Latest / Economy & Finance / Nixon Shock - Why Richard Nixon torpedoed the global monetary system _The Story of Money

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Nixon Shock - Why Richard Nixon torpedoed the global monetary system _The Story of Money · Economy & Finance

• 0:00
  Speaker 1: In 1955, for example, the U.S. had 165% more gold
• 0:06
  Speaker 1: than it needed to redeem all the dollars outside the U.S.
• 0:11
  Speaker 1: But by 1970, 1971, it only had 25%. There was
• 0:17
  Speaker 1: a fear in the U.S., and actually in other countries too,
• 0:21
  Speaker 1: that they would come to the U.S., say, here are dollars,
• 0:23
  Speaker 1: we want gold, and the U.S. wouldn't be able to
• 0:26
  Speaker 1: redeem it.
• 0:27
  Speaker 2: Germany alone had more dollars than In other words, gold
• 0:30
  Speaker 2: in Fort Knox.
• 0:31
  Speaker 3: So, drumroll.
• 0:32
  Speaker 4: I have directed Secretary Connolly to suspend temporarily the convertibility
• 0:36
  Speaker 4: of the dollar into gold.
• 0:47
  Speaker 3: Today on the story of money.
• 0:49
  Speaker 2: What happens when the president of the United States of
• 0:52
  Speaker 2: America makes a shocking unilateral decision to torpedo the entire
• 0:57
  Speaker 2: post-war global economic order? And nope, this time we're not
• 1:01
  Speaker 2: talking about Donald Trump.
• 1:03
  Speaker 3: Let us take you back instead to 9 p.m. East
• 1:07
  Speaker 3: Coast time on the 15th of.
• 1:08
  Speaker 1: August, 1971.
• 1:10
  Speaker 3: U.S. President Richard Milhous Nixon is making a surprise appearance
• 1:16
  Speaker 3: on the major TV networks, elbowing aside a scheduled viewing
• 1:21
  Speaker 3: of Bonanza. That was then the biggest TV show in
• 1:24
  Speaker 3: America at the time.
• 1:25
  Speaker 2: American audiences had actually grown pretty used to these kind
• 1:28
  Speaker 2: of unscheduled addresses. Nixon typically used them to explain his
• 1:32
  Speaker 2: latest moves in Vietnam, for example. But this time, he
• 1:35
  Speaker 2: had a very, very different subject on his mind.
• 1:38
  Speaker 4: The time has come for a new economic policy for
• 1:41
  Speaker 4: the United States. Its targets are unemployment, inflation and international speculations.
• 1:48
  Speaker 3: Unemployment and inflation are big concerns for American voters. These
• 1:53
  Speaker 3: are the early days of 1970s stagflation, and both are
• 1:58
  Speaker 3: on the rise.
• 1:59
  Speaker 2: So Nixon lays out a radical set of new measures
• 2:03
  Speaker 2: to tackle this stagflationary problem. That's when inflation is really
• 2:08
  Speaker 2: high and growth is stagnant. And these measures included investment
• 2:12
  Speaker 2: subsidies and wage controls, price controls, and almost $ 5 billion
• 2:18
  Speaker 2: worth of spending cuts, which was quite a big deal
• 2:20
  Speaker 2: back then.
• 2:21
  Speaker 3: So, drumroll, then he turns to the international speculation bit
• 2:26
  Speaker 3: of his address.
• 2:26
  Speaker 4: In recent weeks, the speculators have been waging an all-out
• 2:30
  Speaker 4: war on the American dollar.
• 2:32
  Speaker 2: So, unknown to his audience that Sunday evening, or indeed, frankly,
• 2:36
  Speaker 2: most of his own government, at the end of his address,
• 2:39
  Speaker 2: Nixon is about to fire that torpedo that we mentioned.
• 2:43
  Speaker 4: I have directed the Secretary of the Treasury to take
• 2:45
  Speaker 4: the action necessary to defend the dollar against the speculators.
• 2:51
  Speaker 4: I have directed Secretary Connolly to suspend temporarily the convertibility
• 2:54
  Speaker 4: of the dollar into gold or other reserve assets.
• 2:58
  Speaker 3: Now, the dollar's value is tied to gold and every
• 3:02
  Speaker 3: other major currency is tied to the dollar. So by
• 3:05
  Speaker 3: cutting that link, Nixon is threatening to set adrift not
• 3:09
  Speaker 3: only his own currency, but all of his allies' currencies
• 3:12
  Speaker 3: as well in a chain reaction.
• 3:15
  Speaker 2: This announcement would become known as the Nixon shock. In
• 3:19
  Speaker 2: a single, seemingly innocuous sentence, whether he realised it or not,
• 3:24
  Speaker 2: the US president had just upended the entire post-war global
• 3:29
  Speaker 2: monetary system that underpinned a quarter century of rapid economic growth.
• 3:35
  Speaker 3: And the thing to stress is until that afternoon, nobody
• 3:38
  Speaker 3: knew it was coming, apart from Nixon and a tiny
• 3:42
  Speaker 3: band of his very closest political allies who just spent
• 3:45
  Speaker 3: the weekend together holed up in a secret meeting in
• 3:49
  Speaker 3: a forest retreat in Maryland.
• 3:51
  Speaker 2: So how did it all come about? How did it
• 3:54
  Speaker 2: go down with America's allies? What would the consequences be,
• 3:59
  Speaker 2: not least for the US dollar?
• 4:00
  Speaker 3: And these are questions that keep reverberating through history. And
• 4:04
  Speaker 3: we're going to be talking about this now in the
• 4:05
  Speaker 3: story of money from the Financial Times with me, Gillian Tett.
• 4:10
  Speaker 2: And me, Robin Wigglesworth.
