On June 26, 1971, I met with my economic advisers at Camp David. We discussed the problems and our options for dealing with them at great length. After weighing all the factors, I decided to remain on the present course with one exception. For several months I had been concerned about conflicting views on the economy that filtered out of different parts of the administration and helped to create a sense of disarray and confusion in the country. My solution to the problem of too many voices was to designate a single voice: an economic spokesman who would be the authoritative source for my administration’s economic policy. I selected John Connally for this role.
As Treasury Secretary, Connally was the senior Cabinet officer with economic responsibility. More important, he was an articulate speaker who could convey his determination to carry out presidential decisions vigorously.
On June 29 Connally briefed the White House press corps on the decisions we had reached at Camp David. He handed down what became known as the “four noes” when he announced that there would be no wage and price review board, no mandatory wage and price controls, no tax cut, and no increase in government spending.
In response to reporters’ questioning, Connally forcefully insisted that the economy was expanding and that better days lay ahead. But even Connally’s skills could not redeem the troubled economic, psychological, and political situation that had been building up over several years.
In the briefing I held for congressional leaders after my July 15 China announcement, I found that for every one who expressed support of that dramatic foreign initiative, at least twice as many used the opportunity to express concern about our domestic economic policies and to urge new actions to deal with the problems of unemployment and inflation. After this meeting Connally and I concluded that the time had come to act.
“If we don’t propose a responsible new program, Congress will have an irresponsible one on your desk within a month,” he said. I knew that he was right, and I authorized him to obtain privately the views of our senior economic advisers and then to prepare a report for me that included action options for me to consider.
Connally’s report was ready on August 6. By nature he always favored the “big play,” so I had expected that he would recommend something bold. But even I was not prepared for the actions he proposed. He urged, in effect, total war on all economic fronts, including across-the-board wage and price controls. “I am not sure this program will work. But I am sure that anything less will not work,” he said. He also advised me to let the issue “sit and simmer” for a while, even if it meant letting matters worsen a bit. If that happened then the actions I took would look all the better.
However, an unexpected development forced us to accelerate dramatically our economic timetable. In the second week of August the British ambassador appeared at the Treasury Department to ask that $3 billion be converted into gold. Whether we honored or denied this request, the consequences of our action would be fraught with danger: if we gave the British the gold they wanted, then other countries might rush to get theirs. If we refused, then that would be an admission of our concern that we could not meet every potential demand for conversion into gold. Connally deferred giving his answer, but we knew that we would very soon have to confront a major crisis concerning the international economic position of the United States.
Acting on Connally’s recommendations, I called a high-level meeting at Camp David for August 13. Fifteen economic experts, White House staff members, and a speechwriter assembled there, some arriving by secret routes lest news of the meeting itself trigger a wave of international speculation.
These were the men who understood the intricate complexities of economics: John Connally, Arthur Burns, George Shultz, Paul McCracken, and Herbert Stein from my Council on Economic Advisers; Peter Peterson, head of the Council of International Economic Policy; and Paul Volcker, Treasury Undersecretary for Monetary Affairs. From my personal staff there were Haldeman, Ehrlichman, and Bill Safire.
I began by laying down the ground rules that I would insist upon being followed over the next few days until I officially announced my decision: “In the past, leaks have compromised our positions on various issues. Between now and Monday, no one here is to say anything.”
I then turned the meeting over to Connally, who succinctly described the actions that the experts had been working on: closing the “gold window” and allowing the dollar to float; imposing a 10 percent import tax that would be mainly a bargaining chip to discourage foreign countries from depressing their currencies in order to promote their exports; reinstating the investment tax credit to stimulate the business community; providing new income tax relief; and repealing the excise tax on automobiles to encourage higher sales.
He left for last the action that would be perceived by the American people as the most dramatic and significant: a ninety-day freeze on wages and prices. No large or permanent bureaucracies would be created; these controls would be monitored for the duration by a Pay Board, a Price Board, and a Cost of Living Council.
Herbert Stein, who subsequently became Chairman of my Council of Economic Advisers, later wrote of those Camp David sessions:
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.
While there was relatively strong, though skeptical, support among those present for the freeze and the other domestic actions, there was substantial disagreement on closing the gold window—in other words suspending the convertibility of the dollar into gold.
The strongest opposition came from Arthur Burns, Chairman of the Federal Reserve Board. He wanted us to wait. Even if all the arguments were right, he said, he still felt that there was no rush. He warned that I would take the blame if the dollar were devalued. “Pravda would write that this was a sign of the collapse of capitalism,” he said. On the economic side he worried that the negative results would be unpredictable: the stock market could go down; the risk to world trade would be greater if the trade basis changed; and there might be retaliation by other countries.
