The Worst Thing Tricky Dick Ever Did: How Nixon and the British Destroyed the Best Monetary System the World Has Ever Had, Forty-Four Years Ago this Weekend

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Morning Briefing | Sunday, August 16, 2015

This weekend marks the forty-fourth anniversary of the deliberate destruction of the highly successful Bretton Woods System by Richard Nixon at Camp David, Maryland on August 15, 1971 – in many ways the worst thing Tricky Dick ever did. Since then, we have lived in the era of floating rates for currencies – a synonym for chaos, in which nobody knows what money will be worth a few weeks or months into the future. This has slowed the growth of world trade, which must be financed one, two, or three months ahead at minimum. The lack of fixed parities among the main world currencies has added crippling currency risk, providing a pretext for toxic derivatives as a way to deal with this risk. The euro crisis is also a spin-off of the Bretton Woods collapse, since a currency union is another way to remove currency risk. The Greek-centered euro crisis and recent competitive devaluations by Japan and China have once again focused world attention on the dangers of currency chaos. The interests of humanity would be best served by a world currency conference or Bretton Woods II in which dollar, euro, yuan, yen, ruble and some regional currencies could restore a system of fixed exchange rates in the framework of a system aimed at raising world standards of living and longevity, expanding world trade, bridling derivatives and other forms of speculation, great projects of world infrastructure, eliminating poverty and backwardness, and more rapid world economic development overall.

The following are excerpts from an account of the last days of Bretton Woods which appears in Webster G. Tarpley’s Surviving the Cataclysm (2009). Note that, contrary to a widespread misconception, it was Great Britain under Edward Heath, and not the France of President Charles de Gaulle, which triggered the final crisis

August 15, 1971: Nixon dismantles Bretton Woods

Every great historical event requires two components: it has an objective side and subjective side. Two decades of dollar weakness and US economic stagnation had now created the objective potential for the terminal crisis of Bretton Woods. But the collapse of the old Bretton Woods order also required a subjective ingredient, some considerable force on the historical stage that saw an advantage for itself in pulling down the weakened structure. This subjective ingredient was provided by the British oligarchy and their fellow travelers.

The demolition of Bretton Woods – like the crisis of 1931 – was a deliberate British project which required the joint effort of the British and Commonwealth governments (especially Canada), the Bank of England and its assets in the US Federal Reserve System, and a pro-British clique in the US Treasury around Paul Volcker. Even all this would not have been enough without the pathological folly of Richard Nixon, John Connally, and other generally non-witting US officials.

During 1970, the British held a general election that ousted the Wilson Labour Party regime and brought in Edward Heath and his Conservatives. Heath personally looked more modern and less like a Colonel Blimp than his Tory predecessor, Harold MacMillan. Heath’s job as a thespian was to act the part of a good European and thus get the British into the Common Market, which they had been trying to enter since 1963. General De Gaulle of France, who had blocked their entry, had resigned in 1969 and died in 1970. The British were certain they could get their way with the unsavory Pompidou, the Rothschild banker.

Heath brought with him Lord Home of the Hirsel as Foreign Secretary, Lord Carrington as Defense Minister, and Anthony Barber as Chancellor of the Exchequer. (Margaret Thatcher was Education Minister.) In order to attach himself to the EEC, Heath had to distance himself from both the US and the British Commonwealth. Heath began busily posturing in these directions. “The long-cherished ‘special relationship’ with the United States was declared to be abruptly ended, and sentimental allegiance to the Commonwealth was briskly shelved.” Naturally, it was all a deception posture. To distance himself from Washington, Heath declined to visit Nixon, seldom called him, and even insisted that direct bilateral consultations between London and Washington be phased out, since the British wanted to negotiate as part of Common Market delegations. Kissinger later wrote that Heath had made Nixon feel like “a jilted lover.”