• 4:19
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• 4:22
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• 4:29
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• 4:37
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• 4:40
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• 4:44
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• 4:47
  Speaker 3: Music So in today's episode, we'll be combining high finance
• 4:57
  Speaker 3: with international monetary policy and the sometimes grubby inner workings
• 5:03
  Speaker 3: of the Nixon administration. And to tell this amazing story,
• 5:06
  Speaker 3: we have the perfect guest, Jeffrey Garten. Jeffrey, welcome to
• 5:11
  Speaker 3: the show.
• 5:11
  Speaker 1: Thank you. It's a pleasure to be here.
• 5:13
  Speaker 3: We're so pleased to have you.
• 5:14
  Speaker 2: Yeah, I mean, Jeffrey, you personally embody three different strands
• 5:18
  Speaker 2: of this story because you worked in high finance as
• 5:21
  Speaker 2: a managing director of Lehman. long before I went bust,
• 5:24
  Speaker 2: of course. You worked on sovereign debt restructuring, a subject
• 5:27
  Speaker 2: close to my heart. You worked at the Blackstone Group.
• 5:29
  Speaker 2: And you're also an academic economist with a focus on
• 5:32
  Speaker 2: international trade, finance, and business. And you're currently Dean Emeritus
• 5:36
  Speaker 2: at Yale.
• 5:37
  Speaker 3: If that wasn't enough, you've also found time to do
• 5:40
  Speaker 3: a lot of work in the US government. You were
• 5:42
  Speaker 3: Undersecretary of Commerce under Bill Clinton. Before that, you worked
• 5:46
  Speaker 3: for the Carter administration, the Ford administration, and, believe it
• 5:51
  Speaker 3: or not, the Nixon administration. Is that right? You actually
• 5:55
  Speaker 3: worked for Nixon?
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  Speaker 1: I was very young, but I did.
• 5:58
  Speaker 3: And what was he like to work for? Because, of course,
• 6:00
  Speaker 3: history hasn't been that kind to him.
• 6:02
  Speaker 1: I was nowhere near him personally, but I was on
• 6:05
  Speaker 1: something called the Council on International Economic Policy, which was
• 6:10
  Speaker 1: the equivalent of the National Security Council in the White House.
• 6:14
  Speaker 1: And I was at least exposed to all of the
• 6:19
  Speaker 1: economic and financial issues of the time.
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  Speaker 3: Well, that sounds unbelievably relevant to what we're talking about today.
• 6:25
  Speaker 2: I mean, you also wrote, obviously, the book on the
• 6:28
  Speaker 2: subject of this episode. It's called Three Days at Camp David.
• 6:32
  Speaker 2: And Camp David, of course, is the Maryland retreat where
• 6:35
  Speaker 2: the secret meeting took place in 1971, thrashed out this
• 6:40
  Speaker 2: Nixon shock policy announcement. So Geoffrey, I mean, this is
• 6:44
  Speaker 2: a big story. So we're actually going to split it
• 6:46
  Speaker 2: over two episodes, because frankly, Gillian and I have been
• 6:48
  Speaker 2: looking forward to this one. And you're going to be
• 6:50
  Speaker 2: our guide through both of them very kindly.
• 6:52
  Speaker 1: Well, I hope I can do it.
• 6:54
  Speaker 3: So let's get started. As Robin mentioned, that TV broadcast
• 6:58
  Speaker 3: by Nixon in 1971 torpedoed the post-war global economic order.
• 7:04
  Speaker 3: And that post-war global economic order in question was the
• 7:08
  Speaker 3: same one that we looked at in a previous episode
• 7:11
  Speaker 3: with Ed Conway. the so-called Bretton Woods system.
• 7:14
  Speaker 2: As a reminder, back in 1944, in the final months
• 7:18
  Speaker 2: of World War II, the US organised a massive summit
• 7:22
  Speaker 2: for all its allies at the Bretton Woods resort in
• 7:25
  Speaker 2: New Hampshire. And for the US, this conference was actually
• 7:29
  Speaker 2: another front in its emerging post-war hegemony. So whilst the
• 7:34
  Speaker 2: US military was conquering Germany and Japan on the battlefields
• 7:38
  Speaker 2: of Europe and the Pacific, at Bretton Woods... the US
• 7:42
  Speaker 2: dollar finally and comprehensively conquered the British pound to become
• 7:47
  Speaker 2: formally enshrined as the world's leading currency. And what that
• 7:52
  Speaker 2: meant in practice was that all of America's trading partners
• 7:56
  Speaker 2: fixed their currency's exchange rates to the dollar and the
• 8:00
  Speaker 2: US in turn pegged the dollar's value to gold.
• 8:03
  Speaker 3: So, Geoffrey, the dollar became the linchpin of the global
• 8:08
  Speaker 3: monetary system. So, Can you explain how and why, what
• 8:12
  Speaker 3: that really meant in practice to have the dollar as
• 8:14
  Speaker 3: the center of the Bretton Woods system?
• 8:16
  Speaker 1: Well, the people at Bretton Woods, especially the US and
• 8:20
  Speaker 1: the UK, wanted to make a new monetary system that
• 8:26
  Speaker 1: would avoid the problems of the 1930s, a time in
• 8:29
  Speaker 1: which there was enormous amount of protectionism. And so they
• 8:33
  Speaker 1: decided that there should be one stable currency in the
• 8:37
  Speaker 1: middle of the whole system, And that was naturally the
• 8:40
  Speaker 1: dollar because the U.S. currency was so strong and basically
• 8:45
  Speaker 1: everybody wanted it.
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  Speaker 4: Yeah.
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  Speaker 2: And the U.S. had all the gold at the time
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  Speaker 2: as well, right?
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  Speaker 1: And the U.S. had about 60% of the world's gold.
