As we move from 1970 into the pivotal year of 1971, the economic and political landscape for the Nixon administration became increasingly fraught, forcing it to embrace policy options it had previously disavowed. The ongoing battle against “stagflation” – the perplexing simultaneous rise of inflation and unemployment – coupled with a deteriorating international monetary system, drove President Nixon to consider dramatic, even unprecedented, interventions in the economy. This period was not merely a reaction to crisis; it was a calculated political maneuver aimed squarely at the looming 1972 presidential election, as Nixon and his team believed the poor economy had cost Republicans in the 1970 midterms.
The Intensifying Economic Squeeze and International Pressures
By early 1971, the nation’s economic performance continued to “disappoint many expectations and intentions”. Inflation, a “legacy of the long inflation,” remained a stubborn problem, alongside unemployment, creating an “intractable dilemma” for policymakers. From 1970, the U.S. merchandise trade surplus, which had existed since 1893, began to shrink, signaling a “major negative structural change” in America’s trading position and raising fears of losing basic competitiveness. This was compounded by significant outflows of short-term capital, increasing from $10 billion in 1970 to $30 billion in 1971.
The President, whose “real passions” lay in foreign policy initiatives like arms control and opening to China, initially wished “not to be bothered with international monetary matters,” instructing that such problems “should be farmed out”. However, the escalating economic pressures made this detachment untenable. “Newsweek wrote, ‘If there is not a sustained pickup in the months ahead, the economy could turn out to be Nixon’s Vietnam'”. Nixon himself admitted, “The first months of 1971 were the lowest point of my first term as president. The problems we confronted were so overwhelming and so apparently impervious to anything we could do to change them that it seemed possible I might not even be nominated for reelection in 1972”.
The international monetary system, fixed under Bretton Woods with the dollar pegged to gold at $35 an ounce, was under “great strain”. U.S. officials believed the dollar was “significantly overvalued” at this rate, while the currencies of West Germany and Japan were “undervalued”. Washington wanted the dollar to be weaker relative to the Mark and Yen.
A “long-feared crisis erupted” in early May 1971. On May 3, West German economists called for a revaluation of the Mark, an action permitted under Bretton Woods and economically sound given Germany’s large trade surplus. However, its occurrence “augured a major disruption”. Throughout the first two weeks of May, the Netherlands, France, and Belgium “demanded to exchange their dollars for gold”. While the amounts were small, the U.S. gold reserves were dwindling, creating “additional anxieties of a gold rush and a subsequent forced closing of the U.S. gold window”.
On May 1971, Pierre-Paul Schweitzer, the IMF managing director, advised Treasury Secretary John Connally to devalue the dollar. However, Connally, known for his “unapologetic nationalist” views and aggressive approach, “opposed and urged Japan to revalue” instead. Connally’s blunt approach, epitomized by his statement, “Foreigners are out to screw us… our job is to screw them first”, was a sharp departure from previous administrations’ trade policies focused on international negotiations and alliance strengthening. Paul Volcker, Undersecretary of the Treasury, who was also present, had his own “reservations” about Connally’s confrontational style.
On May 12, New York Senator Jacob Javits publicly suggested Treasury “stop sales of gold altogether” and called for a “world monetary conference to create a new monetary system”. This sparked fears that Javits was a trial balloon for the administration’s intentions, but Washington offered “nothing” and a “general fear arose that this benign neglect could be a precursor to America’s abandoning the dollar–gold link”.
Internal Deliberations and the Path to the Shock
Throughout late May, June, July, and the first half of August, the Nixon administration engaged in a “whirlwind of meetings” to avert financial catastrophe. On the weekend of June 26, 1971, President Nixon and his economic advisors met at Camp David to discuss the deteriorating economy. It was a “fractious meeting,” with diverse views and “no clear path forward”. Nixon, however, made his expectations clear, telling his cabinet, “If you can’t follow the rule, or if you can’t get along with the Administration’s decisions, then get out”.
