Nixon Showed What Not to Do in an Economic Crisis: Echoes
Comment of the Day

August 08 2011

Commentary by Eoin Treacy

Nixon Showed What Not to Do in an Economic Crisis: Echoes

My thanks to a reader for this interesting opinion column by Amity Shlaes for Bloomberg. Here is the opening:
Head for Camp David. Convene meetings. Take advice from economists, your Cabinet, all the experts. Then put forward a giant new economic program, maybe including some dramatic form of shock therapy that will calm financial markets and create jobs.

That's the kind of response Americans are used to seeing in a president when the nation is suddenly confronted with bad news like last week's market turmoil and the U.S. credit downgrade by Standard & Poor's. But the results of such a response to economic alarm 40 Augusts ago suggest this isn't the way to go.

In 1971, President Richard Nixon convened his experts only to produce a protocol that ruined the economic prospects of the decade.

The urgent case that sent Nixon to Camp David that August was the dollar. At the time, the U.S. was on the gold-exchange standard, under which the price of gold was fixed at $35 an ounce and foreign governments could withdraw gold from American banks. The U.S. had long held the position it would maintain $10 billion in gold stock. Foreigners were concerned that U.S. growth was sluggish and began to take gold elsewhere. "Monetary Reserves of the U.S. Declined $505 Million in May," read a June headline.

By July, the reserve was officially below the $10 billion figure, and the price of gold on international markets rose to $42 an ounce. The U.S. needed a strong dollar, partly to pay the costs of the Vietnam War. Joblessness reached 6 percent. Politically, Nixon stood where President Barack Obama stands now: just 15 months away from elections.

Fearing a run on the dollar and accelerating inflation, Nixon summoned to Camp David his Cabinet and the wisest, most eminent people he knew, names many still revere today: Arthur Burns, Herbert Stein, Paul Volcker, George Shultz, Paul McCracken. Nixon closeted his advisers at Camp David, where they scribbled a plan together, emerging euphoric to be photographed by Life magazine.

On Sunday night television, Nixon presented his New Economic Policy, a cynical plan that helped his political prospects at substantial cost to the long-term economy. He immediately closed the gold window, ending the convertibility of dollars to gold. He imposed temporary wage and price controls. He asked Congress for a tax credit that was frontloaded for maximum impact pre-election, even as he slapped a surcharge on imports.

Eoin Treacy's view I remember that period but found this review of specific details by Amity Shlaes to be an informative refresher.

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