Nixon’s White House thus had a limited appetite for dealing with the complex, often frustrating institutions that went along with global currency management. This attitude was epitomized by John Connally, whom Nixon installed at Treasury in February 1971. Connally was a swaggering Texas Democrat who chomped on unlit cigars in meetings; he had been in the black, simonized sedan with John Kennedy on the day he was assassinated in 1963. Unlike his predecessor David Kennedy, Connally had no allegiance to conservative economic ideals. As one of his aides put it, Connally was “not trapped by any theoretical dogma or by position papers he wrote twenty years ago.”5 His independence bordered on irreverence; upon Connally’s first visit to the International Monetary Fund, according to an IMF executive, he dubbed it “a museum in which anything that wasn’t already stuffed ought to be.”6 In May he made waves more publicly with a speech to an international banking conference in Munich in which he chastised foreign governments for not spending more on their own defense. “No longer does the United States economy dominate the free world,” Connally told the group. “No longer can considerations of friendship or need or capacity justify the United States carrying so heavy a share of the common burden.”7 He appeared to relish such global feather-ruffling; he referred to himself as “the bully boy on the manicured playing fields of international finance.”
This isn’t to say, of course, that Connally took the Treasury seat in 1971 with the goal of ending the dollar’s last ties to gold. There is scant evidence that he even considered the issue in his earliest days at Treasury, and at first blush, such a radical proposal could likely have spooked a political creature like Connally. Nixon wooed Connally to cross party lines and join his cabinet after the Democrats gained seats in the House of Representatives in the 1970 election. Connally’s appointment was seen as fundamentally political; he was interested in an activist president who could be reelected. A biographer noted that when he was appointed to Treasury, the president’s own advisers boasted that Connally was someone who could accomplish an important Republican Party goal: carry Texas for the GOP in 1972. (Hubert Humphrey had won Texas’s twenty-five electoral votes—the sixth-largest state at the time—in 1968, but the margin was fewer than 40,000 votes and the state was clearly within Republican grasp.) Also valuable were Connally’s general contacts with congressional Democrats. Connally, after all, would soon head up the political organization Democrats for Nixon, and during the summer of 1971, Nixon and his aides discussed with Connally the possibility that they would dump Vice President Spiro Agnew from the 1972 ticket and replace him with Connally.8
Indeed, it is impossible to appreciate the economic moves that the Nixon White House made in the summer of 1971 without understanding the heated, and at times surprisingly desperate, political background of those events. The lopsidedness of Nixon’s 1972 reelection victory over George McGovern can blind later observers to the fact that only the year before, Nixon’s chances of reelection were precarious—and perhaps more important, were perceived internally as precarious. The flirtation with Connolly as vice president represented an administration at war with its own weakness; Nixon had lost faith in his vice president, rarely met with him one-on-one, and considered him a liability on the 1972 reelection ticket. Not long after Nixon left office, one of his advisers observed, “If there had been an election in 1971 Nixon would almost certainly have been defeated.”9 Throughout the first half of 1971, the Harris survey indicated just that—Nixon would have lost to Maine senator Edmund Muskie in April by a margin of 47–39, with 11 percent of voters supporting the segregationist former Alabama governor George Wallace.10 There were multiple reasons: not only had the president failed to achieve his 1968 campaign promise to bring “an honorable end to the war in Vietnam,” he had expanded America’s involvement into Cambodia, and the cost of the war in dollars and American lives seemed endless.
But anyone inside the White House asked to name the administration’s biggest weakness would have said the economy.11 While much of the blame for persistently high inflation could be attributed to the Johnson administration’s massive and rapid Vietnam buildup, there was little to be gained from asking voters to look backward. The economy fell into a recession in 1970, and even that medicine did not allow Nixon’s team, including his handpicked Federal Reserve chairman Arthur Burns, to stem inflation’s growth; in the spring of 1971 the inflation rate topped 6 percent for the first time in two decades. A huge amount of Washington’s time in 1970 and 1971 was spent debating whether or not the government should freeze wages and prices. This policy was anathema to free-market Republicans, and for a time split Washington’s economic minds bitterly. Nixon in particular opposed price controls, even during wartime; he had worked briefly during World War II for the Office of Price Administration and believed price controls to be impractical. George Shultz and Paul McCracken agreed, and through the end of 1970, the very idea invoked the White House’s wrath.
