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C h a p t e r F iv e

The President, Policy Implementation,
and the Short Road to Camp D avid

President Nixon only now enters the analysis to any great extent.
His belated appearance accurately reflects the argument of the
study in general and of this chapter in particular that the major
variables explaining the decision to close the gold window lay not
in the Oval Office but elsewhere. The president, for a variety of
reasons, did no more than rubber-stamp the recommendation of
the decision paper formally presented to him by the Volcker Group
in June 1969. The dominant influences on his administration’s
policy remain the consensus uniting administration officials on the
primacy of national autonomy and the structure and process of the
administration’s policy making.
Moreover, the president’s endorsement of the Volcker Group’s
recommendation accomplished less in terms of establishing actual
U.S. policy than it might at first appear. The group recommended
that the United States adopt what it labeled an approach of “ne­
gotiated multilateral evolution” vis-a-vis the Bretton Woods regime.
But this did not represent a coherent approach to policy; instead,
it reflected the efforts of the Volcker group to meld disparate policy
initiatives. The recommendation’s predominant appeal lay in its
ability to command the support of a variety of officials whose in­
terests were incompletely congruent.
Actual U.S. international monetary policy between 1969 and 1971,
therefore, was set not by presidential decision but to a large extent

The President and Policy Implementation

during the implementation of policy—a process dominated by the
Department of the Treasury. In practice, the Nixon administra­
tion’s policy on the position of the dollar and the survival of the
Bretton Woods regime became one of “muddling through/’ a policy
that, given concurrent developments in international financial mar­
kets and in the U.S. economy, was to prove viable for two years.
When both the international and the domestic economy unraveled
in 1971 , however, muddling through was doomed to a rapid de­
mise, as was the postwar monetary regime itself.
In this chapter I trace the course of U.S. international monetary
policy from the formal presentation of the Volcker Group’s rec­
ommendations in the Oval Office in mid- 1969 to the opening of
the Camp David meeting in mid-1971. That course demonstrates
the illusory nature of presidential choice, confirms the power of
the Department of the Treasury over the making of international
monetary policy, and makes clear the emerging clash between the
demands of regime maintenance and those of domestic economic
autonomy—a clash that would eventually lead the United States to
close the gold window.

T h e V o l c k e r G r o u p in t h e O v a l O f f ic e

On June 23, 1969, the president, his top economic advisers, and
members of the Volcker Group met in the president’s office to
discuss the decision paper that the group had spent several months
preparing. Informing the president that “basic policy decisions in
the international monetary area” were “urgent,” the paper em­
phasized the risks to U.S. freedom of decision making in domestic
economic and foreign security policy inherent in the ongoing con­
troversy over international monetary arrangements.1
That controversy could be interpreted, according to the Volcker
Group, “as a struggle over who should assume the main burden
for eliminating or adjusting to the excessive U.S. deficit and the
form the adjustment should take.” Thus the decision paper pointed
out to the president that the “outcome will have implications for
“‘Basic Options in International Monetary Affairs/* p. 1 .

12 7

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G o l d W in d o w

the constraints that may be applied to our foreign and domestic
policies; as compared to the substantial degree of freedom we have
enjoyed during most of the postwar period.”5 In short, warned the
Volcker Group, the stakes involved in the impending presidential
decision were substantial.
The decision paper confronted the president with a choice among
three courses of action: a unilateral devaluation of the dollar through
a rise in the price of gold, an immediate suspension of the con­
vertibility of the dollar into gold, and what was labeled a “multi­
lateral” approach. Despite President Nixon’s adamant insistence
that such papers contain several different but equally realistic policy
options among which he could exercise a genuine choice, the Volcker
Group’s paper offered the president only the illusion of choice:
the three options consisted of two straw men (devaluation and an
immediate suspension of convertibility) and one real option (the
multilateral approach) designed primarily to enable a bureaucratic
consensus to form. Neither domestic deflation nor constraints on
foreign policy appear as options in the decision paper, although
the paper does observe that “the dominant factor affecting the
evolution of the international monetary system (and our success in
guiding that evolution) will be our ability to contain domestic in­
flationary forces.”3
Convinced that a unilateral dollar devaluation would be vitiated
by the reactions of other countries to what they would perceive as
an unwarranted attempt by the United States to improve its export
performance, the Volcker Group advised the president against an
attempt to resolve obvious problems in the Bretton Woods regime
by announcing a rise, either small or large, in the dollar price of
gold. To strengthen its case against a devaluation, the Volcker
Group reminded the president of the significant domestic “legal
and political obstacles” to a change in the gold price: “legally,
congressional sanction would need to be obtained, and a Republican
administration would be forced to seek approval from an opposi­
tion Congress with liberal economic leadership strongly against a
gold price change. Republican Banking and Currency Committee
leadership (e.g., [William B.] Widnall) shares this view. Extended
*Ibid.t p. 9.
p. 19.

3 Ibid.,


The President and Policy Implementation

emotional debate—even if finally won on the basis of ratifying a
‘fait accompli*—would at the least magnify the market uncertainties
and tend to exacerbate the intuitive association of devaluation by
the man in the street with inflation, broken promises, and monetary
In an equally accurate reflection of its earlier discussion of im­
mediately suspending gold convertibility, the Volcker Group sug­
gested to the president that he also avoid any premature closing
of the gold window. The appearance of force majeure in such a
decision, warned the Volcker Group, would impede the pursuit by
the United States of an improved monetary system which “politi­
cally, while definitely implying a gradually increasing participation
and responsibility for other countries in the management of the
international monetary system commensurate with their growing
economic power . . . would retain for an indefinite period a major
role for the dollar and monetary leadership for the United States.”5
While the United States was in reality seeking “a substantial element
of U.S. control” over the monetary system, its best chance of gaining
that control, in the Volcker Group's opinion, was to avoid the ap­
pearance of seeking it. Closing the gold window was inconsistent,
while a multilateral approach was clearly consonant, with that ob­
jective. As the decision paper observed, “in the interest of facili­
tating international harmony, the appearance of U.S. hegemony
should not be sought. In more concrete terms, this tends to point
to the desirability of working in a context of multilateral consul­
tation and cooperation, so long as this does not, by reducing prog­
ress to the lowest common denominator, frustrate needed change.”6
Thus the Volcker Group recommended to the president that he
adopt its third option, the multilateral approach, adding, however,
that ‘‘either external developments or a negotiating impasse may
at some time, and perhaps soon, justify use of the ‘suspension
option/ ”7 The recommendation of “negotiated multilateral evo­
lution” included six elements. First, “early and sizeable activation
of the Special Drawing Rights scheme.. . . ” Second, “some realign-