Nixon’s evolving perspective on the economy became more evident on July 6, 1971, when he stated that “the rules of economics are not working quite the way they used to”. He recognized that the U.S. now faced a situation where “other potential economic powers have the capacity . . . to challenge us on every front”. Using a metaphor of fallen empires, he suggested that the U.S. needed to “adjust” its policies to new realities, implying the need to “take chances with a preemptive stance”.
By July 15, 1971, domestic economic concerns intensified. Following the stunning announcement of Henry Kissinger’s secret trip to China, Nixon found that for every person supporting that foreign policy initiative, “at least twice as many used the opportunity to express concern about our domestic policies and to urge new actions to deal with the problems of unemployment and inflation”. A Harris Poll showed 73% unfavorable view of the administration’s economic performance, and a Gallup Poll indicated half of all Americans backed a wage and price freeze.
On July 23, 1971, Arthur F. Burns, Chairman of the Federal Reserve, stated before the Joint Committee of the U.S. Congress that “the rules of economics are not working quite the way they used to”. This echoed Nixon’s sentiment. At this time, the “deep hostility between the Administration and the chairman of the Fed broke out in the open”. Nixon had previously “grown incensed that Burns was publicly beating the drum for wage and price controls,” a policy Nixon “abhorred”. Nixon’s pressure on Burns, including threats to “take on the Fed publicly”, aimed to force the Fed to expand the money supply and lower interest rates to stimulate employment, a goal Nixon prioritized for the 1972 election.
The financial rumors escalated by July 28, 1971, as The Wall Street Journal reported “rumors in Paris” that the U.S. might abandon its gold convertibility commitment, and “the price of gold soars on global markets”. This was directly linked to the “continuous weakness of the dollar in private markets and the drain on gold”. The next day, July 29, 1971, The Wall Street Journal further reported that the “White House hints” at an “attack on the Federal Reserve Board’s independence,” suggesting a “confrontation of historic proportions”.
On August 4, 1971, President Nixon held a “wide-ranging press conference,” attempting to address the growing economic anxieties. Despite his public opposition to controls, internal discussions were already moving in that direction.
A critical turning point occurred on August 6, 1971, when the Joint Economic Committee, led by Congressman Henry Reuss, issued a report titled “Action Now to Strengthen the U.S. Dollar”. It explicitly “declared that the dollar was overvalued,” urged the IMF to recommend exchange rate changes, and “cited the United States as a country in fundamental disequilibrium”. Crucially, the report “urged the U.S. governor of the IMF (Connally) to ensure that the IMF take on this responsibility” and stated that if the IMF failed, “the United States may have no choice but to take unilateral action to go off gold and establish new dollar parities”. This public call provided the impetus for the administration’s next steps. Allan Meltzer, an economic historian, noted, “If the market needed to be convinced that the dollar would be devalued, the Joint Economic Committee provided that evidence”.
Following this, President Nixon, acting on Connally’s recommendation and Volcker’s long-prepared contingency plan, “agrees to suspend convertibility” of the dollar to gold. Volcker’s plan, “Contingency Planning: Options for the International Monetary Problem,” depicted a “dire picture of a looming international financial crisis” that could erupt “in a matter of weeks”. Connally pushed for a “bold” and “dramatic” approach that would “show people you are aware of the problems” and “have the courage to face up to it” before being “forced to”. He boasted it “will be as big a coup as your China thing”. The plan included a wage and price freeze, closing the gold window, an import tax, and tax reductions. Shultz, while generally a free-trader and opposed to the import surtax, conceded that the overall package would have “maximal political effect”.
The Nixon Shock: August 15, 1971
The crisis escalated dramatically in the week of August 9, with “$4 billion in speculative money fled the United States”. On August 12 and 13 alone, foreign central banks absorbed another $1 billion in short-term dollar inflows, leading the West German mark to a “twenty-year high against the greenback”.