Heath expressed thinly veiled hostility for the US. He referred with contempt to the pro-American pose assumed by other British leaders:  “Now, there are some people who always want to nestle on the shoulder of an American president. That’s no future for Britain.” Heath was also contemptuous of the Nixon-Kissinger proclamation of 1973 as the “Year of Europe.” He said to Kissinger, “Who are you to propose that there should be a Year of Europe? You’re not part of Europe.” [Campbell, 344-345] This was the British Prime Minister who would administer the coup de grace to the Bretton Woods system, even as he attached the British financial parasite to the European Community to ride out the storm. Ultimately, Heath was destroyed as a politician by his own scheming; after the oil shock of 1973, he faced massive labor agitation. He put Britain on a three-day week and was defeated at the polls in early 1974. But Heath had fulfilled his two basic missions for the British oligarchy: pull down the dollar and intrude into Europe.


Inside the Treasury Department in Washington was a group of officials that constituted an important British asset. This was an alleged “study group” called the Volcker Group, after the then Undersecretary for Monetary Affairs. Volcker owed his career to the New York Federal Reserve Bank, the great bastion of Morgan and British power on Wall Street. The Volcker group was a pro-British cell in the Treasury. The Volcker group was the successor of the so-called Deming Group, which had been created by Lyndon Johnson in June 1965 to study how the US could help the British. The Deming Group’s mission had been (in LBJ’s words) to “consider what steps the United States could take to arrange for a relief of pressure on sterling, so as to give the United Kingdom the four- or five-year breathing space it needs to get its economy into shape, and thereby sharply reduce the danger of sterling devaluation or exchange controls or British military disengagement East of Suez or on the Rhine.” [Solomon, 82] The Volcker Group continued this mandate of elaborating a pro-British monetary policy in a way that would inflict grave damage on the United States for the benefit of the London finance oligarchs.


In December 1970, Nixon named former Texas Democratic Governor John Connally as Secretary of the Treasury. Connally portrayed himself as a fighting US nationalist, anxious to end “Marshall Plan psychology” and fight for the best possible deal for US exporters by forcing the others to upvalue their currencies. He talked coercion and unilateralism, while demanding that other nations remove trade barriers and pay their share of the common anti-Soviet defense. During a cabinet-level meeting with Nixon, according to one source, Connally presented “an unbelievable diatribe” against the European Community and Japan, implying that these were the real enemies of America. [Odell, 248] Just after August 15, Connally met with economics professors, and wrapped up the discussion by saying:  “My basic approach is that the foreigners are out to screw us. Our job is to screw them first.” But despite this tough talk, Big Jawn let the British off the hook every time.

It is clear that the Volcker Group quickly captured the boisterous Connally, who was not well-versed in international monetary affairs. As one source relates, “during one of Connally’s first Treasury staff briefings in late 1970, an adviser told him that over the next six months the country was going to face its gravest financial crisis since the depression. Interest rates were starting to fall; the payments deficit would grow. The suspension of convertibility was inevitable, he declared. The only choice was between picking the time and waiting for a crisis to force America’s hand. This adviser pressed for closing the gold window and adopting a supporting domestic policy of restraint.” [Odell, 250] The anonymous official who gave Odell this story appears to have been Volcker or one of his minions. Connally immediately ordered planning to begin for the suspension of dollar convertibility. Volcker claimed he wanted to suspend gold convertibility as a means of forcing the other nations to revalue their currencies, supposedly to help the US trade position. This was sold to Connally as a tough nationalist line. Volcker, in reality, was already looking ahead to the “controlled disintegration” which he would later openly embrace. Ironically, wrecking the old system was the worst thing that could have happened to the US.

Speculation against the dollar in the spring of 1971 was fueled by hot money, much of which was flowing out of London and New York and into Frankfurt and Tokyo. These flows were mightily stimulated by the actions of the Federal Reserve. During 1969, the Fed had raised interest rates to levels not seen since the American Civil War. The crunch peaked with a 7.9% rate on three-month Treasury bills in January 1970. This was the fabled “credit crunch” of 1969 and early 1970. During the credit crunch, the Nixon White House cited the authority of monetarist Milton Friedman as a theoretical justification for policy. Early in 1970, the Federal Reserve began lowering interest rates and easing monetary policy. Since interest rates in Europe were higher, bankers and brokers directed their hot money to Europe, where it was used for leverage to short the dollar. At about this time, the Nixon administration dumped Friedman, and began to profess Keynesianism.