p. 34.
p. 2 6 .
Ibid., p. 13.
7 Ibid., p. 47.
5 Ibid.,


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G o l d W in d o w

ment of existing exchange rate parities now biased against the U.S.
. .. ” Third, following the activation of special drawing rights, “ac­
tive and sympathetic exploration of the various techniques for in­
troducing a greater degree of exchange rate flexibility into the
monetary system. . . . ” Fourth, “expansion of IMF quotas........ ”
Fifth, at some stage possibly an exploration of “the feasibility and
desirability of reserve settlement accounts. . . . ” And, finally, “con­
tinued and strong efforts toward removing structural impediments
to U.S. trade and reducing the balance of payments costs of our
defense efforts. . . . ”8

T h e P r e s i d e n t ’s R e s p o n s e

That President Nixon essentially rubber-stamped the Volcker
Group’s policy paper is congruent with precedents established by
his predecessors in office with respect to the conduct of U.S. in­
ternational monetary policy. The president nominally occupies the
position of greatest power within the government on international
monetary policy, as he does on all other issues. In practice, however,
most presidents have not been consistently active in efforts to de­
termine the course of the government’s policy vis-a-vis the inter­
national monetary system.9 They have, nonetheless, sometimes
exerted a not insignificant influence, in accord with the workings
of the law of anticipated reaction. In President Nixon’s case, for
example, his underlings’ awareness of his preferences contributed
to, although it did not wholly determine, their refusal to consider
seriously deflation, foreign-policy constraints, and extended capital
controls as potential, partial remedies to the ills of the Bretton
Woods regime.
Systemic constraints, a dearth of domestic incentives and a po­
tential surfeit of domestic costs, and the dissociation between high
and low foreign-policy issues all play a role in explaining the lack
sIbid., pp. 2 3 -2 5 .
for example, Porter’s observation that organizational “entities established to
address foreign economic policy issues . . . have not succeeded in consistently engaging the President’s interest and attention, largely because they have not been
tied to a regular work flow with which he must deal" (in Porter, “T he President
and Economic Policy,” p. 2 2 4 ).


The President and Policy Implementation

of active presidential involvement in the making of postwar inter­
national monetary policy. Given the structure of the Bretton Woods
regime, the relatively low (or, perhaps more accurately, the latent)
political salience of international monetary policy issues within the
United States—devaluation excepted—and presidential preoccu­
pations with the Cold War, issues related to the postwar monetary
regime did not normally engage the sustained interest of U.S. pres­
idents. President Kennedy’s reputed preoccupation with the dollar
and the monetary regime was an anomaly rather than the norm.
The structure of the Bretton Woods regime itself worked strongly
against the president’s devoting his scarce time to monetary issues.
That structure demanded that the United States conform to a
standard of behavior unique within the system, remaining passive
with respect to the level of its effective exchange rate. Unless the
exchange rate became impossible to sustain, the United States was
not to act affirmatively to affect the dollar’s value in exchange
markets. The passive role that the Bretton Woods regime assigned
to the United States, therefore, rendered presidential attentiveness
to the dollar and the international financial system as a whole rel­
atively inefficient in the absence of a severe, dollar-centered crisis
in the exchange markets.
Because of the structure of the U.S. economy, moreover, pres­
idents could afford to expend relatively little energy on such issues.
Heads of state of European countries had more cause to be familiar
with and concerned about the setting of international monetary
policy. Their countries were proportionately much more heavily
engaged in international trade than was the United States and
national competitiveness in international markets was for them a
much more critical variable in determining aggregate economic
activity. Both competitiveness and macroeconomic health, in turn,
depended in part on the level of the exchange rate and, because
the rate could be altered (at least in theory), it was a powerful policy
tool that heads of European governments could not ignore. The
structure of the U.S. economy made it much easier for American
presidents to neglect Bretton Woods and the dollar.
Nor, structural considerations aside, did most presidents want
even to contemplate changing the dollar’s exchange rate. Given the
U.S. balance-of-payments deficit, any change in the dollar s value
would have logically implied a devaluation of the dollar with respect

I3 I

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G o l d W in d o w

to gold. Most American presidents, Nixon included, considered a
devaluation the equivalent of political suicide. Schlesinger’s fre­
quently cited recollection of President Kennedy’s attitude toward
the dollar is a vivid example of the abhorrence with which American
presidents regarded the prospect of devaluation. Recalls Schlesinger, “Kennedy . . . used to tell his advisers that the two things
which scared him the most were nuclear war and the payments
deficit. Once he half-humorously derided the notion that nuclear
weapons were essential to international prestige. ‘What really mat­
ters/ he said, ‘is the strength of the currency/ ”10
The British government’s aversion to devaluation of the pound
echoes in Schlesinger’s recollection, evoking an instinctive associ­
ation between reserve currency status and world power, and a fear
that devaluation would destroy both simultaneously.11 It is not al­
together clear that either American presidents or British prime
ministers understood why they mentally linked the two—why, that
is, they believed reserve currencies underpinned world power. It
is possible, of course, that they were well aware that the exercise
of power on a global scale was eased by the use of their national
currencies as important elements of other countries’ reserves; that
they understood that the reserve role of their currencies permitted
an expansive foreign policy and the acquisition of corporate em­
pires overseas without an overriding concern for the foreign-ex­
change costs thereby incurred; that they understood that reserve
currency status gave them leverage over states confronting serious
balance-of-payments deficits.
The problem with such an explanation is that there is no per­
suasive evidence that presidents, and perhaps prime ministers as
well, thought about the issue in such sophisticated terms. It is clear
that presidents on the whole were determined not to allow pay­
ments considerations to constrain their grand foreign-policy
schemes.12 It is not clear, however, that they realized it was the
*°Arthur M. Schlesinger, Jr., A Thousand Days: John F. Kennedy in the White House
(Boston: Houghton Mifflin, 1 9 6 5 ), p. 6 5 4 .
"F or perceptive analyses o f the im portance the British attributed to the reserve
role of sterling, see Stephen Blank, “Britain: T he Politics o f Foreign Economic
Policy, the Domestic Economy, and the Problem o f Domestic Expansion,” in Katzenstein, Between Power and Plenty, pp. 8 9 - 1 3 8 , and Strange, International Monetary
Relations, pp. 1 5 3 -5 5 .
1 As amply evidenced by the refusal o f presidents to adjust foreign policy to the
demands of the U.S. payments accounts.