Soon, however, Nixon and his advisers felt they had no other choice. Connally, for his part, was untroubled by doctrine, and viewed the idea of wage-and-price controls as a desirable extension of executive muscle. (“If the legislature wants to give you a new power—you take it. Put it in the corner like an old shotgun. You never know when you might need it.”)12 After savings hit a postwar high in early ’71, with consumers trying desperately to stave off inflation, Congress in May gave the president the power to impose controls. By June, Nixon’s Council of Economic Advisers had decided that a wage-price freeze was necessary.
Simultaneous to this was a debate over whether or not to float the dollar. Volcker was concerned, even fearful, of the consequences of such a move. In March 1971, Volcker drafted a secret memorandum laying out the advantages and disadvantages of four different monetary approaches. Discussing the suspension of gold-dollar convertibility, he worried that other countries would retaliate, by restricting or prohibiting US investment in their economies, erecting higher trade barriers, and driving the dollar further down by increasing the price of gold. There would be no way to stop them, because the US closure of the gold window would leave international institutions like the IMF “helpless and undermined.”13 Still, he argued that resentment from European allies could be mitigated if the suspension were negotiated for months beforehand and presented as part of a coherent and cooperative international effort.
By the spring, two factors began to push Volcker closer to accepting suspending convertibility, regardless of the severity of the world’s reaction. One was Germany’s floating of the deutschmark, a move that not only increased pressure on the United States but at least theoretically showed that floating the dollar was feasible (the German economy improved somewhat immediately after it floated its currency). The second was a surprise opening presented by Congress. Representative Henry Reuss was a Democrat from Wisconsin who served on the House Banking Committee and had often sparred with Volcker and the administration over gold policy. Reuss particularly opposed the purchases that the United States made from South Africa, arguing that the United States was propping up the apartheid regime. On June 3, Reuss introduced a “sense of Congress” resolution calling on the US government to suspend the dollar’s convertibility. Criticizing a monetary system that “unnecessarily cripples itself,” Reuss argued that “only by closing the gold window and letting the dollar find a newer and sounder relationship with the yen and other undervalued currencies can we avoid the deterioration of our trading position and a return to trade autarchy.”14 It appears that no vote was ever taken on Reuss’s resolution. However, Volcker was given a copy of it and recognized that the resolution represented something new. In March, he’d worried about “an opposition Congress ready, willing and able to frustrate [any dollar devaluation] plan and make political capital of the results.”15 Now, here was a leading congressional Democrat offering—presumably unknowingly—potential political cover for a position that Volcker was beginning to consider inevitable anyway.
Whatever doubts Volcker had about
his boss’s willingness to embrace a high-risk economic policy overhaul began to recede; indeed this kind of political jujitsu was Connally’s specialty. After all, Connally was already trying to prevail upon the president to accept a strong new economic policy—including the wage-and-price freeze, which Nixon continued to resist through late June—to improve unemployment and inflation. And in part, Connally was engaged in a turf battle against economic advisers within the administration and against Burns. When the pressure from the international money markets eased somewhat in early June, Paul McCracken, who chaired Nixon’s Council of Economic Advisers, wrote a memorandum to the president in which he decried the unworkability of the existing system but deemed a floating currency “too uncertain and risky” because it “disrupts the monetary order that has generally prevailed so far.”16 McCracken wanted to convene a large group to follow up on the monetary questions. But Connally, who constantly threatened to resign that spring, shot back, arguing that by law and tradition such decisions should be made by the treasury secretary. Nixon agreed and put Connally in charge. In a stormy meeting with his economic team on June 28 Nixon, tired of endless debates and untraceable press leaks, lowered the boom. There would be, the president asserted, “no more of this crap . . . we need a united front.” Economic policy could only function if there were one person in charge, Nixon said, and that person would be Connally.