The dollar also came under pressure during the first half of 1971 because of an outflow of gold from the Treasury. Between January 1971 and August 15, total gold outflow came to $845 million. But fully half of this sum was accounted for by US gold payments to the International Monetary Fund, which was presenting its claims when they hurt most.


Back in 1968, the Johnson administration had imposed stringent capital outflow restrictions, which mainly impacted US banks and corporations that wanted to invest in Europe and Japan. These controls included the mandatory requirement that no dollars be shifted out of the US for purposes of corporate investment in western Europe and the developing sector. These controls afforded some protection for the dollar against speculation by US banks and corporations themselves. But the new Nixon administration, with its Friedmanite creed of “benign neglect” of the dollar, had relaxed these controls in April 1969.

During April and May of 1971, the German Bundesbank was obliged on a number of days to deal with hot money inflows in the range of $1 to $3 billion. German Superminister Karl Schiller attempted to convince the other EEC countries to accept a joint European float against the dollar, but failed to secure agreement. By May 10 the German mark and the Dutch gulden were floating separately, while Austria and Switzerland revalued. Connally was adamant that the US would not devalue the dollar, even as currency chaos spread.


The climactic crisis of the Bretton Woods system was precipitated by the British. As President Nixon recounts this dramatic episode in his memoirs:

In the second week of August the British Ambassador appeared at the Treasury Department to ask that $3 billion be converted into gold. [Nixon 518]

At this point, the entire gold reserves of the US Treasury were about $10.1 billion. The British were in effect demanding that almost one third of the entire US gold stock be handed over to them. Decades of anti-US resentment and retribution for such humiliations as two pound sterling devaluations, the postwar US loan, the Suez debacle, the pullback from east of Suez and the nominal loss of the Empire were rolled up in this venomous ploy. Bretton Woods was a flawed system, but it was the only monetary system the world had, and wantonly to destroy it was a crime against humanity. Because of decades of wrong policies, the US was trapped in a position of pathetic weakness, and even Nixon knew it:

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. [Nixon 518]

This was an attempt to bring down the entire international monetary system, and it succeeded fully. On Friday, August 13, 1971 Nixon and his advisers retired to Camp David in Maryland’s Catoctin Mountains for one of the most fateful sessions in monetary and financial history. Unfortunately for the United States and the world, Nixon’s team was dominated by the incompetents who had presided over the monetary ruin of the dollar, and who in many cases would continue so to preside. These included: Federal Reserve boss Arthur Burns; Peter Peterson, the head of the Council of International Economic Policy; Undersecretary of the Treasury for Monetary Affairs Paul Volcker; George Shultz; Caspar Weinberger; plus Nixon advisers Paul McCracken, Herbert Stein, and speechwriter William Safire. Kissinger was in Paris for a secret meeting with Le Duc Tho of North Vietnam.

Although by this time Nixon professed to be a Keynesian, the dominant spirit in that infamous Camp David group was once again that of Friedmanite laissez-faire, free-market monetarism in the critical arena of international monetary affairs. Arthur Burns had been Milton Friedman’s teacher, and George Shultz was his friend, student, and admirer. Volcker would later motivate his 21% prime rate with Friedmanite arguments on the money supply.


The French government the same week had asked for a mere $191 million in gold, and the rage of the media focused on Paris, not London. William Safire’s account of this fateful meeting coheres with that left by Nixon. William Safire, a participant at the critical Camp David meetings of August 13-15 who took extensive notes on the discussions, has Connally explaining the crisis thus:

Connally:  What’s our immediate problem? We are meeting here because we are in trouble overseas. The British came in today to ask us to cover $3 billion, all their dollar reserves. Anybody can topple us – anytime they want – we have left ourselves completely exposed. [Safire, 666]

The decisive role of the British in forcing the hand of the US government is still a matter of dispute, with the Anglophiles attempting to cover up for London’s act of economic warfare. The attempted British raid on Fort Knox was not widely known at the time these events took place. But on November 22, 1971 Hendrik S. Houthakker, a well-known economist and former member of Nixon’s Economic Advisory Council, referred to the British role in a speech at DePaul University, noting that “There is as yet little public knowledge of what exactly led to the President’s decision to suspend the convertibility of the dollar into gold…. One clue to the developments that precipitated the decision of August 15 may well be the recent disclosure that two days earlier the United Kingdom drew the entire amount of its so-called swap line with the United States, amounting to $750 million…. If the British action was indeed the immediate reason for our August 15 decision, it will be interesting to know Britain’s motives for thus bringing down the Bretton Woods system of which it had been one of the principal architects.” [Brandon, 225]

