“We have fought two costly and grueling wars. We have undergone deep strains at home as we sought to reconcile our responsibilities abroad with our needs in America,” he told a joint session of Congress (which would later move to impeach him). “The time has come to give a new attention to America’s own interests at home.”
Thus did Richard M. Nixon revolutionize global economics 50 years ago this month — on Aug. 15, 1971. Yet, as the parallels between the “Nixon shock” and former president Donald Trump’s policies show, international economic imbalances, and the disruptions they spawn, are with us still. For that reason alone the episode merits remembering, and reconsideration.
The resulting strong dollar enabled U.S. imports from Japan and Western Europe, stimulating their post-World War II recovery and stabilizing them as partners against Soviet expansion — as intended.
By 1970, however, the United States was running a trade deficit, its first in a century. The country lacked enough gold to pay foreign central banks for all the dollars they had accumulated. Buffeted by the Vietnam War, civil unrest and a maddening unemployment-inflation combination — as of mid-1971, they ran at about 6 percent and 4 percent, respectively — Americans started to question the post-World War II economic system.
Nixon was determined that his 1972 reelection campaign would not end in failure, as his 1960 bid for the White House had. Nixon believed that, as the incumbent vice president, he had been punished by voters for a spike in unemployment amid his campaign against John F. Kennedy, as Jeffrey E. Garten notes in “Three Days at Camp David,” his terrific new book about the 1971 deliberations among Nixon and his advisers.
The United States could have tried to restore international competitiveness by “getting its own house in order” — through painful structural reform.
No more eager to risk the political consequences than other presidents, before or since, Nixon opted to make our trading partners pay. He offered Americans selective tax cuts, while imposing a 10 percent across-the-board tariff and suspending the previously sacrosanct gold-for-dollars guarantee — a de facto dollar devaluation. It was a brutal protectionist double whammy.
As Garten points out, Nixon loved the Aug. 15 plan precisely because it was so unexpected. He saw it as a geoeconomic complement to the geopolitical shock he had announced a month earlier: his opening to China. In both areas, as in detente with the Soviets, his goal was to reduce the costs of U.S. global leadership, thus making it more sustainable.
U.S. allies in Europe and Asia felt blindsided, but, as Nixon correctly calculated, they had little choice but to make the best of it, given their dependence on the United States for security.
He achieved his main objective — reelection — not because he actually fixed the economy but because he was perceived as trying. It helped that he had drawn on proposals supported by the Democrats, who controlled Congress at the time. One of these was a 90-day wage-price freeze to curb inflation.
The Nixon shock gave way to inconclusive trade and “burden-sharing” negotiations with allies and the inevitable collapse of wage-price controls — followed by Watergate, the 1973 oil embargo and 1979 oil crisis and myriad other events that blur Aug. 15′s precise causal impact on subsequent history.
In one respect, though, it was a clear turning point: It doomed the last vestiges of the gold standard and set in motion today’s world of floating exchange rates. Markets, guided by central bankers — not politicians or precious-metal miners — now determine these pivotal prices.
Yet the dollar has maintained its position as the world’s reserve currency. The “full faith and credit” of the United States, embodied in trillions of dollars worth of “risk-free” Treasury bonds, has replaced gold as the basis of the global financial pyramid. Even China, its Nixon-initiated relationship with the United States curdled into mutual hostility, holds $1 trillion worth.
Half a century after Nixon broke a sacred American promise, the world economy still runs on U. S. promises, maybe more than ever.
This is a paradox; it’s also a powerful, if implicit, statement about what the world really expects from the United States: not perfection, but political stability, the rule of law and the ability to preserve these qualities even as we grow and change — and despite the excesses of our most flawed presidents.