Published by EH.Net (May 2022).

Jeffrey E. Garten. *Three Days at Camp David: How a Secret Meeting in 1971
Transformed the Global Economy*. New York: Harper, 2021. 435 pp. $29.99,
ISBN 978-0-06-288767-2 (cloth).

Reviewed for EH.NET <http://eh.net/> by Joseph M. Santos, Professor of
Economics, South Dakota State University.



On July 1, 1944, more than 700 delegates, including John Maynard Keynes
(British delegation) and Harry Dexter White (U.S delegation), from 44
nations, arrived at the Mount Washington Hotel in Bretton Woods, New
Hampshire, to redesign an international monetary system left grossly
imbalanced by the ravages of the Second World War. The outcome of the
conference and subsequent deliberations was a U.S.-led elaborate plan to
reorder the values of foreign exchange and the patterns of international
trade, into a new international financial order that would come to be known
as the Bretton Woods System (Steil 2013). The system included the newly
established International Monetary Fund (IMF) and fixed exchange-rate
parities, adjustable with IMF authorization as structural current-account
imbalances dictated. In principle, the system afforded foreign-exchange
stability—prohibiting competitive, beggar-thy-neighbor devaluations—and
independent national monetary policies—reducing the international
transmission of business cycles.

Roughly a quarter-century later, on August 13, 1971, President Richard M.
Nixon and 15 advisors, including Arthur F. Burns (Chair of the Federal
Reserve), John B. Connally (Secretary of the U.S. Treasury), and Paul A.
Volcker (Undersecretary of the U.S. Treasury for International Monetary
Affairs) arrived at Camp David, the presidential retreat in Catoctin
Mountain Park, Maryland, to craft in secret an economic policy to reverse a
relatively high rate of inflation, a current-account deficit, a
longstanding decline in the U.S. monetary gold stock, and a recent, sharp
rise in external dollar liabilities held by central banks. At the meeting’s
end, on August 15, 1971, in a televised, Sunday-evening address to the
nation, President Nixon announced, as part of his New Economic Policy, “I
have directed Secretary Connally to suspend temporarily the convertibility
of the dollar into gold…” (Garten 2021, 231). Temporary proved permanent:
by March 1973, the dollar-gold link was decoupled completely; the
floating-exchange rate system we know today stood firmly in place,
signaling the unambiguous end to the Bretton Woods System.

In *Three Days at Camp David*, Jeffrey E. Garten, dean emeritus of the Yale
School of Management, takes readers inside the presidential retreat on that
fateful weekend, when the principals and a handful of staff members crafted
the New Economic Policy, a package of wage and price controls, a 10 percent
tariff increase, a 10 percent investment tax credit (and spending cuts to
render the credit revenue neutral), and, most notably, the closure of the
gold window. To Garten, the events of that weekend and the New Economic
Policy it shaped reflected a larger shift in the dollar’s role—and,
correspondingly, the U.S.’s role—in the world economy. The U.S. would no
longer assume and jockey for the mantle of global economic leadership as
the nation had done since the Second World War, a course change driven as
much by pragmatism as anything else: by the early 1970s, economic
challenges at home left little policy space or political appetite to
address fragilities inherent in the Bretton Woods System.

This is to say, the demise of Bretton Woods was, in fact, broadly
anticipated. The IMF Articles of Agreement had established the fund within
the Bretton Woods System to intermediate financial flows across the
balances of payments of member nations. Through the IMF, a nation with a
temporary current-account deficit could borrow from a nation with a
temporary current-account surplus. In this way, a nation that maintained a
deficit [surplus] was not required to balance its current account by
contracting [expanding] domestic economic activity. Absent this IMF
intermediation, at best a contraction in one nation would be met with a
corresponding expansion in another; at worst, the nation that maintained a
current-account surplus would choose not to expand (over concern for
inflation, for example), leading to a contraction of global economic
activity. Meanwhile, according to the Articles, a nation could potentially
correct a structural, or permanent, current-account imbalance by devaluing
or revaluing its exchange rate accordingly. In any case, the Articles did
not practically distinguish between temporary and permanent imbalances; nor
did they “make clear what should happen when the principal reserve currency
country—the United States—ran persistent trade or current account deficits”
(Meltzer 2003, 584). Ultimately, these ambiguities would prove too much for
the system to bear. It lasted twenty-five years; though current-account
convertibility prevailed for only nine years, from 1959-67, when each
member nation freely bought or sold foreign exchange to maintain the
nation’s exchange-rate parity to the U.S. dollar within
one-percentage-point margins; and the U.S. Treasury freely bought or sold
gold—through the so-called gold window—to maintain the value of the U.S.
dollar at $35 per ounce.

During this convertibility phase, interrelated problems challenged the
system: balance-of-payments adjustments relied, to some extent, on the
discretionary macroeconomic policies of debtor and creditor nations;
meanwhile, either the supply of monetary gold constrained systemwide
liquidity or it was supplied by U.S. balance-of-payments deficits, which,
if large enough, strained confidence in the system—and, specifically, the
U.S.—to maintain convertibility (Bordo 1993, 49-74). The Triffin dilemma
implied the “postwar monetary arrangement contained the seeds of its own
demise” (Garten 2021, 7). In the latter half of the 1960s, the scarcity of
monetary gold and global inflationary pressures spurred by U.S.
expansionary monetary policies conspired to compromise the system, which
had effectively defaulted to a dollar standard, though threats posed by
nations intending to exchange dollar liabilities for U.S. monetary gold
loomed. British and French plans to convert their dollars into gold spurred
the weekend meeting at Camp David.