According to journalist Henry Brandon, “British officials in London angrily denied the accusation. Questioned as to the exact facts, they replied that they had asked the Federal Reserve Bank of New York shortly before August 12 to activate a reverse ‘swap’ (guaranteeing dollar holdings against devaluation) and then questioned over the transatlantic telephone as to how much they were asking for, replied that they wanted as much as possible, which meant in effect up to the full amount of the facility they had with them – $2 billion. When the Fed declined to go along with that request and limited the amount to $750 million…the British did not press for more. The reverse swap was carried out on August 13.” Charles Coombs, the Senior Vice President of the Federal Reserve Bank of New York, also denied that the British asked for $3 billion. [Brandon, 223-224]


In January 1972, Fortune magazine published an article by Juan Cameron that revealed more about the causes of August 15. Cameron wrote that Nixon’s moves were “dictated by the largest money run in history which culminated in a panicked request from the Bank of England for a guarantee against devaluation of its dollar holdings totaling some $3 billion. The British request, viewed as tantamount to a to a demand for gold, was relayed to the White House on the morning of August 13.” Cameron also reported that the British demand was “considered a distinctly foul blow; after all, the United States had helped rescue sterling at least three times during the 1960s. An outraged Treasury abruptly turned down the request.” [Brandon, 224-225]

Arthur Burns later put out the pro-British line of the cabal of private central bankers on this issue, minimizing the British move as an “irritant” that “did not play a role in the decision to close the gold window and, as far as I can remember, and I participated in all the important discussions at the Camp David meeting, the British action was never mentioned.” [Brandon, 225] But Safire’s minutes of the Camp David meetings, backed up by the memoirs of Nixon and Connally, show that Arthur Burns was lacking in candor.

Robert Solomon of Burns’ staff at the Fed also hews to the central bank line in his standard work on postwar monetary affairs, The International Monetary System, 1945-1981: “Some observers have suggested that the weekend meeting was triggered by a British request for coverage of its dollar holdings by means of a Federal reserve swap drawing on the Bank of England. It is true that such a drawing was agreed to on August 13, in the amount of $750 million. There was confusion in the communication between the British and American authorities as to just how large a drawing was being requested; the swap line would have permitted a drawing of $2 billion. The amount of $750 million, agreed to on Friday, August 13, was about equal to the Bank of England’s dollar accruals in August. But, as Henry Brandon points out, the British request was no more than an irritant.” [Solomon, 185] Solomon is also fibbing.

The Fed officials were deliberately confusing two separate transactions. Swap agreements were short to medium term agreements among central banks for mutual lending of each other’s currency for use in support operations that were supposed to benefit currency stability. If the British were asking for coverage on dollars they held under a swap agreement, they were asking that sufficient pounds be lent to them to cover the value of those dollars. In effect, coverage meant insurance against losses on dollar holdings if those dollars were to be devalued. But the British were not attacking along a single axis; they were mounting a many-pronged attack on the dollar. The British Ambassador showing up at the Treasury with a demand for $3 billion in gold was a government to government demarche that ran parallel to and additional to whatever amount of dollars the Bank of England was demanding from the New York Fed. In other words, the British were using the gold demand to force a devaluation crisis that would shake the monetary order, while at the same time seeking to indemnify themselves against dollar losses that they might otherwise absorb in the process.

Even Paul Volcker is more honest in his memoirs than Burns and Solomon. Volcker, then at the Treasury, was in touch at the time with Charles Coombs of the international desk of the New York Federal Reserve Bank. Volcker recounts that “the foreign exchange desk in New York had called to inform [Coombs] that the British had just asked for ‘gold’ for their dollar holdings of about $3 billion. If the British, who had founded the system with us, and who had fought so hard to defend their own currency, were going to take gold for their dollars, it was clear the game was indeed over.” That is clear enough. But Volcker adds two other elements. First, he attempts to blur the nature of the British request: “The message to Coombs apparently had gotten a bit garbled; I was told later that the request was for some combination of ‘cover’ to guarantee the value of their dollars, but not necessarily for gold.” [Volcker, 77] We have already cleared up this confusion.