The President and Policy Implementation

reserve role of the dollar that enabled them in part to escape that
Nor is there any evidence that private groups who themselves,
for different reasons, were intent on avoiding presidential recourse
to a dollar devaluation persuaded presidents to link state power in
the international political system to the continuation of the dollar’s
reserve role. As Stephen Krasner has observed, it does not seem
to have occurred to most American elites, including bankers and
financiers, that the dollar’s value might change.13 Interest-group
pressures therefore do not adequately explain presidential oppo­
sition to devaluing the dollar.
The aversion instead may have been instinctive, a product per­
haps of presidents’ believing that devaluation would so damage
their prestige domestically as to undermine seriously their power
to act effectively abroad. The $35 per ounce price of gold had been
established by Congress in 1934 and, as Susan Strange observes,
“much American opinion had come to regard this price as no less
sacrosanct than the flag, the Constitution, Thanksgiving and blue­
berry pie [$ic].”14
Moreover, American presidents had no significant political in­
centives on the domestic front to attend to the intricacies of the
Bretton Woods system, since the role of the United States in the
postwar international monetary system remained an apolitical issue
in American politics for a long time. While particular balance-ofpayments initiatives by the administration on occasion aroused some
political controversy, the monetary system itself for the most part
escaped the scrutiny of the public and Congress. With the exception
of several hearings and reports by a subcommittee of the Joint
Economic Committee, little congressional attention was devoted to
issues concerning the Bretton Woods system itself: few Represent­
atives and Senators were equipped to ask, for example, whether
the Bretton Woods system itself was responsible for the series of
U.S. payments deficits; whether the role of the dollar in the postwar

'3He comments that “until the late 1 9 6 0 s, virtually all sectors of the American
elite regarded both the value o f the dollar and fixed exchange rates as graven in
stone and beyond the tam pering o f mere mortals” (Krasner, US Commercial and
Monetary Policy: Unravelling the Paradox o f External Strength and Internal Weak­
ness,” in Katzenstein, Between Power and Plenty, pp. 6 5 -6 6 ).
14Strange, International Monetary Relations, p. 4 2 .


C l o s in g


G o l d W in d o w

monetary system exerted a deleterious effect on domestic indus­
tries; or whether the obligation of the United States to convert
dollars into gold ought to continue to be U.S. policy. As a result,
presidents could afford, at least from a domestic political perspec­
tive, to skirt issues related to the monetary system.
Trade issues served as the political surrogate for what might
otherwise have become grievances directed at the Bretton Woods
system. When special interests lobbied and Congress legislated in
the sphere of international economics, they targeted trade much
more heavily than they did monetary issues. In part, they were as
constrained as the president was from intervening in international
monetary issues by the structure of the Bretton Woods system and
for a long time they accepted the conventional wisdom that the
dollar’s exchange rate and its relationship to gold were immutable.
Trade issues also proved to be both more susceptible to political
influence and more accessible to intuitive understanding than were
monetary issues. Every industry that either exported or competed
with imported goods knew that reducing foreign trade restrictions
or raising U.S. tariff or nontariff barriers directly influenced their
balance sheets and, consequently, everyone in Congress knew it
too. The history of congressional involvement in the setting of U.S.
tariffs, sometimes on an industry-by-industry basis and sometimes
by legislating the ground rules for the executive branch’s involve­
ment in trade negotiations or adjustment assistance to affected
industries, is extensive.15 Thus, there is a domestic political incen­
tive for presidents to understand and attend to trade issues that
does not apply equally to issues in international monetary policy.
International trade also involves this political incentive because
presidential prestige, at home and abroad, sometimes becomes en­
tangled with the outcome of highly visible international negotia­
tions over tariff levels. The Kennedy Round of negotiations that
concluded in 1967, for example, became a symbol of the president’s
ability to conduct alliance relations while simultaneously promoting
his nation’s economic interests.
>sFor a history and analysis of tariffs and Congress, see E. E. Schattschneider,
Politics, Pressures and the Tariff (Englewood Cliffs, N.J.: Prentice-Hall, 1 9 3 5 ), and
Raymond A. Bauer, Ithiel DeSola Pool, and Lewis Anthony Dexter, American Business
and Public Policy: The Politics of Foreign Trade, 2 d ed. (Chicago: Aldine-Atherton,