• 8:54
  Speaker 1: And the U.S. basically said, anyone who wants to redeem
• 8:59
  Speaker 1: their dollars in gold, we will give you $ 35 per
• 9:03
  Speaker 1: ounce of gold. And the idea was, The dollar would
• 9:09
  Speaker 1: be the central stake in the system. It would be
• 9:13
  Speaker 1: like the planet around which all the other planets revolved.
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  Speaker 1: And everybody at that moment had confidence that the US
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  Speaker 1: could pull this off in large part because it had
• 9:26
  Speaker 1: so much gold that anyone who wanted to exchange their
• 9:30
  Speaker 1: currency for gold was given a commitment that the US
• 9:34
  Speaker 1: would do that. And so this was seen as a very,
• 9:37
  Speaker 1: very stable system. And the objective was that monetary stability
• 9:44
  Speaker 1: would lead to more trade. The whole focus really was
• 9:49
  Speaker 1: on the expansion of trade.
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  Speaker 3: Well, that's a great point. I mean, one of the
• 9:53
  Speaker 3: consequences of this from what you're saying is that it
• 9:56
  Speaker 3: meant that the system was totally asymmetric. I mean, essentially,
• 10:01
  Speaker 3: other countries were dependent on the US and its promises
• 10:05
  Speaker 3: to convert dollars into gold. Is that correct?
• 10:08
  Speaker 1: Absolutely. And I think it's hard for us to conceive today,
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  Speaker 1: but the US was so preeminent at that moment. It
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  Speaker 1: was not only the world's most powerful military machine, but
• 10:22
  Speaker 1: it was the only country in the world that came
• 10:24
  Speaker 1: out of the Second World War stronger than when it
• 10:27
  Speaker 1: went in. And so the amount of confidence that other
• 10:33
  Speaker 1: countries had that they could lean on the US and
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  Speaker 1: that the US was their only hope was really palpable.
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  Speaker 1: And there really was no alternative because the US basically
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  Speaker 1: was calling the shots.
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  Speaker 2: And Okay, so this is the monetary system that Nixon
• 10:50
  Speaker 2: would eventually inherit a quarter of a century later when
• 10:53
  Speaker 2: he became president in 1969. The same system he would
• 10:57
  Speaker 2: go on to wreck with that TV announcement in 71,
• 11:00
  Speaker 2: ending the convertibility of dollars into gold. And of course,
• 11:03
  Speaker 2: with everybody else pegged to the dollar, that was a
• 11:06
  Speaker 2: big deal. But it was kind of surprising because in
• 11:08
  Speaker 2: economic terms, the Bretton Woods era seemed to be resounding success, right, Jeff?
• 11:12
  Speaker 2: I mean, those 25 years before Nixon came to power...
• 11:16
  Speaker 2: have been called sort of a golden age of rapid
• 11:18
  Speaker 2: and stable growth and booming international trade. I mean, the French,
• 11:22
  Speaker 2: who like to complain as much as we Brits do,
• 11:25
  Speaker 2: they call it the tronc glorieuse, right? How much credit
• 11:30
  Speaker 2: does the Bretton Woods system deserve for delivering that economic record?
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  Speaker 1: It deserves a lot of credit. The thing is that
• 11:38
  Speaker 1: the system, it worked, but it was under a lot
• 11:41
  Speaker 1: of strain right from the beginning. because the task of
• 11:48
  Speaker 1: helping Japan and Europe recover was much, much bigger than
• 11:52
  Speaker 1: anyone envisioned. And so it was at first really the U.S.
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  Speaker 1: that supplied all the funds, not the International Monetary Fund,
• 12:02
  Speaker 1: which itself was a creation of Bretton Woods. And if
• 12:06
  Speaker 1: you looked at the Eisenhower administration and then the Kennedy
• 12:11
  Speaker 1: administration and then the Johnson administration, There were great strains
• 12:17
  Speaker 1: on Bretton Woods and the strains got bigger and bigger,
• 12:21
  Speaker 1: but it held until the Nixon administration.
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  Speaker 2: But let's discuss those strains. What were they? What were
• 12:28
  Speaker 2: the main sort of fault lines on the financial side
• 12:30
  Speaker 2: of things then?
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  Speaker 1: Well, the key strain was this, that the whole system
• 12:36
  Speaker 1: depended on countries outside the US accepting the dollar, using
• 12:45
  Speaker 1: the dollar, and knowing that if they ever wanted to,
• 12:49
  Speaker 1: they could take the dollars they were using and exchange
• 12:53
  Speaker 1: it for gold at a fixed rate. At first, nobody
• 12:56
  Speaker 1: denied that the U.S. had enough gold. In 1955, for example,
• 13:02
  Speaker 1: middle of the Eisenhower administration, a calculation was made that
• 13:07
  Speaker 1: the U.S. had 165% more gold than it needed to
• 13:14
  Speaker 1: redeem all the dollars outside the US. But by 1970, 1971,
• 13:20
  Speaker 1: it only had 25%. So over the period, it became
• 13:27
  Speaker 1: clearer and clearer that the basic commitment of exchanging the
• 13:32
  Speaker 1: dollar for gold was not credible. The big strain came
• 13:41
  Speaker 1: because there were so many dollars in circulation that countries
• 13:47
  Speaker 1: felt they didn't need all those dollars. And also they
• 13:50
  Speaker 1: were very worried about the way the U.S. managed its economy.
• 13:55
  Speaker 1: And they were afraid that inflation in the U.S. would
• 13:57
  Speaker 1: actually reduce the value of the dollars they were holding.
• 14:02
  Speaker 1: So all through this period, there was a fear in
• 14:05
  Speaker 1: the U.S. and actually in other countries, too, that they
• 14:08
  Speaker 1: would come to the US, say, here are dollars, we
• 14:11
  Speaker 1: want gold, and the US wouldn't be able to redeem it.
• 14:15
  Speaker 2: At this stage, I think even Germany alone had more
• 14:18
  Speaker 2: dollars than there was gold in Fort Knox, right?