Volcker also hurries to deny that the British caused the crisis, suggesting indeed that their demand was beneficial: “One story later circulated that the British request precipitated our decision to go off gold. That was not true. Demands for gold had been building from other, smaller, countries. The momentum toward the decision was by that time, in my judgment, unstoppable. There was, however, a sense in which those last requests for gold and guarantees were helpful:  no one could argue that the United States had reached its decision frivolously.” [Volcker, 77] We were covered, says Volcker.

Treasury Secretary John Connally wrote in his memoirs about a call he received in Texas from Volcker on Friday, August 6: Volcker “…said that we had received word that on Monday…that the United States would be asked by Great Britain to convert three billion dollars into gold. In the past, we had converted small amounts of dollars into gold for various countries, primarily third world countries, and usually in the amounts of five, ten or fifteen million. This was the first time we had been advised we would be asked to convert a large amount into gold…For every dollar in gold that we had at Fort Knox…$7 were being held in official hands by governments around the world. We knew if we converted three billion dollars for one country, it would set off a chain reaction among other nations to get their dollars converted while we had gold left.” [Connally, 237-238]

George Shultz, who would later supersede Connally at the Treasury, and who was present at Camp David in his capacity as Director of OMB, admits that Nixon’s decisions were precipitated by a British demand for gold, although he does not specify the amount: “A British demand for conversion of dollars into gold (or its equivalent in guarantees) was made in the course of the preceding week and forced final decisions to be made by the weekend. If the British demand had been honored, it surely would have started a ‘run’ on the Fort.” [Shultz and Dam, 110]

Finally, we have the younger James Reston’s biography of Connally. The younger Reston has no trouble revealing the main facts in the case: “…Great Britain, contemplating its future entry into the Common Market, demanded $3 billion – all its dollar reserves. If Britain’s demand were honored, the gold stock at Fort Knox would drop below its statutory bottom of $10 billion, and a run on American gold was sure to follow.” Reston also points out that it was Connally, in his famous tough-talking and posturing press briefing of Monday, August 16, who “covered up the fact that the British demand for gold had prompted the decision.” [Reston, 408, 411]


By now, the necessary US policy would have been to devalue the dollar against gold by about 15%, while negotiating an upvaluing of the other currencies so as to maintain fixed parities. Foreign central banks could have been persuaded to exercise temporary restraint on siphoning off US gold stocks. The US would have required capital controls, exchange controls, and credit controls to fight hot money flows by US banks and corporations. The one good measure that Nixon did implement on August 15 was a momentary return to a Kennedy-style investment tax credit for purchases of capital equipment and machinery. Dirigistic elements in the tax code needed to be increased, and permanently. But no combination of measures could have worked without addressing the need for a US and world economic recovery, led by exports of high-technology capital goods and infrastructure components into the developing sector and other poorer countries. This could have been done unilaterally by a boxcar increase in the funding of the Export-Import Bank, making it the powerhouse of an export-led recovery. The Federal Reserve needed to be nationalized to fight usury and to provide cheap long-term credit for agricultural and industrial production. None of this was seriously considered by the Nixon regime.

The dollar was illiquid because there was an insufficient world demand for dollars; the way to increase demand for dollars was to begin selling and financing capital goods the world wanted to buy, but did not have the credit mechanism to pay for. Instead, Nixon foolishly pulled the plug on the entire system by suspending the convertibility of the dollar into gold – he closed the Treasury gold window. Burns argued in favor of keeping the gold window open – meaning, in practice, letting the British cart off their loot. Nixon’s act of folly unleashed a monetary firestorm that has lasted for almost three decades. The tragic news was released in Nixon’s television speech on Sunday, August 15, 1971:

In recent weeks, the speculators have been waging an all-out war on the American dollar…Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Using Presidential emergency powers, Nixon also imposed a 10% surtax on all imports, which caused a loud outcry in Europe and Japan. On the domestic front, Nixon further announced a 90-day wage and price freeze that amounted in practice to a wage freeze. The wage freeze was denounced by George Meany of the AFL-CIO and other union leaders, but they soon wilted. For the labor movement, this – perhaps even more than Reagan’s breaking of the PATCO air traffic controllers – was the turning point which led into decades of declining membership and bargaining power. It soon turned out that the prices of stocks and bonds were not among those fixed by the freeze. Interest rates, including those on consumer debt, were not affected. Nixon asked corporations to freeze their dividends, but this was voluntary. Phase II of Nixon’s program began in November 1971; this still featured many mandatory controls, but these were less comprehensive. The beginning of Phase III in January 1973 removed most price controls, and many prices rose sharply. Nixon responded by re-imposing a temporary, limited freeze. All controls were finally lifted in the spring of 1974, a few months before the Watergate affair forced Nixon’s resignation. The aftermath of the controls was the double-digit inflation during the outset of the Ford administration. Nixon’s “Phases” were a key factor in the dilapidation of his political capital that made him vulnerable to Watergate.


In London, Ted Heath could now act the part of the outraged European. His biographer says that Nixon’s “unilateral action evoked shock and outrage in Europe and Japan, where it was seen almost as an act of economic war. Heath, despite his deliberate refusal of a special relationship, was furious at what he regarded as an act of international irresponsibility on the part of Washington.” Heath attacked especially the feckless Connally, referring to the wound the Texan had received when President Kennedy was assassinated. “I knew they killed the wrong man in Dallas,” remarked Heath. [Campbell, 343]

Milton Friedman of the monetarist Chicago school attacked Nixon’s wage and price freeze as “pure window dressing which will do harm rather than good.” But on the broader issue of fixed parities, Friedman was well pleased. No fixed parities meant the de-regulation of monetary affairs, getting the governments out and letting the “market” decide what a currency is worth. Monetarists were interested above all in the domestic money supply.

Nixon’s August 15 statement recognized, as we have seen, that “the speculators have been waging an all-out war on the American dollar,” but there were no specific measures to hobble or to punish these speculators, who were of course the Wall Street and City of London banks. Instead, the speculators were rewarded. These bankers cashed in their chips with a huge profit, and began to look for new targets. Most European exchanges closed during the mid-August dollar crisis. During August, the Bank of Japan waged a costly but futile battle to defend its old parity with the dollar at 357.37 yen to the dollar. Japan capitulated and began its own float upwards on August 27, after taking in more than $4 billion. Shultz later commented that “US officials had formed an alliance with the market itself to force a change in the behavior of foreign officials.” [Shultz and Dam, 115] All major currencies were now floating.

In the wake of August 15, 1971, a group of cabinet-level finance ministers met in the White House Library in an attempt to coordinate policies. Present were Schultz, Volcker, Helmut Schmidt, Karl Otto Poehl (the future head of the Bundesbank), and Valery Giscard d’Estaing. This was the Library Club, whose members would remain as protagonists of the ongoing financial fiasco well into the 1980s.

From August 15 until almost Christmas, monetary chaos threatened to disrupt world trade. The Europeans wanted a return to fixed parities, but could not agree on the specific numbers. The US made no proposal, but refused to devalue the dollar. Meanwhile, chaotic floating went forward. Dollar-denominated bills of exchange maturing in between 30 and 90 days were the basis, not just of oil sales, but of most world commodity flows, and no one now knew even approximately what such bills might be worth by the time they matured, because all parities were now floating in various degrees of chaos. Who would dare to discount such bills? And if the bills could not be discounted, how could trade continue? As the weeks went by and “Typhoon” Connally (as he was called in the Japanese press) jawboned and bullied the Europeans and Japanese, the dangers increased. Schweitzer and the IMF were demanding that the US devalue the dollar by raising the official price of gold. Henry Kissinger and Arthur Burns demanded an official devaluation and a quick deal on new fixed parities. Ted Heath postured that he would not meet Nixon at all until such time as the US had begun serious monetary bargaining. This was evidently a tactic suggested to Heath by Kissinger as a way to box in Connally. [Odell, 284]