The President and Policy Implementation

During his administration, President Nixon would conform quite
closely to this pattern of skewed attention toward trade and away
from money. He had pledged in his 1968 campaign to try to al­
leviate the plight of southern textile workers; as a result, the Jap­
anese for several years after Nixon’s election were the unwilling
beneficiaries of a great deal of presidental attention to the issue of
trade in textiles. When Congress attended to international eco­
nomic issues during Nixon’s first two years in office it focused on
trade, threatening to pass restrictive trade measures such as various
proposals to levy surcharges on imports. As the balance of payments
deteriorated sharply in 1971 , the Subcommittee on International
Exchange and Payments of the Joint Economic Committee, chaired
by Henry S. Reuss, would begin to press for a fundamental change
in basic U.S. international monetary policy; but most congressional
energy continued to be expended on trade rather than monetary
On presidents’ own foreign-policy agendas, moreover, issues re­
lated to the Bretton Woods regime did not rank very highly. Co­
inciding for the most part with a period of relatively high SovietAmerican tensions, the Bretton Woods regime could not compete
with, for example, the dispatch of U.S. Marines to Lebanon in 1958,
the Congo crisis of 1960, the Cuban missile crisis, Vietnam, or the
many other ongoing issues and crises related to the Cold War. In
the competition for presidential attention, the appeal of East-West
issues was overwhelming; Bretton Woods, while not insignificant,
nevertheless achieved nowhere near the salience accorded to tra­
ditional security issues by successive American presidents.
As was true of his predecessors then, President Nixon would
attend to international monetary issues on an episodic basis. He
very plainly did not want to be bothered about the balance of
payments: he did not want domestic economic policy restrained by
the payments deficit nor did he want the deficit to impinge on his
direction of foreign policy.16 The deficit, he thought, could be best
dealt with by forcing the European Community to modify its Com10At an economic policy meeting in his office in November 1 9 7 °* ^or example,
President Nixon reportedly “exploded” when the balance of payments was men­
tioned,” stating “I hear all about the balance o f payments and nobody worries about
8 percent unemployment!” (“Meeting in Oval Office on Economic Policy,’ Novem­
ber 3 0 , 1 9 7 0 , docum ent from the files of William Safire, Chevy Chase, Md.)

0 5

C l o s in g t h e G o l d W i n d o w

mon Agricultural Policy or Japan to open its domestic market to
American products. It is true that very early in his administration,
President Nixon, to the consternation of top Treasury officials,
became aware of press reports of unrest in international financial
arrangements and expressed to his aides his interest in doing
“something short of a summit meeting . . . to show my concern in
that area.”17
But thereafter, until the Camp David meeting in August 1971,
Nixon reverted to the more usual pattern of presidential nonin­
volvement in the conduct of U.S. international monetary policy.
Volcker, whose tenure as under secretary coincided with Nixon’s
presidency, states that “American Presidents . . . have not in my
experience wanted to spend much time on the complexities of
international finance. But the repeated charge to the negotiators
seemed clear, and in a sense ominous: ‘I want a system that doesn’t
have all these crises!’ ”18 The fate of H. R. Haldeman’s and John
Ehrlichman’s efforts to engage Nixon’s interest in the Italian lira
in 1972 is well-known: their attempts evoked the famous, expletivedeleted comment by the president that “I don’t give a . . . about
the lira.” 19 Even before Watergate usurped the president’s atten,7“Report on Cabinet Committee on Economic Policy,” February 1 3 , 1 9 6 9 , p. 7 ,
document from the files of William Safire, Chevy Chase, Md. Charls E. Walker, the
under secretary of the Treasury who was sitting in for Secretary Kennedy at the
meeting, was clearly nervous about the president’s desire, in Walker’s words, not
“to be viewed as a ‘do-nothing’ in international monetary reform ” and about the
president’s expression o f intent to discuss international monetary issues in his March
1 9 6 9 trip to Europe. This, Walker stated in a m em orandum to Kennedy relating
the events that transpired, “shook me a little” (U.S., D epartm ent of the Treasury,
“Memorandum for the Secretary,” February 1 3 , 1 9 6 9 , pp. 2 -3 , document released
by the Department of the T reasury under an FOIA request).
' 8Volcker, “Political Economy o f the Dollar,” p. 2 2 .
,9A larger extract from the Ju n e 2 3 , 1 9 7 2 , tape provides further evidence of
President Nixon’s low-level interest in and understanding o f international monetary
Haldeman (H): Did you get the report that the British floated the pound?
President (P): I don’t think so.
H: They did.
P: T hat’s devaluation?
H: Yeah. [Peter] Flanigan’s got a report on it here.
P: I don't care about it. Nothing we can do about it.
H: You want a run-down?
P: No, I don’t.
H: He argues it shows the wisdom of o u r refusal to consider convertibililty until
we get a new monetary system


The President and Policy Implementation

tion, his advisers had trouble getting Nixon to concentrate on the
fate of the international monetary system. During the 1971 meeting
with French President Georges Pompidou, at which the United
States finally conceded that it would devalue the dollar, Treasury
officials competed, not altogether successfully, for the president’s
time with a televised football game.a
The 1969 “Decision”: A Presidential Rubber Stamp

In this context of presidential preference for avoiding intimate
involvement in issues related to the Bretton Woods regime, it is
understandable that President Nixon chose not to deviate from the
elaborate rationales and policy recommendations of his experts.
His inclination to accept the arguments and options as presented
by the Volcker Group was reinforced, moreover, by the fact that,
of his cabinet-level aides present at the June 1969 meeting, only
one issued a significant dissent. Furthermore, the course of action
recommended fitted nicely into his grand scheme of foreign policy.
Among those assembled at the mid- 1969 meeting to consider
and advise the president on the Volcker Group's recommendations,
only Arthur Burns, then serving as counsellor to the president,
registered significant dissent.21 Burns objected to the report’s re­
jection of an immediate devaluation of the dollar by means of a
rise in the price of gold and he vigorously attempted to persuade
the president of the advantages of the devaluation that the Volcker
Group opposed.
Burns expressed his concerns that the dollar was overvalued and
that the U.S. balance of payments would continue to threaten the
Bretton Woods system unless and until the overvaluation was cor­
rected. Against the consensus prevailing within the Volcker Group,
Burns maintained that other countries would not vitiate a unilateral

Good, I think he’s right. It’s too complicated for me to get into. (Unintelligible)
I understand.
H: Burns expects a 5 *day percent (sic) devaluation against the dollar.
P: Yeah, O.K. fine.
H: Burns is concerned about speculation about the lira.
P: Well, I don’t give a (expletive deleted) about the lira.
(Quoted in Williamson, The Failure of International Monetary Reform, p. 1 7 5 )
aiThe following account of Burns’s dissent is based on various interviews.


