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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
Chapter 3: Beyond Bretton Woods, 1971-1972
Justin King – University of Wisconsin-Madison
Abstract: This paper is an adaptation of the third chapter of my senior thesis, Partners and
Rivals: Political Economy and American Diplomacy, 1969-1974. In this larger project, I argue
that the Nixon administration’s bifurcation of economic and strategic policy making led to shortsighted actions which both undermined American alliance relationships and contributed serious,
wide-ranging economic crises around the world. Economic shortsightedness led to unforeseen
strategic failures, a fact which I contend should lead contemporary scholars to re-evaluate both
Nixon’s foreign policy and the salience of international economics in American diplomatic
history. In this chapter, I argue that the Nixon administration badly mishandled the collapse of
the Bretton Woods fixed exchange rate regime, selfishly and needlessly damaging relations with
American allies and contributing to significant subsequent strategic challenges. I draw on
recently declassified State Department documents, memoirs, and notable secondary sources to
make this new argument about the failures of Nixon administration’s storied diplomacy.
The two preceding chapters, omitted here, discuss the basis for the postwar international
economic order and the early trade policies of the Nixon administration, respectively. The
fourth chapter deals with issues of oil, inflation, and the ultimate strategic and economic
consequences of economic policies discussed through the larger work. This paper synthesizes
the most salient elements of my research with the fulcrum of my larger thesis project to
demonstrate specific failures of coordination between international economic and strategic
priorities during the 1971 monetary crisis and thereafter.
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
“America today has the best opportunity in this century to achieve two of its greatest ideals: to
bring about a full generation of peace, and to create a new prosperity without war…We must
protect the position of the American dollar as the pillar of monetary stability around the world”.
-President Nixon, speech announcing the “New Economic Policy,” August 15th, 1971
During its first two years in office, the Nixon administration searched for a new strategy
of international economic policy. Neither Nixon nor his close inner circle took much interest in
international economics, with the exception of some politically-salient trade issues such as
Japanese textile imports. Instead, Nixon was consumed with the “high politics” of détente
diplomacy with the Soviet Union and China. The strategic implications of ending the war in
Vietnam also loomed large in the administration’s foreign policy. Key international economic
matters were seen as abstract, technical problems in spite of their direct relevance to American
partnership with other capitalist democracies.
While the administration’s new trade policies of 1969-1971 strained relations with
American allies, they did little to affect the immense inequalities in the balances of trade and
payments. On monetary matters, the Nixon administration only half-heartedly revisited the
policies of its predecessors. In fact, both key balances continued to worsen throughout the first
two years of the administration. Yet the Nixon administration did little to counteract these
growing economic liabilities.
The economic weaknesses apparent at the beginning of Nixon’s presidency were
becoming increasingly acute. American gold stocks ran ever lower as foreigners exchanged
American dollars for Fort Knox’s gold under the terms of the Bretton Woods system. Overseas
dollar holdings continued to grow. America’s share of international trade continued to drop. All
of the pillars upon which the Bretton Woods fixed exchange rate regime had been constructed
were now wobbling. Economic forces were already pushing the United States towards a major
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
action to correct these imbalances. In 1971, long-term economic trends, radical new ideas, and
catalyzing crises led the Nixon administration to enact new international economic policies with
catastrophic effects on other states.
Gold Holdings in
Millions of U.S. Dollars
Comparative Gold Holdings
30000
25000
20000
15000
10000
5000
0
1948
1951
1954
1957
1960
1963
1966
1969
Year
United States
United Kingdom
France
Germany
Italy
Japan
1
Three key things changed in 1971. First, Nixon became increasingly concerned with his
prospects for reelection and thus the state of the domestic economy. Second, Nixon appointed
Texas Governor John Connally as Secretary of the Treasury as part of his electoral strategy.
Third, the United States’ trade and balance of payments deficits finally reached a crisis point
requiring some form of dramatic action.
Overall economic trends did necessitate some readjustments in the original monetary
system agreed to at Bretton Woods in 1944. By 1971, many observers expected that the United
States would need to revalue the dollar in order to correct for changes and imbalances in the
international economy which had developed since 1944. No one expected that the United States
would devalue the dollar, end convertibility of the dollar into gold, abandon its IMF obligations,
1
Data from imfstatistics.org, compiled and arranged by the author
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
impose trade restrictions, and refuse to negotiate a settlement for months. Yet this is exactly the
strange story of the Nixon administration’s adventure in international monetary policy during
from 1971 into 1972. Where prior administrations had carefully engaged with economic issues,
Nixon and his inner circle were apathetic. Where Nixon’s predecessors had stressed
multilateralism and partnership towards common interests, Nixon stressed unilateralism and selfinterest. Where prior presidents had tread cautiously, Nixon acted boldly, even rashly.
What happened in 1971 was starkly at odds with past American policies in both style and
substance. In style, the Nixon administration abandoned partnership and multilateralism for
naked unilateralism. In substance, the Nixon administration imposed self-interested measures
which directly injured foreign economies, in some cases dramatically so. These dramatic
departures from prior policies had a significant impact not only on the United States’ alliance
relationships, economic stature, and general foreign policy, but also had profound secondary
consequences for economies around the world. Indeed, the Nixon administration’s short-sighted
economic and electoral goals ran contrary to long-term American strategic objectives. This
dramatic failure of policy making provides a striking example of how international economic and
strategic policies can intersect with world-changing consequences.
Electoral Imperatives
Economics and domestic politics are intimately connected, especially in democracies. A
growing economy is likely to boost the fortunes of the ruling party by increasing popular support
for its candidates. Meanwhile, high unemployment, slow growth, or high unemployment are
likely to push voters towards alternative solutions offered by opposition parties. It is thus no
small wonder that political leaders consistently work to promote near-term economic growth and
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
well-being, sometimes at the cost of long term priorities. The Nixon administration was no
exception. Indeed, the long-term costs of its short-term needs eventually proved enormous.
During the first months of 1971, Richard Nixon faced both a sluggish economy, sagging
approval ratings, and growing price inflation which sapped both public welfare and
macroeconomic stability.2 Nixon even considered the problems he faced so serious that he
“might not even be nominated for reelection in 1972,” let alone win.3 Newsweek declared that
the economy might prove to be “Richard Nixon’s ‘Vietnam.’”4 Nixon believed that slow growth
had been a major factor in his electoral defeat in the presidential election of 1960, and was
determined not to suffer a repeat of that event. Letting the economy take its natural course was
not an acceptable outcome.
