164. Editorial Note

The distressed foreign exchange markets of May 1971 had calmed in June and July but as August began were roiled again. President Nixon, on August 2, 1971, met several times with Secretary of the Treasury Connally and Office of Management and Budget Director Shultz. (National Archives, Nixon Presidential Materials, White House Central Files, President’s Daily Diary) Haldeman concluded that the result of these meetings was a “huge economic breakthrough,” which on the international side would provide for closing the gold window, floating the dollar, and imposing a 10 percent import tax. (The Haldeman Diaries: Inside the Nixon White House, pages 335-336) At Treasury, these measures had been anticipated in a contingency paper in May, Document 152.

Tapes of the President’s conversations with Connally and Shultz on August 2 corroborate Haldeman’s conclusion and portray Connally as the primary architect. The President met with Shultz and Connally at [Page 454] 9:58 a.m. on August 2. The discussion opened on domestic issues, specifically rail and steel strikes. During that discussion Congressional and private sector support for an incomes policy was raised, and the President was sympathetic, saying it was necessary to convince the public the administration was doing something. Shortly before his departure at 10:28 a.m., Shultz turned the discussion to international monetary policy and told Connally they needed, in the next few days, to discuss Connally’s proposals, which needed careful consideration. Shultz thought that whether or not to do the “big steps” should be “examined carefully.” Following Shultz’ departure Connally stayed on until 11:53 a.m. Haldeman entered late in this segment but was generally silent. Connally outlined forcefully for the President, with great specificity, virtually all the essential elements of the New Economic Policy the President would announce on August 15. On the domestic side Connally set out the wage/price freeze, reinstitution of the investment tax credit, and various expenditure reductions and/or deferrals, with numbers to illustrate exactly what would be the impact on the budget. On the international side he set out suspending convertibility and floating the dollar and the 10 percent import surcharge, which at one point he even portrayed as part of the domestic program, bringing $4 billion annually to the budget. On the international side the only missing element was the 10 percent reduction in foreign assistance expenditures. Connally insisted the domestic and international aspects of the program were linked, with the domestic measures indicating U.S. willingness to take difficult measures to defend the dollar. Connally thought convertibility could not be maintained through the 1972 election and probably would have to be suspended before the end of the year. He urged the President to act soon, to show that he was in charge of events rather than responding to them, and to show that he had the courage to take a position before being forced into it.

As Connally pressed his program, the President warmed to it, despite his reservations about a wage/price freeze and closing the gold window. They discussed alternatives: acting that week, before Congress adjourned on August 4, during the coming week, or during the week after Congress reconvened in September or in November, which would still allow time to lift the wage/price freeze before the election in November 1972. The President was inclined to favor a November/December timeframe, but Connally warned of the increasing danger of leaks if the program were delayed. As Connally prepared to leave, President Nixon was leaning toward acting during August if necessary, possibly as early as Friday of that week. The President said that if consultations abroad were required, Connally should take it up with Kissinger who had channels to Pompidou, Heath, and Brandt. [Page 455] Under no circumstances was the State Department to be consulted as that agency represented foreign governments. Within the administration, Connally thought Peterson and McCracken were on board for the program, but that Shultz and Burns would have to be convinced.

Following Connally’s departure the President reviewed what would become the New Economic Policy with Haldeman. The latter viewed Shultz as a free trader. Nixon said Shultz would oppose the wage/price freeze and thought he was also concerned that during the 1972 Presidential campaign the President would be portrayed as the one who had devalued the dollar.

The tape log reports Connally’s return to the Oval Office at 1:24 p.m. (which was not recorded in the Daily Diary), and when the discussion turned to the New Economic Policy, the President was hesitant to go with the international part of the program. He thought closing the gold window could be held in reserve, but the administration could go ahead with the domestic measures to strengthen the dollar. Connally pressed for a linked domestic and international program. He said that gold would have to be done within 3-4 months and that former Federal Reserve Chairman Martin agreed, but if that measure were undertaken alone it would have no concurrent domestic measures for cover. The President agreed, sent Connally off to bring Shultz along, and asked him to report back after 4 p.m. that day. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Among President Nixon, Secretary Connally, and others, August 2, 1971, 9:58 a.m.-2:05 p.m., Oval Office, Conversation No. 553-6)

The President met again with Connally on August 4 from 2:19 to 2:55 p.m. in the Oval Office. The two discussed several aspects of the program and the President seemed to be on board. Connally, thumping the desk, advised the President not to defend or explain what was happening, but instead simply to acknowledge there were problems that the administration will solve. He advised the President to create the perception that he was as interested in domestic as foreign affairs, where he already enjoyed high marks, and said that when they returned in September and the President took the strong actions, that perception would change overnight. Connally advised against attempting to change the perception during August, but told the President he would have no choice but to do something before bilateral meetings with the Japanese scheduled for September 9 (see Document 75) and before the Bank/Fund meetings in Washington at the end of September. The President said they needed to run against the tide; they needed to turn the tide. Connally used a stampede analogy: do not run in front of the cattle but alongside the cattle and gradually turn them. He said this “dramatic action” would do it.

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Midway through that meeting they were joined by Shultz. The three then discussed several unrelated domestic issues before Nixon outlined for Shultz his discussion with Connally on the new program. The President thought the positives outweighed the negatives and that the day after Congress returned in September would be the best time to announce the program, which would give delegates to the Japanese bilateral meetings and the Bank/Fund meetings time to get instructions. Connally was to work it out. Shultz stated, somewhat in the form of a question, “You have decided to go with this big program, including the gold window and all that? Our task between now and September 8 is to think it through.” The President said he needed to have it by August 23 to have time to reflect on it. He was concerned with leaks and said it was to be just between the three of them; Peterson was not to be told. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Among President Nixon, Secretary Connally, and Budget Director Shultz, August 4, 1971, 2:19-2:55 p.m., Oval Office, Conversation 554-7)

On Monday, August 9, Council of Economic Advisers Chairman McCracken sent a memorandum to President Nixon summarizing the weakening of the dollar against other currencies and the amounts of dollars that had been taken that day. (Ibid., NSC Files, Agency Files, Box 218, Council on International Economic Policy) McCracken thought the August 6 report of the Reuss Subcommittee on International Exchange and Payments of the Joint Economic Committee, which concluded that the dollar was overvalued and that unless exchange rates were realigned the United States would unilaterally have to suspend the dollar’s convertibility to gold and establish new parities, contributed to the flurry of activity that day. The Reuss report is Action Now To Strengthen the U.S. Dollar: Report of the Subcommittee on International Exchange and Payments of the Joint Economic Committee, Congress of the United States, Together with Minority Views (Washington, U.S. Government Printing Office, 1971).

An August 7 Treasury press release regarding the Reuss report stated it did not reflect a “wide body of Congressional opinion” and there were no plans for discussions on exchange rate realignments at the IMF or elsewhere. The press release then noted that the U.S. approach to these matters had recently been discussed by Secretary Connally in Munich (on May 28; see Document 155) and claimed that the administration was constantly reviewing measures to strengthen the balance of payments and encourage a healthy, non-inflationary domestic economy. The press release (and the Subcommittee report) is with paper VG/Uncl. INFO/71-40 in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/Uncl. INFO/71-1-71-.