C losing th e G old W indow

devaluation by reacting with corresponding devaluations of their
own currencies. He also argued that because a dollar devaluation
was inevitable, it would be to the political advantage of the president
to proceed with the devaluation as rapidly as possible. If President
Nixon sanctioned the move early in his administration, Burns con­
tended, he could attribute its necessity to the policies and practices
of his Democratic predecessors and thereby escape some of the
political fallout that was likely to ensue.
The disparity in the forecasts of foreign reactions to a dollar
devaluation produced by the members of the Volcker Group and
by Burns is not immediately explicable. Burns relied on evidence
and analysis markedly similar to those of other policy makers. The
foreign officials Burns talked with also talked extensively with other
administration officials and Burns was not in 1969 on as intimately
familiar terms with other central bankers as he would be later,
when he assumed the Federal Reserve Board chairmanship. The
history of stubborn resistance by other countries to exchange-rate
changes was accessible to all on equal terms, and the 1968 Bonn
conference had recently provided a vivid reminder of the rigidity
of exchange rates.
The disparity in perspectives had little to do with either evidence
or analysis. It was instead a consequence of an underlying dispute
between Burns and others on a more fundamental point, the nature
of the present and future international monetary systems. Agree­
ment was universal on the goal of a depreciated dollar. The ar­
gument over the optimal way to accomplish depreciation, however,
reflected a latent but basic conflict over the appropriate role of gold
in the future Bretton Woods or any other system, as well as sharply
disparate images of international economic relations writ large.
Both opponents and proponents of a unilateral devaluation agreed
that one of its effects would be to reinforce the role of gold in the
system. They disagreed as to that effect’s desirability, however; and
it was that disagreement which accounted, in part, for divergent
estimates of whether a devaluation would be acceptable to other
countries, despite the absence of any logical linkage between the
two issues. Most members of the Volcker Group wanted gold de­
monetized and believed in the greater utility of the special drawing
right; they also believed that a rise in the gold price in an effort
to realize a dollar devaluation would be self-defeating. Burns, on

The President and Policy Implementation

the other hand, was not particularly enthusiastic about the special
drawing right and still believed in gold rather than a paper stan­
dard; he believed, accordingly, that a unilateral devaluation would
Also underlying the disparity in forecasts of foreign countries’
reactions to a rise in the dollar price of gold was a disagreement
between Burns and most members of the Volcker Group on the
nature of the existing international economic system and on the
nature of states’ participation in that system. As evident in the
debate over the closing of the gold window that occurred at the
Camp David meeting, Burns did not share the image of the inter­
national economic system dominant within the Nixon administra­
tion. Unlike most of his colleagues, who themselves accepted and
attributed to others a nationalist perspective on the involvement of
states in the network of international financial relations, Burns
remained convinced that the spirit of internationalism either equaled
or exceeded in strength the force of nationalism. He was per­
suaded, accordingly, that other states would accept a unilateral
devaluation of the dollar by the United States and, as a result, he
urged President Nixon to raise the price of gold immediately.
The subtleties underlying the dispute over devaluation undoubt­
edly did not impress Nixon as much as his own conviction that
raising the gold price was politically suicidal, to be avoided as long
as possible. With the backing of the vast majority of his advisers,
therefore, the president decided against an immediate effort to
devalue the dollar.
At the same time, the president concurred in the Volcker Group’s
recommendation that a closing of the gold window ought to be
deferred until it appeared that the United States had no alterna­
tive but to do so. His concurrence does not appear to have been
the result of the Volcker Group’s analysis of the impact on the
monetary system of an immediate suspension of convertibility but
instead seems to have been the product of his own larger foreignpolicy design. Intent on gaining Soviet agreement to a strategic
arms limitation treaty, stabilizing and expanding Soviet-American
detente, and opening contacts with the People’s Republic of China,
the president had an interest in securing U.S. alliances, in order
to bolster his negotiating position with the communist nations and
to quell conservative opposition to those moves. To invite conflict


C losing t h e G old W indow

within the alliances by suspending gold convertibility before the
payments situation degenerated seriously and a crisis in the ex­
change markets forced such action did not fit in with the president’s
more broadly conceived plan for American foreign policy.

Against the more certain risk that decisive action involved, a
decision to lay international monetary issues aside—to temporize—
did not threaten important American interests, at least not in the
short term. Even if the deficit were to worsen as predicted, the
conduct of domestic economic policy would not be significantly
affected given the consensus within and outside the administration
that it made little sense to key domestic policy to the course of the
balance of payments. Nor was the course of the balance of payments
likely to influence foreign policy: if the Nixon administration’s for­
eign policy was to be constrained, it was much more likely to be
constrained by public and congressional opposition to the war in
Vietnam than by the balance-of-payments deficit.
Furthermore, European objections to the Bretton Woods regime
were not expected to pose any serious problems. The only fearsome
weapon the Europeans possessed was their de jure right to convert
excess dollars into gold at the U.S. Treasury, but it was apparent
to them that doing so would only transform that right into a de
facto impossibility. When the Nixon administration relaxed capital
controls in April 1969, it became unmistakably clear to the Euro­
peans that conversions would precipitate a U.S. float of the dollar.
The consequences anticipated from suspension powerfully inhib­
ited European resort to gold, and the Nixon administration knew
it. As the Haberler task force ably pointed out, the only viable
European responses, were U.S. deficits to reemerge—either ap­
preciation or inflation—would merely provide some relief to the
American payments situation. Nothing was to be feared from the
European side, therefore, if the president decided to temporize.
That was essentially what the president did when, at the close of
the June 1969 meeting, he rejected the options of devaluation and
an immediate suspension. Instead, he accepted the Volcker Group’s
recommendation that the United States adopt a multipronged ap­
proach to the problems of the dollar and the Bretton Woods system,
an approach that had some small chance of averting their resolution
in a suspension of convertibility. Whether he understood the un­

The President and Policy Implementation

derlying logic of the various components of the policy he sanctioned
at that White House meeting is unclear; the president did not
modify but simply ratified the strategy favored by the majority of
his advisers that had been constructed at the subcabinet level.
It was not until two years later, when he convened his top advisers
at Camp David and decided to close the gold window, that the
president would again assume a role in determining the course of
balance-of-payments strategy and the future of the Bretton Woods
system. By that time, however, the president’s “choice” would again
be largely illusory, decided in advance by a flood of dollars abroad
and by the activity and inactivity of those predominantly subcabinetlevel officials who had overseen international monetary policy in
the interim.

