Video
Jeffrey E. Garten on the meeting that transformed the global economy
This is a fascinating historical account, but also deeply relevant today. What is this book is about?
This is the story of a secret meeting at Camp David in the middle of
August 1971. It was actually 50 years ago this August, when President
Nixon and his top advisors went into a meeting to make a momentous
decision. And that decision was to sever the link between the dollar and
gold.
At that moment—actually, since 1944—$35 could buy one ounce of gold.
That link created a level of stability around the world that fueled the
recovery of Japan and Germany from the war, and that created enormous
prosperity in the US for over two decades.
There are several reasons why [the US] had to sever that link. One
was that the currencies of Japan and Germany, two countries that were
becoming very strong, were much too cheap. They were really undervalued,
which meant the dollar was overvalued. The only way the US could
devalue the dollar was to get rid of its link to gold.
Second, with an overvalued dollar, a trade deficit suddenly began to
appear—the first in the 20th century. So there was an enormous concern
about American competitiveness. The other side
of that was the growth of protectionism, a really major outburst of
protectionism in Congress. To deal with these two problems, the US had
to delink from gold.
But there was a third issue that was even bigger: the world economy
had grown so fast and had become so big, and the need for dollars was so
great, that the US printed many more dollars than it could back by
gold. By 1971, the pledge that an ounce of gold was worth $35 became
void. They couldn’t actually make it happen.
So, for all these reasons, they decided to cut the link. And they did
it in secret. They announced it at the end of the weekend. And it
created enormous turbulence in the global economy and enormous strain
among the political allies. I tell this story through the characters. At
the end, I come to grips with the implications that this decision has
had for the global economy ever since.
What prompted you to write this book?
I’ve written several books on very broad themes, and I have always
been attracted to the possibility of taking a single event and using it
to illustrate some very major topics—but also to focus intensely on the
event itself. This is the first time I did that, and I found it very
gratifying.
[It was gratifying] because you can go very, very deep into something
that has bounds, but at the same time, you really try to think through
the implications of doing this sort of case study. That’s why I was
familiar with the [August 1971] decision—because I had been in the
government not long after it had been taken.
I also knew a lot of people who were actually at Camp David, and
fortunately, I had the chance to interview them. They were all quite
elderly, and none of them have survived since the time that I met with
them, but I was able to capture their memories in the book.
A world-changing decision
How does this help us understand the global economy right now?
When the dollar was delinked from gold, the world really changed in
terms of the way it saw money. Before that, money was kind of a stable
concept. If you held any currency, you could change it into dollars. And
if you held dollars, you could change it into gold.
But once the link between the dollar and gold disappeared, the value
of currencies became an assessment of the credibility of a country’s
policies and the integrity of its financial institutions, such as its
central banks and treasuries.
So we unleashed an era of floating exchange rates, which had two
major effects. First, it created a world economy that was much more
unstable in that the values of currencies went up and down in
substantial amounts. We entered an era that became a kind of financial
casino because as currencies moved up and down, there was a chance to
make money by speculating on currencies. That led to a whole industry of
financial engineering. So, all of the things we see today—derivatives
and derivatives of derivatives, the fear of global banking crises—all of
that really derives from the disconnect between currencies and
something that is very tangible.
On the other hand, we made globalization much more possible because
we reduced the odds of protectionism, since currencies took the hit
rather than economies. We allowed for a much larger and faster flow of
capital, and a much greater volume of trade. I would argue that on
balance, this really helped the world.
Who’s your favorite historical figure in this account and why?
I wrote this book through several characters. What fascinated me the
most was the tension between [them]. The secretary of the treasury at
the time, John Connally, who was a strident nationalist and whose motto
was, “Let’s screw the foreigners before they screw us,” really didn’t
care at all about what the impact would be on other countries. He was
just focused on the US. On the other hand, there were two characters who
opposed him. One was Paul Volcker, whose name is obviously very
familiar. He was just a young fellow at the time. He argued very
strenuously for a world that was much more cooperative, and that [view]
was backed up by Henry Kissinger—also a new foreign-policy advisor to
Nixon—who argued that the importance of our alliances were every bit as
important as the nature of the economic ties. There was this tension
between retrenchment and engagement, which of course has been a tension
that we have seen ever since, and we see a lot of it today.
History repeats itself
What could we learn from this episode for the future about how economic policy is made?
I go into the making of economic policy in considerable detail. What I
show is that Nixon had around him some of the best minds that we have
ever had in government. There was Paul Volcker. There was a fellow named
Arthur Burns who was head of the Federal Reserve. There was George
Shultz. Nobody knew who he was—he was at the beginning of his career—but
he became one of the greatest statesmen of the 20th century. And there
was Pete Peterson, who was a businessman, but really a very far-reaching
thinker.
No matter how smart a group of people is around the table,
and no matter how much studying they do, when you’re dealing with the
global economy, you’re really dealing with an enormous number of
uncertainties
The government had done some very in-depth studies of the global
monetary system and what kind of impact changes could have. But in the
event they got [the impact of the decision] wrong, it’s not that they
didn’t make the right decision. It’s that they really couldn’t
anticipate all the rockiness that would take place.
They thought there would be exchange rates, and they’d move up and
down a little bit. But they never thought we would live in a world of
floating exchange ratings. The lesson I take is, no matter how smart a
group of people is around the table, and no matter how much studying
they do, when you’re dealing with the global economy, you’re really
dealing with an enormous number of uncertainties.
There’s nothing you can do about that other than be very vigilant,
very resilient, and very, very observant of the trends, and try to get
ahead of them. But the notion that somehow you can anticipate what is
going to happen, that will never be the case.
What surprised you most about writing this book? Either in the research, in the writing, or in the response?
What surprised me the most were all the parallels that exist between
August 1971 and August 2021. At that time, there was a growing trade
deficit and a real fear about how the United States was going to compete
in the world. There was a feeling that other countries, what they
called the Economic Community at the time, which is the EU today—that
they and Japan were not doing enough to hold up the world economy.
At that time, there was a fear that Japan in particular had an
economic system that was very different from ours, which was going to
cause enormous problems. There was a feeling that the US had to focus
more on building its society at home and that the Vietnam War had gone
on too long and really had become not only a tragedy, but an enormous
distraction.
When I look at the situation today, I see the trade deficit. I see
the constant pounding on our allies to do more. I see the focus on
rebuilding the economy at home. And in 1971, there was also the
beginning of an inflationary period, and that made people nervous about
holding the dollar. That was a threat to the dollar. The rise of the
German currency, the Deutschmark, was also a kind of threat to the
dollar. When I look at today, I say, “You know, the dollar has remained
very strong. It’s still at the center of the global financial system.”
But substitute China for Japan, look at the inflation, and look at
some of the possibilities for cryptocurrencies, particularly central
bank digital currencies. And you have to ask the question: Is the dollar
going to come under enormous pressure again?
I didn’t start out thinking there were parallels between these two
periods. I just wanted to capture one period for all that it was worth.
But when I was done, I said, “I think that a lot of things have either
come full circle, or maybe they never changed.”
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