I always gave great weight to Burns’s opinions because of my respect for his superior intellect and because he always followed the practice he once described to me of “telling the President what he needs to hear, not just what he wants to hear.” This was to be one of the few cases in which I did not follow his recommendations. I decided to close the gold window and let the dollar float. As events unfolded, this decision turned out to be the best thing that came out of the whole economic program I announced on August 15, 1971.
I decided to announce these decisions on Sunday night so that the new policy would be known before the stock markets opened on Monday morning.
As I worked with Bill Safire on my speech that weekend I wondered how the headlines would read: would it be Nixon Acts Boldly? Or would it be Nixon Changes Mind? Having talked until only recently about the evils of wage and price controls, I knew I had opened myself to the charge that I had either betrayed my own principles or concealed my real intentions. Philosophically, however, I was still against wage-price controls, even though I was convinced that the objective reality of the economic situation forced me to impose them.
The public reaction to my television speech was overwhelmingly favorable. On the networks, 90 percent of the Monday newscasts were devoted to it, and most of the focus was on the brilliant briefing that John Connally had given during the day. From Wall Street the news came in numbers: 33 million shares were traded on the New York Stock Exchange on Monday, and the Dow Jones average gained 32.93 points.
Over the next months the New Economic Policy began to take hold. The inflation rate in 1971, before the freeze, was 3.8 percent. It fell to 1.9 percent during the freeze, and then, after a bulge when the freeze ended, it ran around 3.0 percent for the res
t of 1972. The unemployment rate, which had been 6.1 percent when the new policy was initiated, fell to 5.1 percent at the end of 1972.
A Harris poll taken six weeks after the announcement showed that, by 53 percent to 23 percent, Americans believed my economic policies were working.
Over the next two and a half years the economy went through three additional phases of wage and price controls before all controls were finally lifted in the spring of 1974.
Phase II, which began in November 1971, was our answer to getting out of the controls before they broke down or became permanent. In this phase the controls, although still mandatory and widespread, were much less comprehensive.
The switch into Phase III in January 1973, as we expected, caused some outcry as repressed prices began moving up. In June 1973, this time over the objection of many of my advisers, I reimposed a temporary, limited freeze to settle public anxiety, which by then was compounded by Watergate, and to dampen a rise in prices taking place simply because a freeze was anticipated. If this freeze only further complicated a bad situation, at least it produced a side benefit that was wryly summarized by George Shultz: “At least we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer,” he said.
When mandatory wage and price controls came to a complete end in 1974, the aftermath was far from pleasant. Energy shortages and high food costs contributed to an increase in inflation and to recession, and the pressures that built up after the period of controls led into the destructive double-digit inflation that plagued the early months of the Ford administration. Three years after controls had completely ended, both unemployment and inflation hovered around 7 percent, and there was even nostalgia for the “good old days” in 1971 when we had only 4 percent inflation and 6 percent unemployment.
What did America reap from its brief fling with economic controls? The August 15, 1971, decision to impose them was politically necessary and immensely popular in the short run. But in the long run I believe that it was wrong. The piper must always be paid, and there was an unquestionably high price for tampering with the orthodox economic mechanisms.
In concentrating on the most urgent economic problem of my administration—the inflation–unemployment problem—I have tended to highlight the area in which we felt it necessary to depart dramatically from the free market and then painfully work our way back to it. But there were also a number of economic steps during my administration that better reflected my economic philosophy and that may be more important in the longer run.
For example, in 1969 we reduced income taxes and relieved more than six million low-income people from the burden of paying any income taxes at all. By 1973 we had freed agriculture of almost all production controls for the first time in thirty-five years. We abolished numerous controls on international capital movements that had been imposed in the 1960s, and we took the lead in establishing a worldwide system of free exchange rates. We pushed legislation through Congress authorizing negotiations for reduction of barriers to international trade, and the first of these negotiations was held in Tokyo in September 1973. We also began moves to reduce or eliminate regulations in the fields of transportation and finance that were burdensome on industry and expensive to consumers.
Some people think of the free market as a matter of concern only to businessmen. But when I came into office, one of the severest and most unfair restraints on the free market was the military draft, which is a way of compelling service from everyone rather than hiring service from those who supply it voluntarily. Thus the elimination of the draft and the introduction of a volunteer Army in January 1973 were also major steps to meaningful economic freedom.
Conservatives are always at a disadvantage when speaking about economics because their belief that some pain may be necessary now to save the patient later is conventionally interpreted by liberal politicians and commentators as “heartlessness” or “callous indifference to human suffering.”
It is unfortunate that the politics of economics has come to dictate action more than the economics of economics. Not surprisingly, when prudence clashes with political reality, the latter sometimes triumphs. Like all oversimplifications, this one sounds too cynical; but I can personally attest to how even someone with strong economic ideas can be affected by the sting of criticism and the clamor of those who want a different policy.