T h e I m p l e m e n t a t io n o f P o lic y
The Triumph of “Muddle Through”

The multilateral approach that the president approved in 1969
was no more than an agglomeration of various policies to which
members of the Volcker Group loaned their support in widely
varying degrees. Which components were actually translated into
effective policy in the 1969-1971 period, therefore, depended, in
the absence of close presidential surveillance, on the distribution
of power over the implementation of policy. And since that power
belonged largely to Treasury, it was Treasury’s preferences rather
than the entire multilateral package that became U.S. policy.
That being said, however, it is still difficult to determine what
U.S. policy was before the decision of August 1971. It is clear that
the desire expressed in the decision paper to activate special drawing rights in sizable amounts was translated into policy; the Treas­
ury did press the Europeans hard on the issue and the first
distribution of special drawing rights occurred in 1970. Much of
Volcker's energy was expended on this one issue, which proved
difficult to consummate because the Europeans were as intent on
denying as the United States was on achieving the extra financing
for the U.S. deficit that the assets would provide. Volcker was also

14 1

C losing t h e G old W indow

preoccupied in 1969 by a dispute between the United States and
South Africa, as Washington opposed Pretoria’s demands regard­
ing gold sales to the International Monetary Fund and foreign
central banks.2
There was apparent agreement within the Volcker Group that
other exchange rates needed revaluation; but whether the United
States actually pursued this element of the multilateral approach
before it suspended convertibility remains, more than a decade
later, a matter of heated controversy. The Johnson administration
had begun to move in this direction by late 1968; at the November
conference in Bonn of Group of Ten members, for example, Sec­
retary Fowler had urged Germany to revalue the mark. But whether
Fowler's successors adhered to the same philosophy is disputed.
One vociferous critic of Nixon administration policy, Coombs,
charges that the administration never approached Japan, by 1970
one of the two major surplus countries, about its exchange rate.
The former Federal Reserve Bank of New York official maintains
that “with a sufficiently strong expression of concern, the Japanese
government might have been induced [to raise the yen’s exchange
rate]. . . . Yet no Federal Reserve representative attending the BIS
meetings in 1970-1971 was ever asked to urge on senior Bank of
Japan officials the importance of revaluing the yen. Nor, as far as
I could ascertain, were Nixon officials using other channels for
negotiation of a yen revaluation. Senior Japanese financial officials
have since confirmed to me that there were no American ap­
proaches to them at the time for a revaluation of the yen.”23
A senior Treasury official rebuts Coombs’s allegation as “incon­
ceivable,” pointing out that Coombs also complains that he was
never privy to Nixon administration policy discussions. He “would
have agreed,” the Treasury official admits, “that if you could have
gotten, at that stage of the game, a small number of countries to
substantially revalue . . . their currencies, you could have avoided
the trauma of devaluation of the dollar. The question really became
one of possibilities: how much leverage did the United States really
have to force revaluation of other currencies? And I think the Fed
” For a discussion o f the South African gold dispute, see Solomon, The International
Monetary System, pp. 1 2 5 - 2 6 .
*3Coombs, The Arena of International Finance, pp.

14 2


The President and Policy Implementation

and . . . Coombs felt . . . that the Treasury was not trying hard
enough, and if it had only tried a little harder, it could have gotten
the job done, and we would have saved ourselves from all this
chaos.”24 While clearly believing that the resistance to revaluation
was too strong to have been susceptible to persuasion even by
Coombs, this Treasury official did not directly participate in dis­
cussions of exchange rates with representatives of other countries.
Other U.S. government officials did participate, however, and
testify they made it clear that revaluations were essential. During
meetings between U.S. and Japanese cabinet members in which he
participated, an official of the Council of Economic Advisers states,
the Japanese were told “in no uncertain terms” that their exchange
rate had to be changed. This council official says he does not “have
any sympathy for the idea that if they’d only known they would
have cooperated. There wasn’t the slightest evidence of that.”25
Moreover, Philip H. Trezise, the State Department’s assistant sec­
retary for economic affairs, who frequently conducted negotiations
with the Japanese, actually stated publicly in May 1971 that he
thought the yen was undervalued.26At least one official who himself
urged exchange rate changes also believes, however, that the United
States did not seriously pressure the Japanese to revalue the yen.27
Neither Coombs’s charges nor the various rebuttals are precisely
accurate, although both contain fragments of the truth. Foreign
officials might well have been justifiably confused as to the desires
of the U.S. government regarding exchange-rate changes in this
period, although some clearly thought that revaluations were a goal
of U.S. policy.28 But many voices spoke in the name of the U.S.
government and those voices did not express a consistent, clearcut policy with regard to exchange-rate changes. Treasury, for
example, rebuked Trezise’s public call for a revaluation of the yen.29
*6New York Times, May 2 6 , 1 9 7 1 .
a8By late 1 9 6 9 some European countries, for example, began to ask that swap
agreements carry a guarantee of exchange-rate value in case of a revaluation as
well as a devaluation (Minutes of the FOMC, November 2 5 , 1 9 6 9 )*
S9In May 1 9 7 1 then Secretary o f the Treasury John B. Connally also criticized
the upward float of the deutsche mark (see Odell’s discussion in U S. International
Monetary Policy, chap. 4 ).