During November 1971, Nixon became convinced that the strong-arm approach with the Europeans had yielded all it ever would. Burns and Kissinger scared Nixon with a list of retaliatory measures that the other countries were preparing. Former Treasury official Francis Bator was mobilized by Kissinger to warn that if “Connally does not change course soon, the other side will start shooting back. Control over events will shift to the war parties in all the capitals, and August 15 will be a turning point in postwar Atlantic and US-Japan history.” [Odell, 281]


At this time Paul Volcker of the Treasury flew to Tokyo, Bonn, London, Paris, Rome and back to Paris with the Italian Finance Minister Malagodi in tow for a ministerial meeting at the home of Giscard d’Estaing, and then back to Bonn. On the same evening that Volcker returned to Washington, Treasury Secretary Shultz announced the second devaluation of the dollar, this time by 10%. An ounce of gold now was officially equal to $42.22 in US money. Shultz expressed this new relation in terms of SDR’s in a polemical gesture against pro-gold forces. Shultz claimed that the dollar devaluation had “no practical significance,” which was true only to the extent that the US gold window stayed firmly closed. Shultz announced that the Japanese yen would now begin to float, and that the US would abolish capital controls by the end of the year. By now the yen, lira, Swiss franc, pound and Canadian dollar were all floating.

Germany was the only major currency holding on to its Smithsonian parity. On March 1, European central banks, especially the Bundesbank, took in $3.6 billion in hot money. The exchanges closed another time. Negotiations began among the Europeans as to what to do. The British demanded, as their price for joining a common float, a guarantee of unlimited financial support without guarantee or collateral, and with no specific obligation to repay. This was politely but firmly declined. On March 11 the EEC ministers met in Brussels, where Germany, France, Belgium, the Netherlands, Denmark, and Luxembourg agreed to form a currency snake that would float jointly against the dollar. In the process Germany revalued by 3%. Sweden and Norway soon joined this new snake without a tunnel. And since the rest of the world was floating, for all practical purposes the US was floating too, as metaphysicians were not slow to point out. The Smithsonian regime was dead, and the world was plunged into the chaos and anarchy of permanent floating rates, which has continued down to this very day. Helmut Schmidt marked the event by formally proclaiming the “end of Bretton Woods.”

From the US side, a very significant and laconic commentary on the demise of the system came from Treasury Secretary Shultz, an ideological opponent of both fixed parities and of gold. “Santa Claus is dead,” quipped Shultz, signaling that the United States, in an attitude of deplorable irresponsibility, would not make any serious exertions or commit serious resources for the purpose of preserving the most effective international monetary system the world has yet known.


Gazing back at the proud edifice of the classical Bretton Woods system from amidst the ruins of the chaotic non-system that has replaced it, economic writers have often agreed that the pre-1971 years were “the golden age of capitalism,” “the most successful international monetary system the world has ever seen,” and “the best overall macro performance of any regime.” Economists like Simon Kuznets have noted that under Bretton Woods “material returns [had] grown, per capita, at a rate higher than that ever observed in the past.” [James, 148] Those who think that the growth of US budget deficits and public debt is caused primarily by government overspending should contemplate the following sequence. 1974 was the first full year of floating rates. Fiscal year 1976 began on September 1, 1975, and this is when the fall of Bretton Woods began to show up in the US budget deficit. So it was just after the last gasp of the fixed parities that the US deficit first ballooned to an all-time record in peace or war, the $66.4 registered in FY 1976. The rate of growth of the international debt bubble had begun noticeably to accelerate.

Governments had created a monetary system in 1944, and this monetary system had now been destroyed by international hot-money speculators. The speculators had proven that they were more powerful than the governments; the bandits had taken over the global village. Only chaos had resulted. The speculators and bankers had no interest in a new gold-related system of fixed parities. They were rather triumphant that they had forced the deregulation of the key feature of international financial life. The universal prevalence of floating rates meant greater risk, especially in forward currency markets. As the great currency floater Paul Volcker delicately expressed it in his memoirs, “at the start of the 1970s, there began to be just a germ of a vested private interest in instability in the exchange markets….when exchange rates were freed, bank traders soon found out they were very good at making money from the fluctuations.” [Volcker, 230] Only the demented supporters of chaos theory could imagine that this had been a gain. Part of the impetus for the creation of today’s surrealistic world of derivative instruments has come from post-1973 monetary risk. The world would have been far better off with an orderly, regulated world of fixed parities which would have obviated part of this rationale for derivatives in the first place.