• 14:21
  Speaker 1: That's probably true. The amount of gold relative to dollars
• 14:26
  Speaker 1: outside the US became lower and lower and lower. And
• 14:32
  Speaker 1: it wasn't that people didn't know this because the US
• 14:36
  Speaker 1: published the statistics. but they simply didn't want to abandon
• 14:41
  Speaker 1: the system, the Bretton Woods system, for fear that they
• 14:45
  Speaker 1: didn't know what was on the other end.
• 14:47
  Speaker 2: Okay, let's pause and unpick that a little bit. Because
• 14:51
  Speaker 2: these dollars were flowing out of the US because it
• 14:54
  Speaker 2: had switched from having a gargantuan trade surplus after World
• 14:58
  Speaker 2: War II to actually having a trade deficit by 1971.
• 15:03
  Speaker 2: And partially that was because the Kennedy and the Johnson
• 15:06
  Speaker 2: administrations in the 1960s had brought in all these new
• 15:09
  Speaker 2: welfare benefits, the so-called Great Society programs, things like Medicare, Medicaid,
• 15:16
  Speaker 2: food stamps. Great stuff, right? Cool things that we think
• 15:19
  Speaker 2: of now. But all this government spending helped push the
• 15:23
  Speaker 2: US economy into a trade deficit. And then on top
• 15:26
  Speaker 2: of that, the US government was also spending a ton
• 15:30
  Speaker 2: of money on the Vietnam War as well. So you
• 15:32
  Speaker 2: suddenly had a country with a big trade deficit, a
• 15:35
  Speaker 2: big budget deficit, more and more government debt, and more
• 15:39
  Speaker 2: and more dollars flowing out of the country suddenly.
• 15:42
  Speaker 1: The U.S. was not managing its economy well. Its trade
• 15:47
  Speaker 1: competitiveness was declining as Japan and Germany and other European
• 15:53
  Speaker 1: countries were recovering. And so there were more and more
• 15:57
  Speaker 1: dollars in circulation.
• 15:59
  Speaker 3: So in practical terms, that meant the dollar was massively overvalued.
• 16:04
  Speaker 3: People could see that or sense it. And of course,
• 16:07
  Speaker 3: one of the big problems is that when you have
• 16:09
  Speaker 3: governments that are trying to manage the value of a currency,
• 16:13
  Speaker 3: what's happening with inflation matters enormously. And that was starting
• 16:18
  Speaker 3: to go wrong as well, wasn't it, Jeff?
• 16:20
  Speaker 4: Yeah.
• 16:20
  Speaker 1: The thing is that all the trade for the United States,
• 16:24
  Speaker 1: exports and imports, was only about 7% or 8% of
• 16:29
  Speaker 1: the GDP. So from an American standpoint, they simply couldn't
• 16:36
  Speaker 1: manage their economy to satisfy international requirements. It was a
• 16:42
  Speaker 1: domestically based economy. But from the standpoint of other countries,
• 16:48
  Speaker 1: they were very, very concerned because U.S. economic management was
• 16:53
  Speaker 1: so domestically oriented. And Gillian, as you said, it led
• 16:57
  Speaker 1: to a lot of inflation. It meant that the fiscal
• 17:01
  Speaker 1: and monetary policies We're all about the U.S. and U.S. growth,
• 17:06
  Speaker 1: and the rest of the world was a secondary consideration.
• 17:10
  Speaker 3: Well, all of this is starting to sound horribly familiar,
• 17:12
  Speaker 3: I must say.
• 17:12
  Speaker 2: Yes.
• 17:14
  Speaker 3: There was also the argument that was put forward by
• 17:18
  Speaker 3: Robert Triffin in 1959 that it was actually the international
• 17:22
  Speaker 3: demand for dollars that was the key factor driving things,
• 17:26
  Speaker 3: wasn't it? What was the so-called Triffin dilemma that lots
• 17:29
  Speaker 3: of economic students have to study?
• 17:32
  Speaker 1: Basically, what Triffin said was, if the dollar is going
• 17:37
  Speaker 1: to be the international currency, you would need more and
• 17:41
  Speaker 1: more dollars to finance what was an ever-growing global economy.
• 17:47
  Speaker 1: There was more and more trade, more and more need
• 17:49
  Speaker 1: for dollars. But that meant that the U.S. had to
• 17:54
  Speaker 1: run deficits in order to supply those dollars. And at
• 17:57
  Speaker 1: some point, the size of the deficits would be so
• 18:01
  Speaker 1: great that it would cast doubt on whether or not
• 18:07
  Speaker 1: these dollars were worth what everybody thought they should be.
• 18:10
  Speaker 1: And certainly, it meant that the dollars could not be
• 18:13
  Speaker 1: redeemed in gold. I don't think anybody anticipated how quickly
• 18:20
  Speaker 1: Europe and Japan recovered and how much the dollar was
• 18:24
  Speaker 1: in demand until it wasn't. So you take the 1950s,
• 18:31
  Speaker 1: people talked about a dollar shortage. There wasn't enough dollars
• 18:35
  Speaker 1: to finance all the increase in global trade. But by
• 18:40
  Speaker 1: the 1960s, they talked about a dollar glut. There were
• 18:43
  Speaker 1: too many dollars. And so the Triffin dilemma was basically
• 18:51
  Speaker 1: indicating that at some point, this system had to be
• 18:54
  Speaker 1: totally restructured.
• 18:55
  Speaker 3: And of course, that shows, once again, in a way
• 18:58
  Speaker 3: that's very relevant today, that things can seem incredibly stable
• 19:02
  Speaker 3: and secure and fixed and permanent until suddenly they're not.
• 19:08
  Speaker 1: Exactly.