The easiest method for expanding the economy would have been to simply expand the
money supply, thereby stimulating consumption and investment. Then as now, domestic
economy was managed by the Federal Reserve Board’s monetary policies. Since Federal
Reserve Chairman Arthur Burns and the Federal Open Market Committee (FOMC) set the
interest rates which in turn determined money supply and economic growth, this was the natural
place to exert pressure. However, Federal Reserve Chairmen do not take orders from presidents.
In fact, the Federal Reserve, like all central banks, is explicitly isolated from short-term political
pressures. The most obvious economic route was closed to Nixon by design. All the same,
Nixon still tried mightily to pressure Burns into more pro-growth policies.5
Allen J. Matusow, Nixon’s Economy: Booms, Busts, Dollars, and Votes, (Lawrence, KS: The University of Kansas
Press, 1998), 93. As Matusow’s work concentrates heavily on the domestic political and economic issues to which
this paper provides an internationally-oriented complement, I am incredibly indebted to his ground-breaking work.
3
Richard Nixon, RN: The Memoirs of Richard Nixon, 497.
4
Matusow, 93; citing Newsweek (Jan. 25, 1971), 27.
5
Matusow, 111.
2
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
By and large, Nixon had to find another source for his economic miracle. He was not
without options, though all entailed costs. Nixon could still use fiscal policy, ramping up
spending to stimulate the domestic economy in classic Keynesian fashion. However, such a
policy would also increase inflation. Nixon could institute measures to fight inflation, but only
at the risk of slowing the economy. Neither option was an effective long-term solution on its
own. For more concerted efforts, such difficult policies would also require congressional
cooperation.
To boost the domestic economy and maximize his chances of reelection, Richard Nixon
had to look beyond the ordinary tools available at the domestic level. Unlike most heads of state,
Nixon had the advantage of leading the world’s largest economy and its strongest political and
military power. Under the terms of the 1944 Bretton Woods agreement, the United States was
also the pillar of the international monetary system. All other currencies were fixed to the value
of dollar by the American government’s guarantee to exchange gold for dollars at a rate of $35
per ounce.
Nixon thus had several trump cards in his hand, though each would entail leveraging
American power over traditional allies. Yet by combining these international advantages, Nixon
would be able to overcome other obstacles to pro-growth economic policies. The structure of
choices alone was not sufficient for such an outcome; Nixon had to be apprised of these policy
possibilities and given impetus to enact them.
The Change in Tone
The most critical factor in Nixon’s peculiar approach to international economic policy in
1971 was his newly appointed Secretary of the Treasury, former Texas Governor John Connally.
Connally was a powerful southern Democrat and a protégé of Lyndon Johnson. He had also
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
been seriously wounded in the assassination of John F. Kennedy, struck by one of the bullets
which felled Kennedy. There were few more influential or better-known Democrats in the
South. Connally’s appointment was thus a calculated maneuver by Nixon to shore up his
political support in Texas. In the words of Kissinger, “Nixon considered his choice of one of the
most formidable Democrats an extraordinary coup that sent him into transports of selfcongratulatory pride for weeks afterward.”6
Connally was a shrewd politician, not an economist. His approach to policy at the
Treasury was not influenced by the strong orthodoxies which weighed heavily on men like
Federal Reserve Chairman Arthur Burns and Under Secretary for Monetary Affairs Paul
Volcker. In fact, Connally’s views had little if anything to do with even the most basic
technocratic knowledge of economics, a fact which Connally himself neatly demonstrates in one
exchange before the Senate Finance Committee: “Senator, that’s the theory of comparative
advantage. In the first place, the reason I do not understand it is because I am not an economist.
But if I were an economist, I would not want to understand it because I do not believe it is going
to work.”7
With little international experience, Connally was also prone to see issues in purely
American terms. As such, he can be accurately described as a mercantilist. Connally’s views
were driven by a dogmatic belief that the United States was being economically victimized by its
trade partners. In Connally’s view, American allies in Western Europe and Japan had taken
advantage of American generosity. In return for American aid and defense, these nations offered
paltry defense contributions, copious criticism, and unfair trade practices which sapped
American economic strength. Connally thus felt it was time for a change: “No longer does the
6
7
Henry Kissinger, White House Years, (New York: Little, Brown, & co, 1979) 951.
Matusow, 139; citing Senate Finance Committee, Foreign Trade: Hearings, 1971, 58.
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U.S. economy dominate the free world. No longer can considerations of friendship, or need, or
capacity justify the United States carrying so heavy a share of the common burdens.” 8 In the
face of increased foreign competition, Connally wanted to free the United States to compete
more aggressively. He even went so far as to promote the idea of forming an American “dollar
bloc” to counter the growing EEC.9 As he put it quite bluntly in August of 1971, “My basic
approach is that the foreigners are out to screw us. Our job is to screw them first.”10
Joining Connally was the newly appointed Assistant to the President for International
Economics, Peter G. Peterson. Peterson chaired the cumbersome CIEP, acting as its spokesman
and for a time greatly influencing the President as “number one intellectual concubine.”11
Peterson argued forcefully – with the assistance of splashy charts and graphs – that the United
States’ economic position was rapidly declining. His infamous “Peterson Report” showed that
the United States exports had fallen from 18.2% to 15.4% of world totals, and that imports were
on pace to exceed exports.12 Peterson’s views made quite an impression on Nixon, who
reportedly repeated many of Peterson’s ideas in his conversations.13 Neither of Peterson nor
Connally held mainstream views, but both had the ear of the president.
Crucially, Nixon and Connally had an exceptionally close relationship.
Nixon was
enamored with the plain-spoken, politically-savvy Texan. Nixon respected Connally on a deep
level, once saying “Only three men in America understand the use of power. I do. John
Connally does. And I guess Nelson [Rockefeller] does.”14 Acknowledging an equal was no
8
Kissinger, 952-953
Robert Solomon, The International Monetary System, 1944-1981. (New York : Harper & Row, 1982) ,191.
10
John S. Odell, U.S. International Monetary Policy: Markets, Power, and Ideas as Sources of Change. (Princeton:
Princeton University Press, 1982) , 263, citing interview with a participant of the meeting.