Though Garten provides readers a broad overview of the Bretton Woods System
and walks them through the events leading to the weekend meeting and its
aftermath, the meeting is his primary focus. In a series of chapters Garten
groups under the heading, “The Cast,” the author offers insightful and
colorful biographies of the major attendees: namely, Richard M. Nixon, John
B. Connally, Paul A. Volcker, Arthur F. Burns, George P. Schultz (Director
of the Office of Management and Budget), and Peter G. Peterson (Assistant
to the President for International Economic Policy). He also briefly
introduces “Other Players,” including Paul W. McCracken (Chairman of the
Council of Economic Advisors) and, though absent from the weekend meeting,
Henry A. Kissinger (National Security Advisor). Then, in a series of
chapters Garten groups under the heading “The Weekend,” he artfully weaves
these personalities, and the often-tense negotiations between them and the
president, into the early sausage making of Nixon’s New Economic Policy. In
doing so, Garten offers readers—including monetary economists who imagine
themselves well versed in the demise of Bretton Woods—a unique perspective
and insight on a pivotal decision in the history of this monetary order.

We learn that John Connally, a ruthless political pragmatist and
nationalist whom Nixon respected, believed U.S. allies had long taken
advantage of the nation. In his view, international arrangements—the
Bretton Woods System or otherwise—constrained U.S. progress. Governed by
the self-described preference, “I want to screw the foreigners before they
screw us,” Connally was at best indifferent to preserving the Bretton Woods
System; moreover, using tariffs to protect domestic production did not
offend him (Garten 2021, 77). Paul Volcker was the model career civil
servant, a deep-in-the-weeds policy wonk of impeccable integrity who wrote
long, dense white papers. He reasoned that the best interests of the U.S.
were served by a robust international financial system; and he once
described devaluation of the dollar—and, thus, decoupling its value from
gold—as “anathema to me,” in part because, in his view, the value of money
and, reciprocally, price stability required the anchor that gold provided
(Garten 2001, 83). Arthur Burns, an eminent academic economist who served
the National Bureau of Economic Research as research director, president,
and honorary chairman, mattered to Nixon, if only because dissension from
the chair of the Federal Reserve would compromise the message the president
sought to convey regarding his New Economic Policy. As Garten tells it, as
a monetary policymaker, Burns was at best complicated. He tended to view
inflation as a byproduct of imperfectly competitive labor markets; thus,
wage and price controls, not monetary contractions, were, in his view,
potential instruments of price stability. Moreover, he seemed to cave to
Nixon, a president who famously remarked, “When we get through, this Fed
won’t be independent if it’s the only thing I do” (Garten 2021, 107).

Meanwhile, George Schultz, who held a PhD in industrial economics from MIT
and had served as dean of the University of Chicago Graduate School of
Business, was a “fierce conservative partisan,” a monetarist with a
deregulatory, free-market mindset (Garten 2021, 112). Schultz favored
replacing Bretton Woods with freely floating exchange rates between fiat
currencies. Not surprisingly, he vehemently opposed wage and price
controls. Finally, Peter Peterson was a free trader who, upon witnessing
the seemingly organized world market power Germany and Japan exercised at
great cost to the U.S., came to favor U.S. industrial policies that could
enhance U.S. productivity with targeted investments in technology, the sort
of investments that tax credits might induce, for example.

These and other personalities in the rooms—and cabins—where it happened
during those *Three Days at Camp David* forged, in part, President Nixon’s
New Economic Policy of wage and price controls, tariffs, tax credits, and a
new monetary order. No doubt, larger international macroeconomic imbalances
were in place well before the meeting, a fact Garten rightly acknowledges.
Nevertheless, Garten offers a novel and compelling lens through which to
view an executive decision that unquestionably hastened the pace of
dramatic change in the global international financial order. Additionally,
he persuasively argues his larger point that U.S. international
macroeconomic policy in the early 1970s reflected a broader, intentional
move away from a position of global leadership that the U.S. presumed it
had occupied since the Second World War, a move Garten says the U.S. finds
itself scrutinizing once again.

References:

Bordo, Michael D. (1993) “The Bretton Woods International Monetary System:
A Historical Overview.” In *A Retrospective on the Bretton Woods System:
Lessons for International Monetary Reform*, edited by Michael D. Bordo and
Barry Eichengreen, 3-98. Chicago: University of Chicago Press.

Meltzer, Allan H.  (2003) *A History of the Federal Reserve, Volume 1:
1913–1951* Chicago: University of Chicago Press.

Steil, Benn. (2013) *The Battle of Bretton Woods: John Maynard Keynes,
Harry Dexter White, and the Making of a New World Order*. Princeton:
Princeton University Press.



Joseph M. Santos is Professor of Economics in the Ness School of Management
and Economics at South Dakota State University, where he teaches and writes
on macroeconomics, banking, and financial markets, and where he directs the
Dykhouse Program in Money, Banking, and Regulation.

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