Effectively, this meant that Volcker could go ahead with the contingency plan he’d drafted earlier in the year. But the decisive argument for Connally was not at its core economic. In mid-July, right around the time that trade deficit numbers converted Volcker to the idea of closing the gold window, Connally read an analysis by a Treasury Department consultant named Edward Bernstein, who had been part of the American team during the Bretton Woods negotiations. Bernstein calculated that a devaluation of the dollar (presumably in the neighborhood of 15 percent) could create 500,000 jobs, the equivalent of shaving 0.5 percent off the politically damaging unemployment rate. Primarily this could be achieved through exports: a lower dollar would make American cars and other manufactured goods more competitive abroad. An economy growing jobs that rapidly would give Nixon a strong advantage going into the 1972 election. An administration colleague said bluntly that Bernstein’s “analysis convinced Connally that the devaluation was good politically. Connally always looked at the politics of the economics.”17
And indeed Connally’s perspective was wider still. The suspension of gold convertibility was but one part—and probably not the most important, from a political standpoint—of a dramatic economic package he was assembling for the president’s consideration. In terms of short-term economic impact and the likelihood of political support, the wage-price freeze and a surcharge on imports were arguably more attractive. But Connally believed that suspending the gold window would make Nixon look like a leader who embraced decisive, sweeping action.
Assuming he could use that to sell the idea to Nixon himself, Nixon’s advisers would fall in line, even if they personally opposed all or some of the proposals Connally was assembling. There was but one obstacle: Federal Reserve chairman Arthur Burns. Burns occupied a peculiar position during the Nixon presidency. On the one hand, his career outside the academy was intertwined with Nixon’s; the two men had worked together during the Eisenhower administration, and Nixon wrote in a memoir that Burns had warned him about how the economic trends might affect the 1960 election.18 Nixon had appointed Burns to the position of Federal Reserve chairman in 1970, and Burns clearly treasured his relationship with Nixon and considered him a valued friend. Nixon did not seem to reciprocate the feeling; in an infamous rant about Jewish domination of the Bureau of Labor Statistics, Nixon said, “There’s a Jewish cabal, you know, running through this, working with people like Burns and the rest. And they all—they all only talk to Jews.”19 At the same time, Burns ostensibly asserted the need for the Fed to maintain its independence and integrity. In December of 1970, for example, Burns delivered a speech in Los Angeles in which he supported, however reluctantly, the idea of a board to review wages and prices.20 The remarks were interpreted as having Nixon’s support (and indeed both Nixon and speechwriter William Safire talked to Burns about his speech before it was delivered), but the opposite was true; Nixon was furious that Burns was offering his own policy recommendations. In retaliation for the speech, the White House for a time stopped inviting him to Sunday White House worship services.21
It is an understatement to say that the Nixon White House did not value Fed independence, and most historians today portray Burns as a fairly reliable economic ally in the president’s reelection.22 And yet, less than a month before the critical gold window decision was made, Burns was the target of one of the administration’s most vicious political attacks outside of the “plumbers” activity associated with Watergate. On July 23, Burns testified before Congress’s Joint Economic Committee, venting frustration at an intractable economy. “The rules of economics are not working in quite the way they used to,” Burns lamented. “Despite extensive unemployment in our country, wage rate increases have not moderated. Despite much idle industrial capacity, commodity prices continue to rise rapidly.” One of the biggest problems, Burns said, was the administration’s inability to slow the growth in wages and prices. As long as consumers and businesses believed that prices would continue to grow dramatically, they would hold back on spending and investing, creating a “grave obstacle” to economic recovery.23
The idea of the Fed chairman asserting publicly that the administration was unable to improve the economy did not sit well with Nixon and his advisers. In an Oval Office meeting the next day, Nixon debated with aides H. R. Haldeman and John Ehrlichman the most effective way to get back at Burns, whom Nixon painted as conceited, press-hungry, and ungrateful. They loosely agreed that the word should go out in the economic community around Burns (this, incidentally, was the same day that Nixon erupted about the Jewish dominance in government economic circles) that Burns had fallen afoul of the president. Nixon then presented an idea for a media attack: “Could you get one story leaked through the [Charles] Colson apparatus about Arthur?”24 He promptly suggested two: one, that the president was considering some equivalent of “court-packing” for the Fed—that is, that the president’s advisers were recommending expanding the Federal Reserve’s membership. The second was that the president wanted to end the Federal Reserve’s independence and bring it inside the executive branch. Nixon explained that a newspaper column questioning the wisdom of Fed independence might “worry Arthur a little.” The idea, he added, had come from Connally.