11
William Safire, Before the Fall : an Inside View of the Pre-Watergate White House. (Garden City, N.Y. :
Doubleday, 1975), 498.
12
David P. Calleo, The Imperious Economy. (Cambridge, MA: 1982), 65.
13
Odell, 249.
14
Safire, 498.
9
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
small compliment from such a shrewd politician. Nixon even considered appointing Connally as
his Vice President following Spiro Agnew’s resignation, only later opting for Gerald Ford.15
Nixon’s tendency towards insecurity and distrust was not at all apparent in his relations with
Connally. William Safire cheekily summarizes this relationship in the title of his chapter on
Connally: “The President Falls in Love.”16
This personal relationship had an enormous impact on the formation of international
economic policy. When asked if he would like to consult the new CIEP on certain monetary
issues, Nixon replied “No…The Connally 1-man responsibility route is best. This is an area in
which he should be the lead man.”17 Nixon’s confidence aligned with Connally’s domineering
style.18 Indeed, for eighteen months John Connally became the chief voice within the Nixon
administration on international economic and monetary issues, despite his total lack of technical
credentials or crucial international experience. Fatefully, this brief and influential tenure also
coincided with the terminal crisis of the Bretton Woods system of fixed exchange rates.
Creating a Crisis
In the summer of 1971, a climactic series of crises began to buffet the already shaky
Bretton Woods fixed exchange rate regime. Under the policy of “benign neglect,” the dollar had
been wandering from its assigned value for many months. The United States government
refused to intervene in international currency markets to keep the dollar – the very core of the
international monetary system – at its assigned value. In fact, Treasury officials calculated that
the dollar was effectively overvalued by as much as 15% at that time.19 Overseas dollar holdings
15
Safire, 508.
Safire, 497-508.
17
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972 ; International Monetary Policy, 1969-1972,
Document 159
18
Odell, 244.
19
Paul Volcker and Toyhoo Gyothen, Changing Fortunes: The World’s Money and the Threat to American
Leadership. (New York : Times Books, 1992), 72.
16
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
were now so large that any sharp rise in demand to trade these surplus dollars in for gold would
bring the system to collapse. There simply were too many dollars and too little gold to cover the
American position of free convertibility between the two mediums. All that remained was a
catalyzing crisis to push the United States over the edge.
In May of 1971, rumors of an appreciation of the German mark set off a wave of wild
speculation. Traders exchanged dollars for marks at a furious pace, overwhelming the ability of
the West German government to maintain its currency’s assigned value.20 The West German
Bundesbank absorbed $1 billion in dollars in a single hour of trading, and was forced to halt
trading altogether. The central bank simply lacked the assets to fight such an enormous shift in
currency markets. Thereafter, the mark effectively floated, its value determined entirely by
private markets without the customary managing by the West German government. Reacting to
this massive change by Europe’s economic hub, several other states revalued or floated their
currencies, allowing their values to be determined solely by supply and demand in international
exchange markets. Central bankers feared an expensive repeat of the West German experience.
International trust in the fixed exchange rate regime was beginning to unravel, and Treasury
officials secretly began planning for a potential suspension of dollar/gold convertibility.21
At this moment, In June, the United States posted its first trade deficit since 1893,
catching the attention of officials in the Nixon administration. The trends had been apparent for
some time, but their realization still came as an unpleasant harbinger of deteriorating economic
dominance. The size of the trade shift was less important than the apparent evidence of
economic weakness. The administration took this as bad news for the domestic economy.
Internationally, a large and growing trade deficit removed one of the last tools for reigning in the
20
21
Volcker, 73.
Volcker, 75.
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
United States’ balance of payments. Money was now flowing out of the United States faster
than ever.
In August of 1971, the government of the United Kingdom requested a massive loan in
the amount of $3 billion to guarantee its dollar holdings. This was a tremendous sum which, if
publicized, would almost certainly trigger a rush to trade dollars for gold. The easiest way to
solve both the trade deficit and the instability of the fixed exchange rate regime was to simply
realign the value of the dollar relative to other currencies. A large enough revaluation would
erase the United States’ trade and balance of payments deficits with a simple act of accounting.
Decreasing the value of the dollar would both make American exports less expensive overseas
and
Rather than a measured and cautious approach, Nixon focused on combining a disparate
series of domestic and international measures into a single “New Economic Policy” to be enacted
almost immediately. Inflation-control measures which economic advisors had long
contemplated were now thrown together with extremely aggressive international trade and
monetary measures devised by Connally. In some cases, the proposed policies even had
mutually-counteracting effects on the economy. The confident and comprehensive impression of
action was deemed more important than overall policy coherence.
There was little debate over the timing or implantation of the policies. Sensing a crisis
brewing, Nixon was eager to protect economic stability going into an election year. “Could we
do the whole program tonight? Tomorrow Night? Let’s go to Camp David tomorrow and
announce the whole program Monday.”22 Nixon had made up his mind. Now it was just a
matter of bringing his inner circle up to speed and deciding how to frame the new initiative.
22
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 164.
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
At Camp David, Nixon secretly met with his economic advisors not to absorb their
criticisms, but to bludgeon them into supporting the policies he had already decided upon. In
fact, newly released tapes show that “Connally suggested that at Camp David all should be
encouraged to participate in the discussion, without letting on that the decisions had already been
made.”23 The purpose of the meeting was largely to transform the New Economic Policy’s
potential opponents into complicit actors.
During a tense meeting, Burns and Volcker resisted Nixon and Connally’s proposals.
Both were concerned that a cycle of economic retaliation similar to the 1920s would result from
such a harsh action. In their minds, the legacy that Cordell Hull, Harry Dexter White, and John
Maynard Keynes articulated at Bretton Woods in 1944 was still very much alive. However,
Burns and Volcker were ultimately forced to capitulate and accept the President’s views. Burns’
strenuous objections did, however, cause the President to reconsider, albeit briefly, ceasing the
convertibility of the dollar into gold.
In the end, though, there was little to debate. Nixon had largely decided to accept
Connally’s propositions as a package. Thus the “debate” at Camp David never really was a
debate, but a dictation of policy dressed up as a sincere discussion. Other authors, notably
Joanne Gowa and John Odell, have failed to realize this important distinction. Once all of the
key officials had been persuaded to accept the principal proposals, Nixon could move on to
implementation.
