by Hoover’s rigid faith in the economic gospels of Adam Smith and John Stuart Mill. Nixon paid them lip service, but in practice he was anything but inflexible. Hugh Sidey of Time observed that the President “clings to what is familiar until the last moment. Then, when the evidence overwhelms him or something happens in his gut, he decides to act, and nothing stands very long in his way. He abandons his philosophy, his promises, his speeches, his friends, his counselers. He marches out of one life into a new world without any apologies or glancing back.” At times this could be disconcerting, but in that August of 1971, with the dollar tottering on the brink of disaster, it was heartening.
At the close of World War II the United States had been the wealthiest country in the history of civilization, holding 35 billion of the world’s 40-odd billions of monetary gold. The structure of postwar finance had been established the year before at Bretton Woods, New Hampshire, where gold and dollars had been established as the reserves behind the money of every major nation outside the Communist bloc. There wasn’t enough gol
d to support the anticipated flow of foreign trade, so the dollar, the world’s strongest money, was made equal to gold. Debts between countries could be paid with either one. America pledged to redeem all available dollars with an ounce of gold for every $35, and other countries expressed the value of their currency in dollars. It worked. Trade prospered. Whenever a country managed to tip the balance of its U.S. trade in its favor—exporting more goods to America than it imported from there—its surplus dollars were used to back new issues of its own money.
Since the United States was rich and the rest of the world was comparatively poor, large sums went overseas to help the needy. It didn’t matter; there was so much. Then came the Korean War and the revival of European commerce. By 1961, the end of the Common Market’s first year, U.S. gold reserves were down to 17 billion dollars. In 1962 they dropped to 16 billion, in 1963 to 15 billion. At the beginning of the 1970s the reserves stood at 11 billion—almost the bare minimum, since American law required a dollar’s worth of gold in Fort Knox for each four dollars in circulation, and the nation’s business needed 40 billion in paper and silver. Meantime the balance of trade had become less and less favorable to the United States. In 1960 the country had imported 15 billion dollars’ worth of goods and sold 20 billion abroad, leaving a surplus of five billion. By 1970 this margin was down to two billion. In May 1971 it vanished. The nation was trading in the red, and with the Pentagon still hemorrhaging wealth in Vietnam there was no hope of a quick turnaround. Secretary of Commerce Maurice Stans warned that the U.S. faced its first trade deficit since 1893.
That month economists received anxious signals from Germany. The Wirtschaftswunder had transformed the Federal Republic into a heavy exporter. Twice during the previous decade the deutsche mark had been revalued upward, altering its value vis-à-vis the dollar and enriching speculators who accumulated reserves of it. Now the pressure was mounting for another revaluation. As a member of the International Monetary Fund established at Bretton Woods, Bonn was obliged to maintain the relationship between the dollar and the mark, buying dollars and selling marks as the mark became more valuable. Because of the unfavorable balance in American trade, speculators had a lot of dollars—or “Eurodollars,” as dollars owned abroad were called—to invest. In the first four months of 1971 the stocks of Eurodollars on the continent had taken a frightening jump, from five billion to between 50 and 60 billion, and the German central bank was being flooded with them.
Die Zentralbank bought and bought until Bonn, recognizing early signs of inflation, notified the International Monetary Fund on May 9 that it wouldn’t buy any more, Bretton Woods or no Bretton Woods. Instead the Germans proposed to let their currency find its own level under the law of supply and demand. In the idiom of economists they would “float” the mark. It floated up from 25 cents to 27 cents and hung there, relieving the pressure on their central bank and, incidentally, improving the U.S. balance of trade with the Federal Republic, since American goods were now cheaper there. But the respite was brief. Because of what Larry Stuntz of the Associated Press called “that huge pool of Eurodollars sloshing around Europe”—it amounted to the equivalent of all the money circulating in America—speculators were bound to turn elsewhere. They built a fire under the French franc, but Paris, which had been watching the German agony, quickly cut loose from the International Monetary Fund and limited dollar trades. The wildcatters went after the Swiss franc next. Bern followed the example of Paris. It was becoming increasingly hard to unload dollars. Bretton Woods was coming unstuck; Barron’s was predicting a worldwide panic by fall. Then, early in August, came an authoritative forecast that the U.S. trade deficit for the second quarter would exceed seven billion dollars. This was swiftly followed by a report of the Joint Congressional Economic Committee which declared that the dollar was overvalued, that other currencies should be revalued upward, and that if this wasn’t done the United States should stop buying gold. The stock market dove; the Dow Jones industrial average dropped 100 points from its April high. There was virtually no market for Eurodollars now. American tourists in Europe found that the once mighty dollar had become unacceptable currency. World trade was at a standstill; merchants could no longer be sure what their money would buy next week, or even tomorrow.