• 19:09
  Speaker 2: There's just one other thing from that Nixon announcement in
• 19:12
  Speaker 2: August of 1971 that I'm really curious to hear your
• 19:15
  Speaker 2: thoughts on. He talked about these international speculators in the
• 19:21
  Speaker 2: TV address. And it's very vague and oblique, as it were.
• 19:25
  Speaker 2: Who were these speculators? What were they getting up to?
• 19:28
  Speaker 2: Why was Nixon so angry at them?
• 19:30
  Speaker 1: If I could take one moment for history, during the
• 19:34
  Speaker 1: Bretton Woods discussions, it was all about stable exchange rates
• 19:39
  Speaker 1: and the expansion of trade. And there was no contemplation
• 19:44
  Speaker 1: of private capital and its importance. In fact, the Bretton
• 19:49
  Speaker 1: Woods discussion officials, they didn't like private capital crossing borders.
• 19:55
  Speaker 1: They thought that was one of the reasons why there
• 19:58
  Speaker 1: was such a collapse in finance in the 1930s. But
• 20:02
  Speaker 1: capital will come when it comes and it will go
• 20:05
  Speaker 1: where it goes. And by the late 50s, early 60s,
• 20:10
  Speaker 1: it was clear that private capital was moving across borders
• 20:14
  Speaker 1: in ever greater amounts and with ever greater speed. And
• 20:18
  Speaker 1: there emerged a capital market in Europe called the Eurodollar market.
• 20:24
  Speaker 1: These were dollars in European banks that were not regulated
• 20:28
  Speaker 1: by either the Europeans or by the U.S. And so
• 20:32
  Speaker 1: what Nixon was talking about was there was a massive
• 20:36
  Speaker 1: amount of capital that was available for speculations. And he
• 20:42
  Speaker 1: attributed this speculation to a lot of the financial crises
• 20:48
  Speaker 1: that occurred in the 60s. The valuation of the British pound,
• 20:53
  Speaker 1: revaluation of the German mark. He called them financial speculators
• 20:58
  Speaker 1: because he was trying to make them the enemy and
• 21:03
  Speaker 1: therefore justify all the other measures he was talking about
• 21:08
  Speaker 1: on August 15th.
• 21:09
  Speaker 2: Well, I have, Jeff and Jillian, I have a confession
• 21:12
  Speaker 2: to make. I've actually visited the previously Soviet-run bank in
• 21:16
  Speaker 2: Paris that apparently gave the name to Eurodollars. So this
• 21:20
  Speaker 2: was a state-run bank from the Soviet Union in Paris
• 21:24
  Speaker 2: on the Haussmann Boulevard. And its telegram name or address
• 21:30
  Speaker 2: was Eurobank. And apparently, a lot of dollars that the
• 21:34
  Speaker 2: Soviet-owned bank had accumulated through exports were held there, sort
• 21:39
  Speaker 2: of away from seizure from the Americans. And that's how
• 21:42
  Speaker 2: Eurodollars became known as Eurodollars. And it's a very geeky thing,
• 21:45
  Speaker 2: but I visited that bank and took a selfie outside
• 21:48
  Speaker 2: it because I thought it was quite a cool little
• 21:49
  Speaker 2: moment of financial history.
• 21:51
  Speaker 1: It was a big thing. It was a big thing
• 21:53
  Speaker 1: in the 50s and 60s. And it was something never
• 21:56
  Speaker 1: contemplated at Bretton Woods.
• 21:58
  Speaker 2: Exactly.
• 21:59
  Speaker 1: Well, I would say that the beginning of the dollar crisis,
• 22:02
  Speaker 1: the very beginning, was actually, I guess it was 1960,
• 22:06
  Speaker 1: very end of the Eisenhower administration. The Secretary of the Treasury,
• 22:11
  Speaker 1: he made a trip to Germany, twisted Germany's arms, first
• 22:15
  Speaker 1: of all, not to redeem dollars into gold, but also
• 22:20
  Speaker 1: to accelerate the repayments of the Marshall Plan, to pay
• 22:25
  Speaker 1: more for the American troops in Germany. And that was
• 22:28
  Speaker 1: the beginning of the recognition that there had to be
• 22:31
  Speaker 1: a big change. And all through the Kennedy administration, there
• 22:36
  Speaker 1: were efforts to control the outflow of dollars from the U.S.
• 22:42
  Speaker 1: And those efforts got more intense during the Johnson administration.
• 22:47
  Speaker 1: And along the way, Great Britain devalued, I can't remember
• 22:52
  Speaker 1: how many times, I think it was twice. And that
• 22:55
  Speaker 1: created shivers through the system because the pound sterling was
• 22:59
  Speaker 1: seen as a major currency and it made others look
• 23:02
  Speaker 1: at the dollar and say, are you next? So by
• 23:05
  Speaker 1: the time Johnson came in, he put controls, he put
• 23:11
  Speaker 1: real controls on outflows of dollars, but it still didn't work.
• 23:16
  Speaker 1: So the crisis just got bigger and bigger. And when
• 23:21
  Speaker 1: Nixon was elected, it was about to burst open.
• 23:24
  Speaker 2: And we are going to find out just how much
• 23:27
  Speaker 2: peril the dollar was in and what kind of difference
• 23:30
  Speaker 2: this newly elected President Nixon was going to make after
• 23:33
  Speaker 2: the break.
• 23:41
  Speaker 5: The future of fixed income investing will continue to blur
• 23:44
  Speaker 5: the lines between public and private markets. Nuveen's credit platform
• 23:48
  Speaker 5: was built to navigate this shifting landscape. Transcription by CastingWords.
• 24:16
  Speaker 3: Well, welcome back. So just to recap, it's 1969. The
• 24:21
  Speaker 3: dollar's position is beginning to look decidedly wobbly. The dollar's
• 24:25
  Speaker 3: reserves piling up in the foreign central banks are already
• 24:29
  Speaker 3: worth two to three times the value of US Federal
• 24:33
  Speaker 3: Reserve's entire gold reserves. So the question is, will the
• 24:38
  Speaker 3: US be able to honour its pledges or is something
• 24:41
  Speaker 3: going to crack?