Discussion quickly turned toward how the new policies would be presented to the public.
Important details about the policies were left to be considered later. Nixon insisted on an
immediate, brief, and bravado-driven speech to inform and reassure the public. Substance was
23
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 164.
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
less important that style. In the end, Nixon himself spent an entire sleepless night drafting a
speech laden with “gutsy rhetoric” that avoided the serious long-term implications of his
proposed policies. In this dramatic “big play,” public perception was more important than
substantive policy. Nixon later confessed that his main worry was not economic impacts at
home or abroad, but simply whether Monday’s headlines would read “Nixon Acts Boldly” or
“Nixon Changes Mind.”24
The foreign policy implications of these new policies were the last thing on anyone’s
mind.25 Secretary of State William Rogers was typically excluded from important policy
decisions, and was in any event “bored stiff” by such matters.26 Henry Kissinger, Nixon’s
trusted point-man on all things international, was preparing for another round of negotiations
with the North Vietnamese in Paris. There was thus no voice at Camp David to raise the crucial
diplomatic questions and consider the policies under discussion within the broader context of
American foreign relations. The exception, of course, was Nixon himself.
Yet Nixon failed to consider the substantial effects of these dramatic policies on other
states. In particular, the United States’ closest allies such as Britain, West Germany, France,
Italy and Japan would suffer serious economic costs in three ways. First, the suspension of
gold/dollar convertibility would remove the central pillar of the international monetary order
with unknowable and potentially catastrophic results. Second, the imposition of import
surcharges would directly harm the competitiveness of their crucial exports to the United States,
particularly in the case of Japan. Third, the likely floating and subsequent revaluation of the
24
Nixon, 520.
Revealingly, Nixon does not even mention foreign reactions in the few pages of his memoirs devoted to the New
Economic Policy. Instead, he spends a few paragraphs discussing the domestic side of the program before moving
on to a discussion of the “high politics” of the SALT-I negotiations. The phrase “Bretton Woods” does not even
appear in the index. However, Nixon does include the singularly ironic statement that “It is unfortunate that the
politics of economics has come to dictate action more than the economics of economics,” on page 522.
26
Joanne Gowa, Closing the Gold Window: Domestic Politics and the End of Bretton Woods. (Ithaca: Cornell
University Press, 1983), 159. Citing interview (presumably with Rogers).
25
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
dollar would leave these states permanently disadvantaged in their trading relations with the
United States. For all of these ills, key American allies could place blame squarely, and rightly,
on the shoulders of Richard Nixon.
The potential turmoil in the international economic – and perhaps political – systems was
the great unknown. As they had recovered from the Second World War, Western Europe and
Japan had become increasingly wealthy and independent with the help of American aid and
protection. Reversing this trend completely and demanding what was in effect a massive
redistribution of wealth would spark serious tensions within these critical alliance relationships.
Resentment of American hegemonic political and economic power, outrage over the Vietnam
war, and frustration over trade policy had already soured relations between the United States and
its strategic partners.
Nixon and Kissinger’s strategy of détente with the Soviet Union fundamentally rested
upon negotiating from a position of strength. Only as a credible and equal rival could the United
States bargain with the Soviet Union and intensify relations with the People’s Republic of China.
An openly fractured alliance and an admission of diminishing economic strength would greatly
weaken the United States within the context of détente. Moreover, such a move would violently
and dramatically change the tenor in the great alliance of capitalist democracies which the United
States had constructed in the postwar era.
The Nixon administration’s prized foreign policy initiatives now contrasted sharply with
its economic and electoral imperatives. In ending the common monetary system and
aggressively moving to improve the United States’ position in the international economy, the
United States would end its role as economic patron to its allies. This move would be a
declaration that while Western Europe and Japan were American strategic partners, they were
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
now also American economic rivals. A new era would begin in the postwar capitalist world, and
it would begin with a serious economic conflict with important allies during a critical period of
diplomatic engagement with the common foe, the Soviet Union.
At this stage, however, there were few alternatives to consider. Now that a crisis had
developed and a run on the dollar seemed imminent, it was too late to engage in a serious process
of multilateral negotiation. The time for effective multilateral engagement had already come and
gone many years earlier. The potential crisis itself had already been apparent during the Johnson
administration.27 Yet due to his earlier neglect of monetary issues, Nixon now had to take a
difficult course into unknown territory for the international economic system. Negotiations
would now come after, not before, aggressive American actions, causing strained relations with
critical American allies.
If this harsh treatment of American allies bothered Nixon, it didn’t show. If anything, the
frustrating trade diplomacy and the perspectives of his new advisors probably inclined Nixon
towards giving these American allies a good, hard knock. Certainly Connally, with his beliefs of
foreign economic exploitation of the United States, would not object to such a policy. When
Federal Reserve Chairman Arthur Burns warned of the potential for foreign retaliation, Connally
simply challenged “Let ‘em. What can they do?”28
In any event, details were not Nixon’s strong suit. Instead, he looked at the problem
broadly. “The question is, is the U.S. going to strive to be Number One economically?”29
27
Francis Gavin, Gold, Dollars, and Powers: The Politics of International Monetary Relations, 1958-1971. (Chapel
Hill: University of North Carolina Press, 2004), 59.
28
Safire, 514.
29
Safire, 517.
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The Shock Heard ‘Round the World
At 9 PM Eastern on Sunday, August 15th, 1971, Nixon unveiled his economic gambit to
the world in a televised address to the nation. The program was formally known as the “New
Economic Policy” (NEP), but was more colloquially known around the world as the “Nixon
Shock.”30 The NEP reflected virtually every one of Connally’s proposals in a hodge-podge of
foreign and domestic measures, some of which were in fact contradictory.31 .
On the domestic side, the NEP’s centerpiece was a 90-day freeze on wages and prices
meant to control inflation. The Federal budget and taxes alike were slashed. An excise tax on
automobiles was even repealed in hopes of stimulating sales and overall economic activity.
Americans were meant to feel richer, consume more goods and services, and thereby boost
overall economic growth. Eventually, this combination of policies would lead to higher inflation
that would largely eliminate gains in wealth – hopefully not before Nixon took credit for
fattening American wallets.