Americans were getting bad economic news at home, too. Nixon, predicting that 1971 would be a good year and 1972 a bad year, had based his budget on an anticipated Gross National Product of 1,065 billion dollars. It came in at 1,050 billion, and half the gain was inflation. Production was down; unemployment, at 6 percent, was nearing the recession level. At the end of June the administration ended the fiscal year with an appalling 23.2-billion-dollar deficit, just two billion less than Johnson’s record-breaking 1968 shortfall and an incredible 24.5 billion below Nixon’s expectations. The President had alarmed his conservative supporters by talking in terms of a “full employment balance,” a Keynesian concept which holds that a budget is “balanced” if the amount of spending does not exceed the amount which would be collected in taxes if everyone had a job. But even with that yardstick the administration was eight billion in the red. And the future was glum. New labor contracts promised rail workers a hike of 42 percent in 42 months; steelworkers would get 30 percent in three years. Inflation would jump accordingly.
Congress had given the President the Economic Stabilization Act of 1970, authorizing him to “issue such orders as he may deem appropriate to stabilize prices, rents, wages, and salaries.” Nixon had opposed the bill. He had been forced to sign it because it set aside basic resources needed for national defense, but he had vowed he would never use it. His plans excluded controls. He didn’t even believe in voluntary guidelines or jawboning—using presidential prestige to persuade labor and management to forego wage or price increases.
All this changed in one short weekend at Camp David with his economic advisers. Summoned on twenty-four hours’ notice, they drafted an economic message invoking the very powers he rejected, and on Sunday, August 15, he was on television with it. He called the program his New Economic Policy. Among the measures he ordered, or asked Congress for, was a closing of the “gold window”—the United States would no longer exchange dollars for gold. Most imports would be subjected to a 10 percent surtax, designed to make American goods more competitive at home with those from abroad, and in some cases Americans would receive tax breaks if they bought U.S. merchandise. Industry would get tax credit for new investment. The 7 percent excise tax on automobiles would be repealed, an average saving of $200 per car. With few exceptions, all U.S. prices, wages, rents, and dividends would be frozen for ninety days at their present levels. A Cost of Living Council headed by Treasury Secretary John Connally would preside over the freeze.
Nixon had floated the dollar, and the effect was the same as devaluation. In money markets it amounted to 2 percent in the first two weeks. Foreign bankers were understanding; they indicated that they were prepared to revalue their currencies if the U.S. would drop the surcharge. Meanwhile there was little retaliation abroad. The Danes did introduce a surcharge of their own, and the French muttered about imposing one, but there were few threats to build tariff walls against American goods which had suddenly become cheaper. Connally was not a popular man in foreign chancelleries; his insistence that the United States must quickly achieve a 13-billion-dollar swing in its balance of payments provoked protests that so rapid a reversal would destroy the Common Market. But at a September meeting of the International Monetary Fund, financiers from the “Group of Ten” wealthiest nations continued to be sympathetic to the U.S. position. Connally, in turn, hinted that America might reopen the gold window and raise its price—direct devaluation. Subsequent talks in Rome led to an agreement, announced at the Smithsonian Institution in Washington, under which the U.S. surcharge was canceled, the value of other currencies was raised, and the price of gold was provisionally boosted to $38.
On Wall Street the day after Nixon’s announcement of the freeze—or Phase One,
as it was already being called—the Dow Jones industrial average jumped 32.93 to 888.95 on what was then the busiest day in its history; 31,720,000 shares were traded. In September, the first full month of Phase One, the nation’s rise in living costs was held to 2.4 percent and the wholesale price index posted its biggest decline in five years. A few holes were poked in the wage and price ceilings, and inevitably there was a great deal of confusion in some industries, but for the most part the thing worked. Unfortunately it was, by definition, only the first step. On November 13 it would expire. Before then the administration had to find guidelines which provided hope of preserving relative stability while rectifying the injustices which had been frozen into the system.
On October 8 Nixon spoke to the nation again, this time setting up the machinery for Phase Two. The challenge was greater now. Economist Herbert Stein, the chief planner of the new stage, had anticipated the difficulties at the time of the first message. He said, “I knew immediately the problem would not be the freeze, but the unfreeze, the thaw.” The goal of this second program was to hold inflation to between 2 and 3 percent a year. Controls would be administered by a seven-man Price Commission and a fifteen-member pay board. There would be no ceiling on profits, the President said, and the success or failure of the plan would depend upon “the voluntary cooperation of the American people.”
The Glory and the Dream: A Narrative History of America, 1932-1972 Page 188