• 24:42
  Speaker 2: And this was the moment that Richard Nixon stepped onto
• 24:46
  Speaker 2: the stage. He'd won the 1968 election, ending eight years
• 24:50
  Speaker 2: of democratic rule. So, Geoffrey, these days, the Nixon presidency
• 24:55
  Speaker 2: is obviously overshadowed and severely tarnished by the Watergate scandal
• 24:59
  Speaker 2: that came later. But can you tell us a bit
• 25:02
  Speaker 2: more about the man that was inaugurated as president that
• 25:04
  Speaker 2: January in 1969, when Watergate was frankly still just an
• 25:08
  Speaker 2: ugly hotel in Washington? What was Nixon's background? What kind
• 25:12
  Speaker 2: of values did Nixon bring to the White House at
• 25:15
  Speaker 2: the time?
• 25:16
  Speaker 3: And what was he like to work for?
• 25:18
  Speaker 1: Well, the Nixon that actually took office was a respected,
• 25:25
  Speaker 1: experienced public figure. He had been the vice president for
• 25:31
  Speaker 1: President Eisenhower for eight years. He was acknowledged to be
• 25:37
  Speaker 1: very sophisticated strategist when it came to foreign policy and
• 25:43
  Speaker 1: international affairs. He was welcomed because after JFK and the
• 25:50
  Speaker 1: Johnson administrations, there had been so much spending on social
• 25:55
  Speaker 1: programs and a Republican administration coming in was seen as
• 26:02
  Speaker 1: really necessary to pare back these very, very lofty ambitions.
• 26:07
  Speaker 1: many of which didn't really pan out. Nixon also surrounded
• 26:11
  Speaker 1: himself with an extraordinary group of people, particularly in the
• 26:17
  Speaker 1: finance and economic realm. So I think that in 1970,
• 26:23
  Speaker 1: when he took office, there were really high hopes that
• 26:26
  Speaker 1: he was the right person.
• 26:28
  Speaker 2: Do you see any similarities between Richard Nixon and today
• 26:32
  Speaker 2: Donald Trump? They both saw themselves as political outsiders. They
• 26:36
  Speaker 2: despised the East Coast elites. They had these incredible political
• 26:40
  Speaker 2: comebacks after they'd been written off. And obviously, they were
• 26:43
  Speaker 2: both more sort of nationalistic figures, if I can use
• 26:47
  Speaker 2: that phrase, than their democratic predecessors had been.
• 26:51
  Speaker 3: I wondered how long it was going to take you
• 26:52
  Speaker 3: to get to the T word, the Trump word.
• 26:54
  Speaker 2: Yes, exactly.
• 26:54
  Speaker 3: And it's indeed a question I think many people would
• 26:57
  Speaker 3: ask immediately.
• 26:58
  Speaker 1: First, let me talk about the distinctions. Nixon... was very
• 27:03
  Speaker 1: experienced as a public figure.
• 27:07
  Speaker 2: He was a political heavyweight, right?
• 27:09
  Speaker 1: He was a political heavyweight. He had been in the Congress.
• 27:14
  Speaker 1: He had been vice president, as I said. He had
• 27:18
  Speaker 1: traveled the world. He knew a lot of statesmen. And actually,
• 27:23
  Speaker 1: he also had a very deep knowledge of public policy.
• 27:27
  Speaker 1: He was into budgets. He also did things that were
• 27:30
  Speaker 1: not expected of him. For example, the conservative administration set
• 27:35
  Speaker 1: up the Environmental Protection Agency. And so for all those reasons,
• 27:42
  Speaker 1: I think he is very distinguishable from Trump. Where they
• 27:47
  Speaker 1: sound very similar is they're both very revengeful. They are
• 27:56
  Speaker 1: looking for the big, grand gesture. The height of Nixon's
• 28:01
  Speaker 1: fame was really Nixon going to China. Nixon, who had
• 28:07
  Speaker 1: been a highly anti-communist public figure, going to China, that
• 28:12
  Speaker 1: was a big, big move, and Nixon just delighted in
• 28:16
  Speaker 1: shocking the audience. He was not a nationalist in the
• 28:21
  Speaker 1: way that Trump is. In fact, one of the major
• 28:25
  Speaker 1: things about the Nixon shock is that It was designed
• 28:31
  Speaker 1: to make an adjustment in Bretton Woods, but in no
• 28:35
  Speaker 1: way was it designed to wreck Bretton Woods. In fact,
• 28:39
  Speaker 1: Nixon kept emphasizing that he believed in free trade, he
• 28:43
  Speaker 1: believed in free flows of capital, that there had to
• 28:46
  Speaker 1: be an adjustment so that the system could endure. It
• 28:52
  Speaker 1: was no question about the Nixon administration's wanting the spirit
• 28:59
  Speaker 1: of Bretton Woods, the multilateralism, the economic liberalism, they wanted
• 29:04
  Speaker 1: all that to continue. They just said there was an
• 29:07
  Speaker 1: imbalance at the center. Whereas Trump basically has totally disrupted
• 29:16
  Speaker 1: the global economy. And I don't think anybody can say
• 29:20
  Speaker 1: that he has a vision for where it should go
• 29:22
  Speaker 1: other than that the U.S. should be.
• 29:26
  Speaker 1: The big beast in the jungle.
• 29:28
  Speaker 2: But obviously Nixon was quite different from some of his
• 29:31
  Speaker 2: democratic predecessors, right? How quickly did America's allies realize they
• 29:36
  Speaker 2: were dealing with somebody fundamentally different in the White House?