On the international level, the NEP ended the United States’ policy of converting dollars
into gold under the obligations of the Bretton Woods system. The NEP also included a 10%
surcharge on all imports to serve as a bargaining chip in monetary relations, a 10% reduction in
foreign aid, and new export and investment tax credits. In so doing, the United States blatantly
abandoned its formal obligations under the Bretton Woods system and threw its strategic allies
into economic chaos.32
In Japan, this was actually referred to as the second Nixon Shock, the first having been Nixon’s opening of
relations with the People’s Republic of China.
31
For example, the logic of tax cuts and inflation controls clash. Tax cuts increase the money and consumption
available in the economy, generally leading to higher inflation. A price control system could contain the upward
pressure on the wages, goods, and services, but not indefinitely. Eventually, this unstable system would have to
collapse. In the meantime, however, it would prove incredibly popular.
32
Odell, 167.
30
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Nixon also drew on an important intangible: confidence. Nixon stressed jobs and growth,
spoke of “defending the dollar,” and offered rugged reassurances on highly technical issues.
Nixon’s speech portrayed a confident command of problems and a concern for helping the
ordinary American. This confidence-inspiring style of delivery was arguably every bit as
important for Nixon’s domestic economic goals as the substance of the policies themselves.
Together, this combination of means aimed to stimulate the domestic economy, dampen
inflation, boost exports, and ultimately boost support for Nixon in the 1972 presidential election.
Some of the costs would eventually fall on American consumers. Many of the costs, however,
were to be directly demanded from American trading partners who also happened to be crucial
strategic allies. There were simply no votes in pleasing foreign allies, and Nixon was keenly
aware of this fact.
In the midst of these policies, Nixon also took his revenge on Japanese Prime Minister
Eisaku Sato for failing to restrain Japanese textile exports to the United States.33 Sato received
no warning of this economic earthquake, just as he had received no warning about the United
States’ opening of relations with the People’s Republic of China. Beyond these insults, Nixon
invoked the quite harshly named Trading with the Enemy Act of 1917 to discriminate against
Japanese textiles imports. This obscure law provided the Nixon administration with the nominal
legal cover it required for such a violation of longstanding GATT rules. Fulfilling Nixon’s old
campaign pledge to Strom Thurmond was a higher priority than close relations with this
important strategic partner.
The domestic measures met with widespread adulation in the United States. The
combination of confidence, inflation controls, and international competitiveness measures boded
well for economic growth. The American stock market roared ahead. The Dow Jones Industrial
33
Volcker, 79.
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
Average posted its largest one-day gain up to that point. One paper proclaimed “New Score Is
Dow 32, Nixon 72.,” a headline which certainly would have pleased Nixon.34 Polls confirmed
widespread public agreement with Nixon’s message.35 This was precisely the extraordinary
coup Nixon had hoped for. The impression of courageous action masked a serious economic
defeat for the United States, which had been forced to retreat from its position of international
monetary dominance.36
Meanwhile, the international measures produced a panic. Stock markets in Europe and
Japan tumbled. European currency markets simply shut down in the chaos. Japanese currency
markets remained open as the government attempted to maintain the old ratio of 360 yen to the
dollar, mistakenly believing that a dollar revaluation was not inevitable.37 Within two weeks,
Japan absorbed $3.4 billion in currency trading, increasing its official dollar reserves by 42%
before allowing the value of the yen to be determined by the market.38 No state or central bank
could stand against the enormous changes sweeping through the international economic system.
Denmark countered the import surcharge by enacting its own 10% tax on all imports,
realizing the fears of retaliation many economists had long held. Perhaps other states would
instate similar surcharges and quota systems, grinding international trade to an impoverishing
halt just as during the Great Depression. As foreign governments knew all too well, any
revaluation of the dollar would ultimately transfer wealth from their societies back to the United
34
Matusow, 156. Citing New York Times, Aug. 22, 1971, IV, 1.
Matusow, 156. Citing Wall Street Journal, Aug. 17, 1971, 3.
36
David Calleo is quotable here: “Just as defeat in Vietnam had to be hidden behind an elaborate series of
diplomatic initiatives designed to demonstrate America’s continuing control of the world situation, so the dollar’s
fall had to be masked by spectacular initiatives in the economic sphere,” Calleo, 62.
37
Volcker, 81.
38
Matusow, 168.
35
18
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
States, a bitter reminder of American power. As one author puts it, “No American interest was
served by exposing Europe’s weakness so brutally.”39
Foreign nations anxiously waited for the Nixon administration to put forth a proposal for
a new monetary system. Yet no such proposal was forthcoming. This was for two reasons.
One, Connally felt that a period of uncertainty would make other states more receptive to the
eventual American proposal. Two, there was, in fact, no proposal to present. The Nixon
administration aimed for a realignment of exchange rates, but without the dollar’s rate firmly
fixed to gold, there could be no center of stability in the system. All that was clear on August
15th, 1971, was that some currency revaluation would likely have to take place. No serious
further planning had been completed.
Thus began Connally’s great adventure in confounding finance ministers around the
world. At his first meeting with finance ministers in London, Connally openly asserted that
currency revaluations would have to be enacted which would shift the American balance of
payments from negative $9 billion to positive $4 billion. This was, in effect, a ransom for $13
billion from the other states in the system that would come directly from their trade balances.40
Until that ransom was paid, the international monetary system would remain adrift. As Connally
later put it, “the dollar may be our currency, but it’s your problem.”41
Weeks later, speaking to delegates meeting at the IMF in Washington, Connally hinted
that progress was possible – if other states revalued their currencies and began to dismantle trade
barriers. Connally’s real main objective remained these impediments to American exports. At a
meeting in Rome, Connally suggested devaluing the dollar by ten percent, a huge figure that sent
foreign finance ministers into a frenzy. Connally continued to dangle potential figures for
39
Calleo, 78.
Odell, 278.
41
Volcker, 81.
40
19
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
revaluation before foreign governments until formal talks finally began in December, 1971 –
four months after the announcement of the NEP.42
43
All the while, foreign frustrations grew. The United States could weather the
uncertainties in the international economy for the time being. Other states which were more
dependent on trade with the United States and one another were not so fortunate.
Unemployment rose in every major developed nation.44 Uncertainty snarled international trade
and domestic economies alike. Acrimony in allied relations advertised weakness and disunity in
the American camp, reducing credibility within the context of détente with the Soviet Union and
42
This made many within the U.S. government uncomfortable as well. As Arthur Burns said in early 1972,
“Connally uses brutal techniques…When Connally gets into foreign relations, God help us. FRUS 1969-1976,
Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972, Document 236.