Government enterprise is the most inefficient and costly way of producing jobs. Through the private enterprise system, with all its faults, the United States in its 200 years has waged the most successful war on poverty in the history of civilized man. Private enterprise is an instrument that produces change and encourages progress; government enterprise almost invariably discourages change and inhibits progress.
It is significant to note that our major Communist competitor, the Soviet Union, has found it necessary to turn to our way to increase production. At a time when the Communists are by necessity providing increased incentives for more efficient producers, the United States seems to be slowly but surely turning their way by discouraging incentives.
America today is at a watershed as far as our economic and political system is concerned. Federal, state, and local taxes now take 40 percent of our net national product. If this percentage continues to rise, we will soon reach a point at which people will be working more for the government than for themselves. If that day ever comes, then we will no longer have the private enterprise system that has made America the freest and most prosperous nation in the world. We can only hope that statesmen of both parties will see the danger of this situation and not allow it to come to pass.
SALT BREAKTHROUGH AND BERLIN SETTLEMENT
There were dire predictions that the announcement that I would be going to China, which I made on July 15, 1971, would seriously damage U.S.–Soviet relations. Exactly the opposite occurred. On October 12 a joint announcement issued in Washington and Moscow confirmed that I would visit the Soviet Union three months after returning from China.
A U.S.–Soviet summit was at last possible because of two achievements: progress in the Strategic Arms Limitation Talks before the China overture was revealed, and progress on a Berlin settlement after the China announcement had been made.
The SALT talks, which had begun at the end of 1969, had quickly bogged down because the two sides differed on the proper scope of an agreement. Stated in its simplest form, the Soviets wanted to conclude an agreement dealing only with the limitation of defensive ABM systems. We, however, wanted to conclude a comprehensive agreement covering not only defensive systems like the ABMs but also offensive weapons like Intercontinental Ballistic Missiles (ICBMs) and Multiple Independently-targetable Re-entry Vehicles (MIRVs).
On January 9, 1971, I sent a personal message to Brezhnev stressing the necessity of linking offensive and defensive weapons if an agreement were to be reached.
Two weeks later Kissinger met with Dobrynin, who had just returned from lengthy consultations with Brezhnev in Moscow. At this meeting Dobrynin suggested late summer for a summit meeting and indicated that a SALT agreement might be worked out along the compromise lines we had suggested: an ABM-only formula coupled with a freeze on offensive weapons while further talks took place.
On March 12, however, Dobrynin delivered a reply to our proposed SALT agreement that seemed to return to earlier hard-line insistence on ABM-only terms. After having made what appeared to be considerable progress in our relations, it looked as if we were in for another period of testing by the Soviets.
Perhaps this sudden about-face was one final test they felt they had to make, or perhaps Brezhnev was just covering his own flanks on the eve of a Party Congress. Whatever the reason, on March 26 Dobrynin received a new set of instructions from Moscow, and they embodied the breakthrough we had been waiting for: the Soviets would agree to continued talks and a freeze on offensive weapons after reaching an ABM agreement.
The SALT talks in Vienna, under the leadership of our ch
ief negotiator, Gerard Smith, and the secret exchanges of messages through Kissinger and Dobrynin immediately became more intense and serious. The major problem, as I saw it, was going to be the American negotiating position. Congressional doves were treating the Soviet ABM-only proposal as a way to chalk up a belated victory over the administration on the ABM issue and urged that I accept immediately.
I felt that it would be disastrous to go into the final SALT negotiations in this position. I believed that the only effective way to achieve nuclear arms limitation was to confront the Soviets with an unacceptable alternative in the form of increased American armaments and the determination to use them.
On April 20 I met for an hour and a half in the Cabinet Room with a group of Senate Republicans. I said, “If SALT is to have a chance, we cannot give away in the Senate things we might want to negotiate with the Soviets. They will say, ‘Why should we continue to negotiate SALT when the United States is going to take these actions unilaterally?’ The Soviets have strong reasons to have an agreement, but we know for a fact that they will only deal from strength and that they only respect those who have strength; otherwise they have historically moved into the power vacuums.”
On May 12 Dobrynin delivered to Kissinger the latest Soviet proposals regarding SALT. They had dropped the last remaining objectionable provision. Now we had our breakthrough. I appeared before the television cameras in the White House briefing room at noon on May 20.
“As you know,” I began, “the Soviet-American talks on limiting nuclear arms have been deadlocked for over a year. As a result of negotiations involving the highest level of both governments, I am announcing today a significant development in breaking the deadlock.” I read the statement, which was being released at the same moment in Moscow. Its wording was purposely vague: it said only that we had agreed to concentrate on an ABM agreement and that they had agreed on “certain measures” with respect to the limitation of offensive weapons.
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