According to Colson’s account, there was an added bullet: to attack Burns for promoting wage and price controls while also saying that the salary of the Fed chairman should be increased.25 Colson says he then instructed an underling to leak Burns’s apparent hypocrisy to the Wall Street Journal, knowing full well that Burns had recommended a raise only for his successor, not for himself. Sure enough, a Journal story soon appeared, reporting that a “furious” president was considering legislation to bring the Federal Reserve under executive control, and quoting an unnamed aide who charged Burns with “hypocrisy” for trying to get his own salary raised by about 50 percent.26 The president and his top advisers took evident glee in having delivered a blow to Burns. Nixon brought the topic up in several phone calls on July 28: “He’s squealing pretty hard.” Haldeman said in his diary that the leak “got Arthur pretty upset, as it was intended that it would.”27
The attack on Burns was especially petty, as it was ostensibly designed to punish him for advocating a policy that the administration was days away from approving anyway. The recession had hit the metal-mining industry particularly hard, and falling production in the nation’s mines was a major obstacle to economic recovery. Throughout 1971, the steelworkers’ union had used strikes and threatened strikes to great advantage, winning big wage increases for copper and aluminum miners. On August 2, after a strike deadline had passed,
the steel industry announced a settlement that would increase wages 30 percent over three years. To pay for it, the steel companies announced that they would raise prices by 8 percent.
This was all the fuel that Connally needed to sell his economic program. The potential damage of the steel agreement was obvious—Connally told the president, “the steel settlement is a hell of an inflationary settlement”—and most of the president’s day was taken up with trying to figure out how to react and get his message through. “We’ve got to grandstand more,” he told Shultz and Connally. In addition to wage and price controls for 90–120 days, Connally pitched the reinstitution of an investment tax credit, an insistence on capping federal spending, and the imposition of a 10 percent import quota. The important thing, he stressed, was to take bold action, so that Nixon would appear to be in control of events instead of being controlled by them. The convertibility of the dollar to gold, Connally told Nixon, was something that “we’re going to have to stop that at some point. Most people think that $10 billion in gold [reserves] is the point” at which the United States would need to stop convertibility, and “we’ll lose a $1 billion in reserves this week . . . I don’t think you’ll be able to hold [on to gold convertibility] through the election next year.” He added that the United States “probably ought to float” the dollar as Germany and Canada were already doing with their currencies. Taken together, Connally insisted, the sweeping package would “stimulate the hell” out of the economy, and he urged the president to “take a position before you are forced to take a position.” It would be, Connally said, “as big a coup as your China thing.” Different timetables were discussed, from that very week before Congress adjourned to November or December. In his diary entry for that day, Haldeman called Connally’s plan “a huge economic breakthrough” and speculated that while Shultz might try to slow the plan down, he would be unlikely to stop it.28 In a similar Oval Office meeting two days later, Connally became so impassioned that he can be heard on the White House tape thumping the president’s desk. When Shultz joined them, he quickly realized that the time for debate had passed. “You have decided to go with this big program, including the gold window and all that?,” he said, in a half-question, half-statement.
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