43
Herbert Block, Herblock’s State of the Union (New York, NY: Simon and Schuster, 1972), 156.
44
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 198.
20
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
China. Throughout the fall of 1971, the monetary crisis increasingly became an inter-allied
crisis, just as the Nixon administration should have foreseen.
Beyond Bretton Woods
Sensing that the situation was growing out of control, Kissinger at last intervened,
convincing Nixon to avoid further damage to American alliances. International economic issues
had begun to exacerbate and eclipse the political and strategic issues which Kissinger understood
and deeply cared about. It may have been true, as Volcker suspected, that “papers on the
intricacies of international monetary affairs ended up at the bottom of Kissinger’s in-tray,
assuming they got that far.”45 Kissinger may not have understood the specifics, but he certainly
understood the risks that Nixon’s New Economic Policy was taking with American allies.
The “Nixon shock” came on top of a war in Vietnam that had long been unpopular with
American allies, acrimonious trade relations, and, in the case of Japan, the surprise
announcement that the United States was opening relations with the People’s Republic of China.
The Europeans and Japanese were rather acutely aware of the ways in which American power
had been wielded against their will of late. British Prime Minister Edward Heath, referring to
Connally, fumed “I knew they killed the wrong man in Dallas.”46 One aide warned Kissinger
that
The longer we go without a reasonable U.S. position, the more confused our friends become, the
more skeptical they are that we want to cooperate to solve the present problem, and the more
vulnerable they are to the importunements of those who wish to develop a European position
counter to our interest on economic issues, and political/security issues as well.47
45
Volcker, 65
John Campbell, Edward Heath: A Biography, (London : Jonathan Cape, 1993), 343
47
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 202.
46
21
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
Kissinger, who had “never understood Connally,” whom he considered “anti-foreigner,”
was at last ready to make his move by mid-November.48 Since the start of the NEP, Nixon had
been largely absorbed by other matters.49 Nixon grudgingly accepted Kissinger’s admonitions,
and scheduled a meeting with the French government to hash out an initial settlement. In return,
the crisis now became Kissinger’s problem in another, unexpected way.
Kissinger, who “knew nothing about economics and thought that economic leaders were
usually political idiots,” was awkwardly placed in the role of chief negotiator on one of the
greatest economic crises of the century.50 Without the technical knowledge to wheel and deal,
Kissinger drove a hard and unalterable bargain, cleverly giving the impression of toughness
rather than incompetence. Connally conferred with Kissinger during breaks to adjust the
American bargaining position. More interested in a football game than the currency values,
Nixon himself waited in the wings for a decisive solution.51 Meanwhile, Kissinger seems to
have been preoccupied with a brewing conflict between India and Pakistan.52 Kissinger is
notably uncomfortable in discussing this situation in his memoirs:
So it happened that a solution to the monetary crisis was being negotiated between Pompidou, a
leading financial expert and a professional banker, and a neophyte; even in my most
megalomaniac moments I did not believe that I would be remembered for my contributions to the
reform of the international monetary system. 53
48
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 236. Also see H.R. Haldeman, The Haldeman Diaries, (New York, NY: G.P. Putnam’s Sons, 1994),
340
49
Haldeman, 340-372.
50
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 71. This particular quotation is a paraphrase of Kissinger’s actual words.
51
Much more interested, in fact. Nixon was anxious to return to Washington following an exciting Redskins
victory. He had excitedly visited a Redskins practice several weeks earlier, and was a die-hard fan. See Haldeman,
340-372, for context.
52
Haldeman, 384, and preceding entries.
53
Kissinger, White House Years, 960
22
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
After all of this trouble, little attention was given to the critical negotiations which
framed the outcome. In the end, Kissinger and Pompidou agreed that the dollar would be
devalued by 8.6%. Both sides knew that some devaluation was necessary, but French pride was
well-served by a prominent role in setting the conditions for that devaluation. The hypothetical
price of gold would now hypothetically be $38 per ounce. The price was only hypothetical
because the “gold window” would remain closed; the United States would not actually exchange
dollars for gold as it once had. Rather, the effective value of the dollar would simply change in
accord with such a price change. This initial settlement paved the way for what the
administration hoped would be the final act of the monetary crisis.
The remainder of the new exchange rates were negotiated during a mid-December
conference at the red brick castle of the Smithsonian Institution in Washington, DC. West
Germany adjusted the mark upwards by about 14%. Japan, apparently the principal target of the
entire maneuver, agreed to revalue the yen upwards by roughly 17%, a massive amount. Japan’s
finance minister, Mikio Mizuta, called this currency adjustment “the greatest economic shock
that Japan had experienced since the end of the World War.”54 The average increase was about
10% among the major economies at the conference. These were truly enormous changes which
reconfigured the international balance of trade in favor of the United States.
The participants also agreed to accept wider bands of variation in their currencies of plus
or minus 2.25%. The gold window was forever closed; the United States would never again
guarantee gold for dollars. While new exchange rates could be discussed, ultimately there was
no single, solid “anchor” for the system. The central feature of the Bretton Woods fixed
exchange rate regime, gold/dollar convertibility, was dead.
54
James, 237.
23
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
These results were largely congruent with American goals, as shown in recently
declassified documents.55 In return for the favorable revaluations, Connally at last relinquished
the American import surcharge. Though the Smithsonian Agreement was meant to be the final
word on monetary matters, what Nixon hailed as “the most significant monetary agreement in
the history of the world” was a fragile compromise.56 Paul Volcker recalls muttering to an
associate “I hope it lasts three months.” Volcker was overly pessimistic, but not by very much.
In reality, the agreement would hold for just six months.
Into 1972, the Nixon Administration’s expansive policies increased the money supply
and loosened credit, stimulating the economy in an election year.57 Ironically, this temporary
boom also sucked in huge quantities of imports from overseas, worsening the new trade deficit.
Consumption, production, and incomes all rose, producing inflation in spite of price controls.
American inflation spread abroad, quickly undoing the careful balance agreed to at the
Smithsonian. The size of the American economy was simply too big not to fundamentally affect
the rest of the international economic system. With the United States unprepared to stand by the
new system, and unwilling to propose another more comprehensive scheme, adherence to the
Smithsonian agreement lapsed.