With the return of floating rates, some observers once again feared the return of all-out world economic depression of the post-1931 variety. To understand these fears, we should recall the then-traditional view of the floating rates of the early interwar years as expressed by Melchior Palyi in his Twilight of Gold, referring to the floating rate period of 1918 – 1924:  “Throughout the early postwar years, international trade had been distorted, disorganized and even disrupted by fluctuations in foreign exchange rates. They obliterated business and investment calculations ….Maintaining a balance of payments came to depend on speculative capital movements in large volumes…, their direction hinging on guesses and rumors about the positive or negative stabilization prospects of individual currencies….Under a regime of ‘floating’ exchange rates…rational monetary policy was severely handicapped by foreign exchange fluctuations. The crucial aspect of broadly fluctuating exchange rates was the fact that they failed to fulfill the function assigned to them in monetary theory – to bring about an automatic adjustment of the respective countries’ international accounts.” [Palyi, 42-43] In the 1970s also, there would no automatic adjustment in international accounts, but greater and greater distortions.

In 1994, a quarter century after these fateful events, a retrospective analysis of the floating exchange rate system was offered by the 47 influential establishment-oriented bankers and economists of a group calling itself the Bretton Woods Commission. The chairman of this blue-ribbon panel was none other than Volcker himself, who had been, in practice, one of the leading gravediggers of the old fixed-rate system. Here is the verdict of the Bretton Woods Commission on the impact of currency deregulation:

Since the early 1970s, long-term growth in the major industrial countries has been cut in half, from about 5 percent a year to about 2.5 percent a year. Although many factors contributed to this decline in different countries at different times, low growth has been an international problem, and the loss of exchange rate discipline has played a part. [Greider 1997, 250]

Volcker’s own commission found that in addition to the braking of world growth, unemployment has been higher and capital investment has been more anemic in the post-1971 world of floating rates than in the regulated currency world of Bretton Woods: “When current exchange rates are misaligned, resources are misallocated; when exchange rates are unduly volatile, it creates uncertainty and productive investments are inhibited,” wrote the same group.

Japan is a country that must export in order to live, but the relation between the Japanese yen and the US dollar has been one of the most unpredictable of the post-1971 era. The Japanese have thus had ample opportunity to study the deleterious impact of exchange rate gyrations on commodity production for export. Here are the observations of Kenichi Ohno of Tsukuba University, a Japanese economist: “A sharp appreciation of the home currency throws tradable industries into disarray…A sudden loss of international price competitiveness, amounting to 10-40 percent in real terms, is much larger than the typical profit margins in these industries….To survive, these industries are forced to make costly downsizing adjustments. These include operating below capacity, implementing cost-cutting measures, scaling down investment plans, and even scrapping existing facilities, laying off workers…outsourcing, shifting manufacturing bases abroad, joint ventures with foreigners, and so on.” [Ohno, see also Greider 1997, 249] American exporters would be largely wiped out by these effects during the 1984-85 era of the Volcker superdollar.

In the event, it took another decade and several more deliberate shocks administered to the world economy to precipitate the world into pervasive economic depression. In 1973, the German and Japanese economies were still reasonably vigorous, and the US, though stagnant, still possessed an intact industrial base. But in terms of a qualitative-quantitative world composite of wages, living standards, employment, investment, growth rates, and world trade volume, the period 1965-1971 represents the overall high water-mark of postwar economic development on this planet.

When the dust had settled on the ruin of the Smithsonian system, Volcker submitted the Treasury’s plan for rebuilding world monetary relations. This turned out to be very similar of Lord Keynes’ 1944 draft, with great stress on the supremacy of supernational institutions. Instead of bancor, Volcker relied on the SDR as the instrument for creating new reserves. Under Volcker’s system, countries that persisted in running deficits or surpluses would have been subjected to supernational IMF coercion in the form of “sanctions” and “graduated pressures.” But the Volcker-Keynes scheme was never implemented.

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