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 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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