When the Nixon administration finally ended the wage and price controls of the NEP in
January of 1973, dollars began to flow abroad in strength. This touched off a cascade of
troubling monetary consequences that set Paul Volcker jetting to Tokyo and Bonn for desperate
negotiations.58 The West German finance minister worried aloud that a new crisis would lead to
55
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 200. Targets are described as follows: Japan, 15%; Germany, 10%; France, 5%, etc.
56
Public Papers of Richard Nixon, 1971 (Government Printing Office, Washington, DC: 1972), 1195-1196.
57
James, 238.
58
Volcker, 103-108
24
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
“economic war between the United States and Japan.”59 Japan again revalued the yen by 17%.
This revaluation was achieved by allowing the yen to float temporarily on the open market
without the customary government management. Several European currencies revalued by the
same means.
Subsequently, Volcker and the Nixon administration did not commit to defending the
new currency rates. The strong verbal commitments once made to multilateral cooperation and
exchange rate maintenance were absent. By pursuing another “non-policy,” the Nixon
administration was choking off the basis for any fixed exchange rate regime at all. Temporary
floating of currencies gave way to indefinite floating. Without the power of the United States’
economy to stabilize global exchange rates, a pattern of floating and minimal currency
management became the new norm. Markets, not governments, would henceforth determine the
values of nations’ currencies. The new system was, in fact, a non-system.
In response to this new era of monetary instability and American economic hostility,
Western European countries began to coordinate exchange rates among themselves. In effect,
these states fixed exchange rates within Western Europe, while floating against other currencies.
Stabilizing exchange rates among states whose interests were much more tightly aligned was far
easier than settling the trans-Atlantic dispute. This European Monetary Union (EMU) was the
first essential step in creating a common currency in the form of the Euro.
The official death of Bretton Woods did not occur until 1976, when the Jamaica meeting
of the IMF signed a formal treaty eviscerating the old system. Years of negotiations led only to
continual deadlock, with the United States and its trading partners poles apart.60 The unintended
59
James, 241.
Several scholars have noted the irony of the United States’ situation. In 1944, the United States argued for the
structures of the Bretton Woods system because it was a strong exporting economy. In the 1970s, the United States
argued for an unstructured system as an importer. The reverse in priorities, while rational, is nonetheless striking.
60
25
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
consequences of Nixon’s NEP, the end of the Bretton Woods system, and exogenous factors
united to ensure that no new system would emerge. What these massive international economic
changes did create was a series of unintended consequences and unexpected strategic problems
for the United States.
Unintended Consequences
There are four additional noteworthy unintended international consequences of the NEP
and the end of the Bretton Woods system. These extend beyond the proximate and obvious
effects of uncertainty, instability, and widespread international frustration with the United States.
First, the International Monetary Fund (IMF) was never the same again. As IMF
President Pierre-Paul Schweitzer watched Nixon flicker across the television that night in 1971,
he watched the end of the IMF as he knew it.61 By 1973, every single member of the IMF was
acting in direct violation of their formal obligations to the institution.62 With its mission of
maintaining the fixed exchange rate regime no longer relevant, the IMF became an institution in
search of mission. As developed states ceased to require the IMF’s services, it shifted its
attention to monetary and financial matters in the developing world.63 So began a long and
controversial history of tinkering with the finances of some of the world’s poorest countries.64
However one wishes to assess the IMF’s legacy since that time, the end of the fixed exchange
rate regime provided the impetus for this new IMF mission.65
61
Inviting Schweitzer to view the address on a television set at the Treasury Department was how the Nixon
administration tried to finesse the requirement of consulting and informing the IMF on such critical monetary
matters. The same slapdash treatment applied to other important leaders. Japanese Prime Minister Eisaku Sato
received ten minutes’ warning from Secretary of State Rogers that he might want to watch the President’s speech
that evening. Thinking of others was not exactly a strongpoint of administration policy that weekend in August.
62
James, 258.
63
James, International Monetary Cooperation Since Bretton Woods, offers the definitive account of this transition.
64
A history which, I might add, is being studied and summarized by University of Wisconsin-Madison political
science professor Mark Copelovitch.
26
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
Second, the need for global capital controls evaporated. Such government restrictions on
the international flow of funds had long been necessary to stabilize exchange rates, since large
net flows of currency could destabilize effective currency values. Early in the Nixon
administration, officials had privately concluded that such controls were of questionable effect
and sought to end their usage.66 With the end of fixed exchange rates, though, there was no need
for any major government to continue to use capital controls. The United States ended its capital
controls program in 1974, and other states soon followed suit. As a result, funds could now flow
freely around the globe. This would have a tremendous impact on the arena of international
finance, allowing funds to flow without restriction, seeking profits and fleeing crises. Liquid
capital became both a blessing and a curse, as quick movements of money could facilitate
development but also destabilize economies.
Third, the devaluation of the dollar effectively lowered the price of oil. During early
discussions of dollar devaluation, one official raised an important point: what about contracts and
commodities specifically denominated in dollars? Connally reportedly replied pointedly,
“Forget about those Arabs.”67 The official had a point, however. Oil had long been priced in
dollars on the international market. This made sense when the dollar’s value was fixed and
central to the international monetary system. However, with the dollar’s value sinking, oil was
effectively being devalued as well.68 One author quotes the Kuwaiti Oil Minister as saying
“What is the point of producing more oil and selling it for an unguaranteed paper currency?”69
This was only a partial contributor to the 1973 Oil Crisis, but it was one impetus for that
dramatic economic upheaval. Devaluation of their exports gave the increasingly-organized
66
FRUS 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972,
Document 54.
67
Odell, 245. Citing an interview with an anonymous official.
68
James, 253.
69
James, 253
27
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
OPEC states now in control of the majority of world production a clear incentive to restrict
supplies. No one gave much thought to this problem at the time, but the Nixon administration
would later have the opportunity to regret this neglect.