• 29:40
  Speaker 2: Someone who, while maybe not intending to shatter the Bretton
• 29:43
  Speaker 2: Woods system, was at least willing to take radical steps
• 29:46
  Speaker 2: that could put it at risk. When did the rest
• 29:49
  Speaker 2: of the world realize that something was afoot?
• 29:51
  Speaker 1: Well, I think what really disturbed other countries was that
• 29:57
  Speaker 1: the strains on Bretton Woods were getting bigger and bigger.
• 30:03
  Speaker 1: And when the Nixon administration came in, Nixon had a
• 30:07
  Speaker 1: policy of what was called at the time benign neglect.
• 30:12
  Speaker 1: They just didn't want to deal with it. And this
• 30:15
  Speaker 1: infuriated the Europeans and the Japanese because they at least
• 30:19
  Speaker 1: wanted the U.S. to be trying. And so as these
• 30:24
  Speaker 1: strains built up and as Washington basically said to the
• 30:28
  Speaker 1: rest of the world, in fact, The Secretary of the Treasury,
• 30:31
  Speaker 1: John Connolly, said this. It's our dollar, but it's your problem.
• 30:37
  Speaker 1: This really got other countries worried that the U.S. was
• 30:40
  Speaker 1: going to allow the system to collapse and not do
• 30:44
  Speaker 1: anything about it. So when Nixon announced his series of
• 30:49
  Speaker 1: measures in August 1971, it came as a great surprise.
• 30:55
  Speaker 2: But Nixon may have shown benign neglect, as you put it,
• 30:58
  Speaker 2: towards the international monetary system, but he wasn't afraid to
• 31:02
  Speaker 2: take an aggressive stance towards US allies and other foreign
• 31:05
  Speaker 2: policy domains. I mean, there was the Nixon Doctrine, of course.
• 31:09
  Speaker 1: Well, the Nixon Doctrine was very important because what Nixon
• 31:14
  Speaker 1: basically said there, 1969, he was really talking about Vietnam,
• 31:20
  Speaker 1: but he said that the US would no longer supply
• 31:25
  Speaker 1: soldiers and weapons to every country that was fighting communism,
• 31:30
  Speaker 1: that they would only do this for their close allies.
• 31:33
  Speaker 1: But the Nixon doctrine was interpreted as meaning the U.S.
• 31:38
  Speaker 1: cannot shoulder all these burdens. And in fact, that's exactly
• 31:43
  Speaker 1: what was happening in the financial arena, that Nixon was saying,
• 31:49
  Speaker 1: we need more burden sharing, a term we hear a
• 31:53
  Speaker 1: lot about today. We need other countries to expand their
• 31:59
  Speaker 1: defense budgets. We need other countries to contribute more to
• 32:03
  Speaker 1: the World Bank and the IMF. We just couldn't afford
• 32:07
  Speaker 1: to do it all. And this question about the dollar
• 32:11
  Speaker 1: and gold was really a major part of that.
• 32:15
  Speaker 3: Just to recap, you've got a dollar that's looking increasingly overvalued,
• 32:19
  Speaker 3: and you've also got these swelling trade imbalances. where essentially
• 32:24
  Speaker 3: Japan and West Germany are running huge trade surpluses, getting
• 32:28
  Speaker 3: loads of dollars as a result, and the whole system's
• 32:31
  Speaker 3: looking more and more potentially strained, if not unstable. As
• 32:37
  Speaker 3: I understand it, one of the things that Nixon complained
• 32:39
  Speaker 3: a lot about was the idea that Germany and Japan
• 32:43
  Speaker 3: weren't opening up their markets enough, and that was very unfair. Again,
• 32:47
  Speaker 3: that's got echoes of today. I'm curious, from the perspective
• 32:50
  Speaker 3: of Germany and Japan, though, or West Germany as it
• 32:52
  Speaker 3: was then, who did they blame for the system coming
• 32:57
  Speaker 3: under strain?
• 32:58
  Speaker 1: Well, they certainly thought the U.S. was mismanaging its economy.
• 33:04
  Speaker 1: And they felt that there was too much inflation in
• 33:08
  Speaker 1: the U.S. For example, we had a lot of collective
• 33:12
  Speaker 1: bargaining between labor and business, driving up wages and driving
• 33:18
  Speaker 1: up prices. But I think looking at it dispassionately Everybody
• 33:23
  Speaker 1: was to blame. The Germans were mercantilistic. The Japanese were
• 33:27
  Speaker 1: really mercantilistic. They were super, super competitive. I'll give you
• 33:31
  Speaker 1: just one number. Between 1965 and 1970, America's exports of
• 33:35
  Speaker 1: goods increased 100%. Germany's increased 200%. And Japan's increased 400%.
• 33:40
  Speaker 1: So the whole system was.
• 33:51
  Speaker 1: Under great strain, and the US basically was confronting a
• 33:57
  Speaker 1: lack of competitiveness, a lot of the same issues that
• 34:00
  Speaker 1: we have now.
• 34:01
  Speaker 2: Okay, so we're now in a situation where the US
• 34:04
  Speaker 2: economy is huge and dominant, but maybe a little bit
• 34:09
  Speaker 2: less dominant than it had been. The Bundesbank in West Germany,
• 34:13
  Speaker 2: the Bank of Japan in Tokyo, all these foreign central
• 34:17
  Speaker 2: banks are accumulating massive hauls of dollars. But they're becoming
• 34:22
  Speaker 2: quietly more and more concerned about how convertible these dollars
• 34:25
  Speaker 2: will be into gold because the system was just not
• 34:28
  Speaker 2: looking as sustainable. The US gold reserves just weren't what
• 34:32
  Speaker 2: they once were. But of course, everybody wanted to keep
• 34:36
  Speaker 2: the Bretton Woods system alive. I mean, even Nixon, as
• 34:39
  Speaker 2: you said, Jeffrey, didn't actually want to demolish it. But
• 34:42
  Speaker 2: of course, you also have these speculators to contend with.
