The Nixon Shock

The US had profited enormously from the Bretton Woods system, as the American currency became the linchpin of the international monetary system, where major commodities, such as oil, and trade in currencies were conducted in dollars�

By the end of the 1960s, the costs of the Vietnam War, the widening of the US balance of payment deficits, and the decrease in US gold reserves threatened the Bretton Woods stability� In particular, as soon as the increasing American balance of payment deficits signaled that the dollar could be overvalued, the gold reserves of the Federal Reserve shrunk rapidly, because dollar holders preferred to convert dollars to gold, at the guaranteed price of 35 dollars an ounce, instead of running the risk of a dollar devaluation�⁴

The increasing US difficulties in maintaining parity between the dollar and gold seemed to render material the paradox elaborated by the Belgian economist Robert Triffin in 1960, which pointed out that the use of the dollar as a global reserve currency would soon create imbalances in the American balance of payments, as the number of US dollars in circulation exceeded the amount of gold that was backing them�

On the other side of the Atlantic, the Western European countries were at the peak of their postwar economic growth� They were not involved in

3 Harold, J�, Rambouillet, 15 novembre 1975. La globalizzazione dell’economia, Bologna, Il Mulino, 1999; Basosi, D�, “The US, Western Europe and a changing monetary system 1969-1979”, p� 99-116�

4 Zimmermann, H�, “Unraveling the ties that really bind”, p� 128-9�

expensive conflicts like the Vietnam War, they were benefiting from the stability of the international monetary system, and a large burden of their defense costs was financed by their strongest ally, the US� Since the end of the 1960s, the EC member countries have been particularly interested in strengthening their monetary cooperation as a way of preserving stability, especially after the monetary crisis of 1968, which forced the French franc to devalue and the deutschmark to revaluate� Maintaining the fixed exchange rate system alive was considered a necessity, in order to safeguard the Common Market and its achievements, in particular its main common policy, the Common Agricultural Policy (CAP), which benefited France in particular�⁵

So, the debate on the stability of the international monetary system deeply affected US–Western European relations� From the European point of view, the US had abused its exorbitant privilege of having the dollar as the world’s main currency� One of the favorite themes of Charles de Gaulle’s challenge to the US was the overrated role of the dollar as a legacy of the Bretton Woods system and his decision in 1965 to convert 600 million dollars into gold�⁶

Charles de Gaulle’s resignation as French President in April 1969 raised new expectations among the advocates of European integration�

His successor, Georges Pompidou, decided to relaunch the European integration project and to convene a conference at the Hague in December 1969, with the aim to solve the thorny issue of the UK’s entry into the European Community�⁷

Pompidou summarized the objectives of the conference in the so-called

“triptych”: “completion, deepening and enlargement” of the integration process� Concerning deepening, one of the most important results of the Hague Conference was the agreement to set up the EMU step by step, a proposal put forward by the German Chancellor Willy Brandt, which was enthusiastically accepted also by the French President Georges Pompidou�⁸ At the Hague, the Six decided to work out for October 1970 a plan for the setting up of the EMU, as a means of deepening the

5 Basosi, D�, “The US, Western Europe and a changing monetary system”, p� 100�

6 Bussière, E�, “France, European monetary cooperation and the international monetary system crisis 1969-1973”, p� 171-88: Vaïsse, M�, La grandeur. Politique étrangère du général de Gaulle 1958-1969, Paris, Fayard, 1998, p� 400-7�

7 On the Hague Conference see Guasconi, M� E�, L’Europa tra continuità e cambiamento.

Il vertice dell’Aja del 1969 e il rilancio della costruzione europea, Florence, Polistampa, 2004, and the monographic number of the Journal of European Integration (Vol� 9, No� 2, 2003), ed� J� Van der Haarst�

8 Zimmermann, H�, “Unraveling the ties that really bind”, p� 134�

Common Market and safeguarding the achievements of the integration process from the turmoil of monetary instability, due to speculation on the dollar, which had put the deutschmark under pressure�

Germany considered EMU essential for assuring a Community of stability and economic growth for the EC countries, and gave priority to the harmonization of economic policies before moving to monetary cooperation�⁹ Despite insurmuntable differences of opinion among the governments, the Werner Plan was worked out in October 1970 and enlisted the steps to achieve EMU for 1980�

The plan was the result of an intense effort to mediate between the divergent positions of the “monetarist” countries, headed by France, which considered as a priority the establishment of common constraints on monetary policies, and the “economist” ones, headed by West Germany and the Netherlands, which instead gave priority to the harmonization of economic policies before moving to monetary cooperation� It proposed proceeding in parallel with economic and monetary union within ten years, through a gradual and flexible process, marked by a series of steps that included the harmonization of economic policies, budget and taxes, the reduction of fluctuations in exchange rates, and the setting up of a European monetary cooperation fund�¹⁰

On the other side of the Atlantic, Richard Nixon, who entered the White House in January 1969, inherited from the Johnson administration a “lost war, a deteriorating trade balance, a collapsing currency and domestic stagflation”�¹¹ Following its first weeks in office, the Nixon administration debated the issue of pursuing a unilateral monetary policy, as a way of solving the economic problems threatening the US economy�

It was an option which was highly criticized by the State Department and by Henry Kissinger, at that time National Security Adviser, who warned that such a decision “would trigger currency speculation and damage relations with the Europeans, who would have to cope with the effects”�¹²

As regards the US attitude towards European integration, the Nixon administration displayed an ambivalent feeling and an increasing uneasiness towards the European relaunch promoted at the Hague�

9 Heipel, C�, “In search of the greatest common denominator� Germany and the Hague Summit Conference 1969”, in Van der Haarst, J� (ed�), p� 79�

10 Fauri, F�, L’integrazione economica europea, Bologna, Il Mulino, 2006, p� 150-1�

11 Calleo, D�, The Imperious Economy, Cambridge, MA, Harvard University Press, 1982, p� 5�

12 Zimmermann, H�, “Unraveling the ties that really bind”, p� 135�

In a speech given in Bonn to the German Foreign Policy Association on February 12, 1970, Robert Schaetzel, at that time US representative to the European Community in Brussels, described the development of an increasingly critical attitude towards European integration, shared by the economic Departments inside the Nixon administration� “Unfortunately, conventional wisdom in America”, affirmed Shaetzel,

has judged the Community protectionist and inward-looking� There is an exact correlation between awareness of the Community and awareness of a European agriculture policy that had reduced American exports to the Community and has led to massive subsidies of surpluses to compete our traditional markets elsewhere in the world�

He concluded:

In sum the wide enthusiasm for the Community in America of the Eisenhower and Kennedy periods, the rosy expectations of rapid and brilliant progress towards unity has largely evaporated and been replaced by irritation, frustration and a brooding sense of apprehension as to what the future will hold�¹³ In October 1970, a European delegation, headed by Ralph Dahrendorf, European Commissioner in charge of Foreign Relations and Foreign Trade, visited Washington and met with US officials from the State Department and the Departments of Agriculture, Treasury and Commerce� The consultations focused mainly on trade legislation, EC enlargement, agriculture and preferential EC arrangements towards the Mediterranean, but did not cover monetary issues, a signal that the US probably did not believe that European efforts to increase monetary cooperation would succeed and that Washington did not intend to negotiate with the Europeans the reform of the international monetary system�¹⁴

During the visit, it was clear that, in spite of the traditional political support towards European integration, shared by the State Department, the economic sphere of the Nixon administration viewed the European Community as a rival, not as a partner, an inward-looking bloc that was trying to erode US market shares�¹⁵

13 National Archives, Kew Gardens, London, Prime Minister Records 13/3542, Remarks by Robert Schaetzel, US representative to the European Communities, before the German Foreign Policy Association, February 12, 1970�

14 National Archives (NA), College Park, USA, Nixon Presidential Material staff, National Security Council (NSC) Files, European Common Market, Box 322, Memorandum for the President, October 20, 1970, limited official use� See also Grygowski, D�, “Les États-Unis et l’unification monétaire de l’Europe”, in Journal of European Integration History, No� 1, 2007, p� 111-31�

15 Basosi, D�, “The US, Western Europe and a changing monetary system”, p� 103�

This increasing criticism of the Common Market reflected the Nixon administration’s strong preoccupations with European policies in the field of agriculture and trade and was made explicit in April 1971 during the visit of the President of the European Commission, the Italian Franco Maria Malfatti, to the US� Malfatti visited Washington, his goal being to “propose a constructive dialogue” to the Nixon administration in order to solve these transatlantic misunderstandings�¹⁶ The journey, preceded by an explorative mission headed by Renato Ruggiero, did not achieve the aimed-for results�

Malfatti, unlike his predecessor Jean Rey, was received by Richard Nixon and had important meetings with the secretary of State, William Rogers, and with members of the Council on International Economic Policy� Nonetheless, the US officials expressed their concerns over the high level of agricultural protectionism implemented by the Community and criticized the conclusion of preferential trade agreements with a widening circle of countries in the Mediterranean, such as Israel and Spain�¹⁷ As Hubert Zimmermann has argued, “The Bretton Woods system fell victim to the doubts about Europe prevailing in Washington”�¹⁸

In March 1971, the Europeans adopted the first measures to reduce the currency fluctuations and tighten their exchange rates as suggested by the Werner Plan, but two months later, in May, an enormous flux of foreign currencies, especially dollars, forced the German government to close the foreign exchange markets and to float the deutschmark, a decision that threatened the achievement of the Werner Plan and showed how difficult the goal of strengthening European monetary cooperation was�

In the same period, the Nixon administration was slowly moving towards its monetary breakthrough, strongly advocated by the new secretary of the Treasury, John Connally� Connally, a former Democrat governor of Texas, had been appointed secretary of the Treasury a few months earlier, in December 1970, with the task of ameliorating the problems of growing rates of inflation (6%) and unemployment (6�2%) which were threatening the US balance of payments� Described as “an elephant in a china shop”,¹⁹ Connally gave voice to the critical anti-European perspective existing inside the Nixon administration and played

16 Guasconi, M�  E�, “La Commissione Malfatti e le sfide degli anni Settanta”, in Morelli, U� & Pistone, S� (eds�), L’Italia e l’unità europea dal Risorgimento a oggi.

Idee e protagonisti, Padua, CEDAM, 2015, p� 321-38�

17 Historical Archives of the European Union, Florence, Franco Maria Malfatti Papers, Folder 23, Visit to the United States, Entretien Rogers-Malfatti, April 4, 1971�

18 Zimmermann, H�, “Unraveling the ties that really bind”, p� 137�

19 Basosi, D� Il governo del dollaro, p� 162-5�

a relevant role in the decision-making process aimed at abandoning the Bretton Woods system�²⁰

In late July and early August, another dollar crisis forced Nixon and Connally to move quickly� During a secret meeting held at Camp David on August 13, Richard Nixon, John Connally and a group of top financial and economic advisers, including the President of the Federal Reserve Bureau Arthur Burns, the undersecretary to the Treasury Paul Volcker, the Director of the Office of Management and Budget George Shultz and the assistant for International Economic Affairs Peter Peterson, decided, without consulting the Europeans, to close the gold window and to impose a 10% surtax on all imports to the US�²¹ The decision was announced by the President on August 15, a Sunday evening and a holiday in most of Europe (with no newspapers), with a carefully crafted televised address�²²