Closing t h e G old W indow

While this might reasonably be attributed to bureaucratic pique or
concern for market stability, it instead appears to be consistent with
actual policy, at least as Volcker conducted it.
“Appreciation of other currencies,” explained Volcker later,
“never seemed (to me at least) to provide an answer. It was ex­
pecting too much to think then, before inflationary concerns had
become so great a consideration in exchange rate policy, that in­
dividual countries would voluntarily take the political and economic
risks of seeming to write off exports, jobs, and profits so long as
they had another alternative.”30 Volcker also apparently adhered
to the view that whatever exchange-rate changes might have re­
sulted from American pressure would not have been sufficient to
restore global payments equilibrium; but they might have been
sufficient to cause the collapse of the entire Bretton Woods system.
In this view, any relaxation of exchange-rate rigidity would have
created an incentive for holders of dollars to convert their stocks
into currencies that they saw as likely candidates for revaluation.
As the discarded dollars began to pile up in foreign central banks,
pressures to convert those dollars into gold at the U.S. Treasury
would have increased, compelling the United States to close the
gold window either immediately or when its gold stock had been
depleted. The revaluations that some members of the U.S. gov­
ernment were urging as a solution to the problems of the Bretton
Woods system appeared instead to the under secretary to threaten
its demise.
Whether the option of persuading other countries to revalue
their rates actually was adopted as U.S. policy is, therefore, a more
complex question than it appears at first glance. The answer de­
pends, in part, on which official of which department the observer
perceives to have represented the U.S. government. Volcker, as a
representative of the most influential department in U.S. inter­
national monetary policy and as the country's chief negotiator
abroad, wielded an authority at least equal to that of cabinet officials
carrying different messages. To complicate matters further, many
subcabinet-level officials in a variety of agencies who had contact
with their counterparts in foreign governments plainly thought that
U.S. policy was to encourage other countries to revalue in order

“Political Economy o f the Dollar,” p.

14 4


The President and Policy Implementation

to alleviate pressure on the U.S. balance of payments. To observers
in finance ministries and central banks abroad, American policy
undoubtedly appeared ambivalent and thus justified either reval­
uing an exchange rate or maintaining a parity unchanged.
Nor was systemic reform in practice a clear priority of the U.S.
government, reflecting Treasury’s fear that serious discussions of
change could cause the collapse of the existing system without
providing any reliable replacement. For its part, the Volcker Group
apparently never reached a conclusion as to which system of limited
flexibility, if any, was most desirable. The Treasury did undertake
bilateral discussions with officials of the British Treasury on the
technical feasibility of particular limited flexibility systems.31 Volcker
did inform Canadian authorities that the U.S. government in­
tended to study proposals for such systems to determine their fea­
sibility.32 Furthermore, in the person of William Dale the United
States participated in a secret study by the executive directors of
the International Monetary Fund that examined limited flexibility
in the context of a larger study of the exchange-rate mechanism.33
Members of the Volcker Group and other U.S. officials maintain,
however, that there was no serious U.S. commitment to reform the
existing exchange-rate mechanism. Volcker, said one official of the
Council of Economic Advisers, “really wanted no part of any re­
form, and he just played along . .. but he never had his heart in
it.”34 In the opinion of a Federal Reserve official, Volcker’s attitude
toward reform was “schizophrenic. . . . He could never quite make
up his mind what he thought about it until very late in the game.
.. . Some days he would lean one way and some days another.. . . ”
As a consequence, “the government never really put their heart
into [achieving systemic reform]. . .. They didn’t take it half as
seriously as they would have had to ... to prevent the situation
that we got into in 1971. . . . ”35
31 Interview.

3*“Memorandum o f Conversation,” p. 1 3 .
33T he resulting International Monetary Fund study w published in 1 9 7 0 (see
“The Role of Exchange Rates in the Adjustment o f International Payments, in J.
Keith Horsefield, ed., The International Monetary Fund, 1945 - 1 9^5: Twenty Years of
International Monetary Cooperation, 3 vols. [Washington D.C.: International Monetary
Fund, 1 9 6 9 ], vol. 3 : Documents).


C losing th e G old W indow

Indeed, it apparently was the case that systemic reform did not
receive high-priority attention from the U.S. Treasury between
1969 and 1971. As a State Department official commented wryly,
“during those years when we had those marvelously interesting
discussions of how to reform the system . . . the fact is that the
action that was taken always went along the traditional line. . . . ”30
“The hope was,” a Treasury official confirmed, “that the system
could be saved by people accumulating dollars and that the balance
of payments of other countries would be reduced, always on the
assumption that United States domestic economic policy would be
tolerable. .. . The implicit assumption or hope was that we could
muddle through.”37
Volcker’s enthusiasm for systemic reform in the direction of more
flexible exchange rates proved, in practice, to be limited. He ap­
peared to doubt that such reform would resolve the dollar’s prob­
lems and to believe that too much experimentation in that direction
might precipitate crises. His outlook on the U.S. balance of pay­
ments and the monetary system as of 1969 seemed to be that the
situation was difficult but perhaps not untenable. If both domestic
and international economic trends moved in a favorable direction,
it might prove possible to sustain both the dollar and the system
via reliance on traditional methods. Reliance on options other than
the traditional ones, Volcker feared, would precipitate a run on
the dollar and force the closing of the gold window, which he, like
other members of the Volcker Group, regarded with some
The Treasury also gave apparent credence to the arguments of
those who contended that the contemplated reforms would not, in
fact, prove acceptable to other governments or workable even if
implemented. Most governments were demonstrably antipathetic
to more flexible rates; most would not accept a crawling peg system
in which the dollar did not flex; and the exchange-rate changes
envisioned in the limited flexibility proposals would not suffice to
alleviate the U.S. balance-of-payments deficit. Combined with the

S Interview.
3®Based on various interviews.
14 6

The President and Policy Implementation

fear that vigorous pursuit of any reform initiatives would itself
destabilize exchange markets, these arguments apparently per­
suaded the Treasury to expend relatively little energy on the issue
of systemic reform. “Muddle through” remained dominant.
The End of “Muddle Through”

