By MICHAEL TANSEY
Gold had been set at a price of $35 an ounce under the Bretton Woods agreement at the end of World War II. But at that price the U.S. gold reserves covered only $1 out of every $7 of U.S. commitments to convert dollars to gold. When the United Kingdom forced the issue by demanding gold instead of promises to deliver gold, the Nixon administration could no longer delay the decision about the gold standard.
At the Nixon Presidential Library, a picture taken at Camp David shows the Nixon administration members who had to make that decision.
Prominent in the group is Paul Volcker, who would become the Federal Reserve chairman and drive the economy into recession to stop inflation rates that would reach double digits by the late 1970s. That inflation also drove gold prices to $800 an ounce.
Also in the picture: Arthur Burns, the Federal Reserve chairman who advised against going off the gold standard. He wrote a diary that describes how the decision to get off the gold standard was made.
And then there are George Shultz and Herbert Stein, two champions of the free market and followers of economist Milton Friedman. At Camp David they pushed to get off the gold standard, a stand that some free-market economists today rue. While President Richard Nixon followed their advice on the gold standard, he decided to impose price controls at the same time to divert public attention, something that Shultz and Stein opposed. Shultz would soon leave the administration when, after decontrolling prices, the president re-imposed controls with a second price freeze in June 1973.
Also in the Camp David lineup is John Connally, who had been wounded in the assassination of President John F. Kennedy in November 1963. Connally, as Nixon’s Treasury secretary, pushed for a program that would grab public attention away from the gold standard. He was right: Few people today remember when we finally went off the gold standard, but many more remember Nixon’s price controls.
Today we see the legacy of that decision 40 years ago. Instead of $35 an ounce, gold has pushed beyond $1,700 an ounce. But there is a more subtle legacy: tolerance of inflation. Price controls were imposed in 1971 to hold down inflation, but after that experience, presidents and Congress have been very reluctant to impose them on oil, gold, drugs, health care or anything.
With the passing of 40 years, we finally have the accounting of the participants to the Camp David decision to leave the gold standard.
The latest and most fascinating account became publicly available in 2010, a gem published by the University Press of Kansas. “Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974” shows how important economic decisions are made and gives us a picture of the decision makers who decided at Camp David to terminate the gold standard.
Michael Tansey is a professor at Rockhurst University, where he has developed a curriculum for executive learning in international economics for the Executive Fellows Program and an MBA for doctors and medical students.
Read more: http://www.kansascity.com/2011/08/15/3078412/disaster-followed-leaving-the.html#ixzz1VDEqVFPB