• 34:46
  Speaker 2: These evil money men, right? Euro dollars sloshing around, capitalizing
• 34:51
  Speaker 2: on the devaluations of the pound, the franc in the 1960s.
• 34:55
  Speaker 2: And by May 1971, things really start coming to a
• 35:01
  Speaker 2: head for the dollar, right? So tell us what happened
• 35:04
  Speaker 2: that month.
• 35:05
  Speaker 1: The dollar started to flow into Germany. There was a
• 35:09
  Speaker 1: sense that Germany was going to have to revalue its currency.
• 35:15
  Speaker 1: And the speculators were betting that it would, and so
• 35:18
  Speaker 1: they wanted to get in early. And massive amounts of
• 35:22
  Speaker 1: dollars flowed into Germany such that it had to basically
• 35:27
  Speaker 1: stop accepting dollars altogether. And it was really clear the U.S.
• 35:32
  Speaker 1: was petrified that now countries were going to come with
• 35:36
  Speaker 1: all these dollars and ask for the gold, and there
• 35:39
  Speaker 1: wasn't enough gold. And so if there had been this
• 35:42
  Speaker 1: gold rush, so to speak, the U.S. would have de
• 35:46
  Speaker 1: facto defaulted on a treaty commitment. And they were not
• 35:50
  Speaker 1: only worried that this would be disastrous for the global
• 35:54
  Speaker 1: financial system, but that it would call into question all
• 35:58
  Speaker 1: other U.S. commitments on the security side. So by the
• 36:02
  Speaker 1: end of May, Nixon and his close advisors really began
• 36:07
  Speaker 1: to think through what they had to do.
• 36:10
  Speaker 2: Apparently in the newspapers at the time, there was fear
• 36:14
  Speaker 2: of the French. So the French had been pulling their
• 36:17
  Speaker 2: physical gold out of the United States for a while
• 36:19
  Speaker 2: and keeping it in Paris. But in the summer of 71,
• 36:24
  Speaker 2: President Pompidou sent a battleship to collect the last remaining
• 36:28
  Speaker 2: French gold that was held at the New York Federal Reserve.
• 36:31
  Speaker 2: And that made headlines. And obviously it was just physically
• 36:33
  Speaker 2: moving gold from one place to the next. It was
• 36:36
  Speaker 2: France's gold. But apparently... was part of this general feeling
• 36:40
  Speaker 2: that things were fraying and maybe about to unravel at
• 36:44
  Speaker 2: that time?
• 36:45
  Speaker 1: Probably so. But countries were holding off for the most
• 36:49
  Speaker 1: part because the Bretton Woods system had been so successful,
• 36:57
  Speaker 1: there was enormous fear about what would happen if the
• 37:01
  Speaker 1: system cracked. And so the central banks were actually... in
• 37:09
  Speaker 1: very close coordination. They were not going to make the
• 37:13
  Speaker 1: decision to take their currencies and exchange it for gold,
• 37:18
  Speaker 1: but they didn't have control over their governments who might
• 37:22
  Speaker 1: do that. They also, I think there was a fear,
• 37:25
  Speaker 1: especially Germany and Japan, and here's where the foreign policy
• 37:29
  Speaker 1: stuff comes in again. The US was their protector. The
• 37:34
  Speaker 1: US was the country that was basically supplying the military protection.
• 37:43
  Speaker 1: And so while on economic and financial terms, they might
• 37:47
  Speaker 1: want to exchange their currency for gold, they were quite
• 37:54
  Speaker 1: uncertain about what the United States reaction would be in
• 37:59
  Speaker 1: the foreign policy and defense arenas. So there was kind
• 38:04
  Speaker 1: of a standstill, except every once in a while, France
• 38:10
  Speaker 1: would come in and want some gold. Belgium would do that.
• 38:13
  Speaker 1: They were not great amounts, but they were enough to
• 38:17
  Speaker 1: really worry the U.S. What if Germany and Japan actually
• 38:22
  Speaker 1: changed their mind? Because U.S. policies were failing. As Gillian said,
• 38:28
  Speaker 1: there was more inflation. There was more unemployment. The collective
• 38:33
  Speaker 1: bargaining system was out of whack. The balance of payments
• 38:37
  Speaker 1: deficit was getting bigger. Robin, I think you alluded to this,
• 38:42
  Speaker 1: that in 1971, for the first time since 1893, the
• 38:49
  Speaker 1: US ran a deficit on the merchandise trade balance. That
• 38:55
  Speaker 1: was a real shocker because up until then, there were
• 38:59
  Speaker 1: sufficient trade surpluses to pay for a lot of America's
• 39:03
  Speaker 1: overseas expenses. But when the balance of trade turned negative,
• 39:09
  Speaker 1: It really appeared that the game was up.
• 39:11
  Speaker 3: So the pressures are building. Things are looking increasingly unsustainable.
• 39:16
  Speaker 3: Something's going to have to give. The question is what?
• 39:19
  Speaker 3: So that's our cliffhanger. And you will find out in
• 39:23
  Speaker 3: the next episode what happens to the dollar, what happens
• 39:26
  Speaker 3: to the Bretton Woods system, and what happens to America's position.
• 39:30
  Speaker 3: in the world as a whole. Part two of the
• 39:33
  Speaker 3: Nixon Shock here on the Story of Money with me,
• 39:36
  Speaker 3: Gillian Tett.
• 39:38
  Speaker 2: And me, Robin Wigglesworth. And Professor Jeffrey Garton, thank you
• 39:41
  Speaker 2: so much for being with us here today. We're really
• 39:45
  Speaker 2: looking forward to having you back on the show next week.
• 39:48
  Speaker 1: I look forward to it too.
• 39:50
  Speaker 3: We'll meet again here next week.