The Treasury, the U.S. government, and the Bretton Woods
system were able to muddle through successfully for two years as,
contrary to the expectations of the Haberler report, the Nixon
administration’s first years in office turned out to be placid ones
for the dollar. Exchange markets focused on the mark and the
franc, which the 1968 Bonn conference had indicated were likely
candidates for parity changes. The stringent monetary policy pur­
sued by the Federal Reserve to combat domestic inflation raised
interest rates to levels that attracted large inflows of Eurodollars,
draining foreign central banks of their dollar reserves, relieving
pressures on the U.S. gold stock, and raising European interest
rates. In contrast to their earlier complaints about excess dollars,
the Europeans began to complain about the dollar drain and the
effects of the Federal Reserve’s tight money policy on their interest
rates. In response to these complaints, and also in an attempt to
equalize the competitive positions of domestic banks with foreign
branches and those without, the Federal Reserve imposed marginal
reserve requirements on Eurodollar deposits, thus raising the cost
of borrowing abroad.
In 1970, the tight money policy began to have its intended effect.
The domestic economy began to slide into recession, boosting the
current account position of the United States but by a perceptibly
smaller amount than would have prevailed in the absence of an
overvalued dollar. Despite the strains its actions would be likely to
impose on the Bretton Woods regime but in accord with its long­
standing tradition of awarding precedence to domestic economic
policy, the Federal Reserve began to relax monetary policy as the
pace of the domestic economy slowed. Interest rates in the United
States began to decline and, by early 1971, the flows of funds that
had concerned the Europeans in 1969 reversed direction. Massive
outflows of funds from the United States moved both the Treasury
and the Federal Reserve to distinctly marginal efforts to stem the


C losing t h e G old W indow

tide.39 The probable effects of domestic recovery and capital out­
flows on the U.S. balance of payments led market participants to
anticipate a change in the dollar’s value. By spring 1971 , outflows
of funds from the United States began to appear not only as a
response to interest-rate differentials but also as speculation on a
dollar devaluation. Currency flows expanded massively early in
May, as four West German research institutes recommended a
revaluation of the deutsche mark. After absorbing $ 1 billion in one
hour on May 5 , Germany closed its exchange markets. Several days
later it let the mark float; the Netherlands followed; and Austria
and Switzerland revalued. The current-account position of the
United States weakened and in May the United States announced
trade figures for April demonstrating that, as Solomon put it,
the “now small export surplus had given way to an import
surplus. . . .”4
Sometime in the spring of 1971 , intense contingency planning
began within the U.S. government in anticipation of a suspension.
Unknown to most Volcker Group members, their earlier deliber­
ations about the desirability of a suspension in the event of a crisis
were being translated into reality. Volcker and John R. Petty, the
Treasury’s assistant secretary for international affairs, began to
assemble a “game plan” for the suspension.41 In their planning,
Volcker and Petty considered whether foreign governments ought
to be alerted in advance of the suspension, whether Volcker ought
to be on his way to Europe as the suspension was being announced,
whether the Group of Ten would be an appropriate forum in which
to discuss exchange-rate changes after the suspension, and whether
a three-day weekend should be the target date for the
Petty and Volcker were also convinced that a domestic anti-in­
flationary program had to accompany the suspension, to persuade
foreign governments that they were not to bear alone the full bur­
den of correcting the dollar’s overvaluation. They recommended
wage and price controls and an across-the-board budget cut, which
S T he Treasury issued several billion dollars’ worth of securities abroad to absorb
dollars that otherwise might have ended up in foreign central banks and the Federal
Reserve decreased the reserve-free base o f member banks.
4°Solomon, The International Monetary System, p. 1 8 1 .
41 Interview.
14 8

The President and Policy Implementation

then Secretary of the Treasury John B. Connally pressed on the
president and George P. Shultz, director of the Office of Manage­
ment and Budget, and Paul McCracken opposed. Sometime in July
the president accepted Connally’s recommendation on the domestic
economy and possibly on the gold window as well. It was in midJuly, one official of the Council of Economic Advisers recalls, that
Volcker confided to him that “ ‘we were coming to the end of the
road [vis-a-vis gold convertibility]/ He [Volcker] said, ‘we can get
through this weekend. I think we can get through next weekend.
We might even get through the next. But not much further.’ ”4“
In August, pressure on the dollar intensified. Belgium and the
Netherlands demanded that the United States pay off their swap
obligations, pushing the United States uncomfortably close to the
exhaustion of its automatic borrowing rights in the International
Monetary Fund. Britain and France converted $800 million into
gold at the U.S. Treasury to repay their drawings on the Fund and
the U.S. gold stock dropped below the crucial $10 billion mark.43
On August 6 , 1971, Reuss’s Subcommittee on International Ex­
change and Payments of the Joint Economic Committee issued a
report urging that the United States suspend gold payments if it
could not otherwise obtain a depreciation of the dollar.44On August
13, the British government requested that the United States guar­
antee a portion of its dollar holdings at the prevailing sterlingdollar parity.45 Secretary Connally was called back from his Texas
vacation and a meeting of the president and his top advisers was
convened at Camp David to decide whether the time had come for
the U.S. government to close the gold window. “Muddle through”
was at an end.
42 Interview.
43Susan Strange, “T he Dollar Crisis, 1 9 7 1 ,” International Affairs, 4 8 (April 1 9 7 2 ),
p. 2 0 3 ; the Treasury reported on July 2 6 , 1 9 7 1 , that its gold stock stood at $ 1 0 ,5 0 7
billion, but that included priority claims against that stock by the International
Monetary Fund that reduced its value to $ 9 ,9 7 9 billion (New York Times, July 2 7 ,
Action Now to Strengthen the U.S. Dollar.
45Exactly what and how much the British requested remains a matter of some
controversy (see, for example, Solomon, The International Monetary System, p. 1 8 5 ).

14 9