Fourth, the demise of the fixed exchange rate regime contributed to extant inflationary
pressures. Under floating rates, governments were no longer firmly constrained in their domestic
fiscal and monetary policies which tended to alter affect currency values. To stimulate the
economy, an individual state could simply print more money, injecting capital and jumpstarting
growth. Since elected officials are quick to take the credit for such growth, the incentives for
such a policy are obvious. The byproduct of this policy was inflation, which would ordinarily be
tolerable within certain bounds. However, with many states simultaneously increasing the
money supply, world inflation was creeping unusually high. This was in addition to sharply
rising commodity prices and, later, the 1973 Oil Crisis.70
Partners and Rivals
The Nixon Administration’s international economic policies of 1971-1972 put an
exclamation mark on a trend years in the making. Throughout the postwar era, the United States
had consistently acted as both the military protector and the economic patron of its allies in
Western Europe and Japan. As these states recovered, they came to challenge both American
political hegemony and international economic dominance. These conflicts sharpened with
Nixon’s more aggressive trade policies in 1970-1971, and reached a crescendo with the “Nixon
Shock” of 1971. Nations which the United States had rebuilt in its own democratic, capitalist
image had long been natural strategic partners. Now, these states were also open economic
rivals.
70
James, 260
28
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
In contrast, the Nixon administration’s foreign policy is famous for its détente policies of
friendly engagement with the Soviet Union and the People’s Republic of China. In the case of
China, the Nixon administration entered a tacit strategic alliance against the Soviet Union, which
had been sparring with Mao’s China. This shift was also accentuated by ongoing and
intensifying relationships with right-wing and military governments in other strategic regions.
While these overtures towards enemies and unsavory regimes are well known, they are thrown
into stark relief by the Nixon administration’s actions towards its allies. While old strategic
allies became economic rivals, ideological and strategic rivals became partners. States with
similar systems and values were brusquely cast aside, while states with diametrically opposed
values and practices were embraced. The longstanding postwar order had been turned on its
head.
As enemies became partners, partners became rivals. The Nixon administration failed to
integrate its economic and strategic priorities, and American interests materially suffered as a
result. This was not a necessary outcome of détente or the realignment of American economic
interests during the early 1970s. Rather, it was the product of poor policy formulation,
coordination, and execution.
The larger trends of economic growth in Western Europe and Japan and strategic parity
with the Soviet Union cannot be ignored. It was manifestly in the United States’ interest to
pursue policies of détente with the Soviet Union and China, just as it was clearly in the United
States’ interest to strengthen its economic position. The problem fell in reconciling these
interests with valuable American relationships with allies in Western Europe and Japan.
29
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
71
Nixon administration could have made much wiser and more artful choices in its
relations with allies. Rather than acting unilaterally, the Nixon administration could have
engaged in multilateral bargaining. Rather than offering months of frustration and negotiation,
the Nixon administration could have offered a clear plan for a new international economic order.
Rather than cajoling Western Europe and Japan as dangerous rivals, the United States could have
reassured and cooperated with these powers as longtime allies. Unfortunately, Nixon chose
expedient policies which sacrificed international relationships for short term economic and
electoral gains.
As it happened, poor relations with Western Europe and Japan became a critical
hindrance to American strategy in subsequent years. Allied relations were so damaged that
Kissinger’s 1973 “Year of Europe” initiative, aimed at revitalizing American allied relationships,
failed disastrously. When the 1973 Arab-Israeli War broke out, the United States found itself
71
Herbert Block, 156. Note that trade issues are on the top of the pile of “offenses.”
30
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
virtually alone in aiding Israel and countering Soviet threats to directly intervene in the conflict.
This was in spite of the fact that direct Soviet intervention in the region was a very serious threat
that would have triggered a potentially catastrophic showdown between the United States and the
Soviet Union. The interests of the United States and its allies could not have been clearer, and
yet frustrated and fearful American allies sat on the sidelines.
The 1973 Oil Crisis emerged directly from that war and at least partially from the original
devaluation of the dollar. Strategic and economic choices now blew back in the form of a global
economic catastrophe. As OPEC choked off oil supplies, prices spiraled upwards. Shortages
crippled industry throughout the world. Meanwhile, the costs of goods, services, and
transportation rose with the cost energy. Economies ceased growing while prices skyrocketed.
The dismal era of stagflation had arrived.
All of this raises fundamental questions about the role of political economy in American
diplomacy. How should economic and strategic issues be balanced? How should policy leaders
coordinate and concert their actions around coherent strategic goals? There are perhaps no easy
or universal answers to these important questions. One point should be clear, however:
Economic and strategic interests cannot be treated as separate and distinct, for one often has an
enormous effect upon the other. Scholars of diplomatic history and international relations are
often loath to touch the technical intricacies of economics, the unfamiliar realm of
mathematically-minded technocrats. Yet as the case of the Nixon administration forcefully
demonstrates, failing to integrate economic and strategic thinking can lead to serious
consequences which may even undermine fundamental national interests.
In an era of accelerating global economic integration, these points will only grow more
salient. The interplay of economic and strategic interests grows ever more problematic, as
31
Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
contemporary relations with China manifestly demonstrate. Can a state be both a strategic rival
and the United States’ most valuable trading partner? Can the United States, with its growing
debts and government deficits, continue to finance its international power? As we move into the
21st century, great minds in foreign policy must think not only of guns and governments, but
simultaneously of markets and money. Only by integrating our thinking across fields can we
hope to adapt domestic and international policies toward our desired ends.
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Calleo, David P. The Imperious Economy. Cambridge, MA: Harvard University Press,
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Campbell, John. Edward Heath: A Biography. London : Jonathan Cape, 1993.
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Gavin, Francis J. Gold, Dollars, and Powers: The Politics of International Monetary
Relations, 1958-1971. Chapel Hill: University of North Carolina Press, 2004.
Gowa, Joanne. Closing the Gold Window: Domestic Politics and the End of Bretton
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H.R. Haldeman. The Haldeman Diaries: Inside the Nixon White House. New York :
G.P. Putnam’s, 1994.
IMF Statistical Database, imfstatistics.org
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D.C. : International Monetary Fund : New York : Oxford University Press, 1996.
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Partners and Rivals: Political Economy and American Diplomacy, 1969-1974
Kissinger, Henry. White House Years. Boston : Little, Brown, & co., 1979.
Matusow, Allen J. Nixon’s Economy: Booms, Busts, Dollars, and Votes. Lawrence:
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Odell, John S. U.S. International Monetary Policy: Markets, Power, and Ideas as
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Safire, William. Before the Fall : an Inside View of the Pre-Watergate White House.
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Solomon, Robert. The International Monetary System, 1945-1981. New York : Harper
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33