The ultimate decisions were made during the weekend of August 13–15, 1971, at Camp David. Nixon, his top advisors (Connally, Burns, Shultz, McCracken, and Volcker), met in a series of intense, secretive discussions. Nixon’s primary concern remained the political impact and his reelection in 1972. He emphasized focusing on the “big picture” for the American people, not the individual economic elements. Connally, understanding Nixon’s political focus, argued for a “bold approach that contained everything” to create a strong “impact on the American people”.
Arthur Burns, despite his prior advocacy for controls, “disagreed about the decision to close the gold window”. He “warned that [Nixon] would take the blame if the dollar were devalued. ‘Pravda would write that this was a sign of the collapse of capitalism'”. However, Nixon rejected this, stating the decision to close the gold window “turned out to be the best thing that came out of the whole economic program I announced on August 15, 1971”. Nixon was “adamant about not increasing the deficit” in the context of tax breaks, and wanted the wage and price freeze to be “temporary”. He was also preoccupied with how to present the “devaluation” of the dollar positively, fearing it carried a “connotation of failure and humiliation”. He settled on framing it as a defense against “international money speculators”.
On Sunday, August 15, 1971, at 9:00 p.m., President Nixon announced the New Economic Policy (NEP) to the nation and the world in a televised address. He unilaterally “severed America’s long-standing commitment to the dollar–gold link at $35 an ounce,” effectively closing the “gold window” at the U.S. Treasury. The NEP was a comprehensive package designed to combat inflation, reduce unemployment, and strengthen the dollar and U.S. competitiveness. Key components included:
- A ninety-day wage and price freeze.
- A 10 percent surtax on imports.
- Reinstatement of the investment tax credit and elimination of excise taxes on domestically produced cars.
- Reductions in government spending and acceleration of planned income tax reductions.
Nixon emphasized the “sheer scope of the actions” and their interconnectedness, stating, “We are going to move forward to the new prosperity without war as befits a great people—all together, and along a broad front”. He aimed to make it “harder for critics to attack any one part”.
Immediate Aftermath and Long-Term Implications
The public response to the NEP was overwhelmingly positive. On Monday, August 16, the Dow Jones average “rose 32.9 points, representing the largest one-day increase in dollar value to that time”. The administration “encountered enthusiasm bordering on euphoria”. Media, even those previously critical, “unhesitatingly applaud[ed] the boldness”. Economists, including Walter Heller and Robert Triffin, were laudatory. The Democratic opposition, while acknowledging Nixon had “stolen their shoes” by adopting their ideas, were “grateful that the president had taken their ideas”.
In September 1971, Hugh Sidey, after interviewing many participants, stated that the “men around [Nixon] were to be the tacticians in a campaign already conceived in its broader outlines”. This highlights that while the specifics were hammered out at Camp David, the general direction and the need for bold action were already clear to Nixon and his inner circle.
Internationally, the reaction was swift and often hostile. The unilateral nature of Nixon’s actions, particularly the import surcharge and the suspension of gold convertibility without prior consultation, was perceived by many as an “act of raw unilateral power” and a “declaration of economic war”. Foreign officials, central bankers, and media accused the U.S. of “nationalism and protectionism”. Connally, however, “relished the conflicts as a sign the United States was standing up for its interests”.
The Nixon Shock marked a “critical turning point for the modern global economy,” leading to “the most significant structural changes regarding the dollar and the international monetary system between the 1944 Bretton Woods Agreement and today”. The fixed exchange rate system, already under strain, began to unravel. While price controls temporarily suppressed inflation, it “shot back up” when they were lifted. Critics argue that “Nixon’s sustained pressure on Arthur Burns to keep interest rates too low throughout 1972 to help ensure his reelection” exacerbated later inflation. This period set the stage for continued international monetary instability and the eventual transition to a floating exchange rate system.