Why Richard Nixon torpedoed the global monetary system

**Jeffrey Garten** (0:00)
In 1955, for example, the US had 165% more gold than it needed to redeem all the dollars outside the US. But by 1970, 1971, it only had 25%.
There was a fear in the US., and actually in other countries too, that they would come to the US say, Here are dollars we want gold, and the US wouldn't be able to redeem it.

**Robin Wigglesworth** (0:27)
Germany alone had more dollars than there was gold in Fort Knox.

**Gillian Tett** (0:31)
So, drum roll.

**SPEAKER_4** (0:32)
I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar into gold.

**Gillian Tett** (0:47)
Today, on The Story of Money…

**Robin Wigglesworth** (0:49)
What happens when the President of the United States of America makes a shocking unilateral decision to torpedo the entire post-war global economic order? And nope, this time we're not talking about Donald Trump.

**Gillian Tett** (1:03)
Let us take you back instead to 9pm East Coast time on the 15th of August 1971
US. President Richard Milhous Nixon is making a surprise appearance on the major TV networks, elbowing aside a scheduled viewing of Bonanza. That was then the biggest TV show in America at the time.

**Robin Wigglesworth** (1:25)
American audiences have actually grown pretty used to these kind of unscheduled addresses. Nixon typically used them to explain his latest moves in Vietnam, for example. But this time, he had a very, very different subject on his mind.

**SPEAKER_4** (1:38)
The time has come for a new economic policy for the United States. Its targets are unemployment, inflation and international speculation.

**Gillian Tett** (1:48)
Unemployment and inflation are big concerns for American voters. These are the early days of 1970s stagflation.
And both are on the rise.

**Robin Wigglesworth** (1:59)
So, Nixon lays out a radical set of new measures to tackle this stagflationary problem. That's when inflation is really high and growth is stagnant.
These measures included investment subsidies, wage controls, price controls, and almost $5 billion worth of spending cuts, which was quite a big deal back then.

**Gillian Tett** (2:21)
So drumroll, then he turns to the international speculation bit of his address.

**SPEAKER_4** (2:27)
In recent weeks, the speculators have been waging an all-out war on the American dollar.

**Robin Wigglesworth** (2:32)
So unknown to his audience that Sunday evening, or indeed frankly most of his own government, at the end of his address, Nixon is about to fire that torpedo that we mentioned.

**SPEAKER_4** (2:42)
I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar in the gold or other reserve assets.

**Gillian Tett** (2:58)
Now, the dollar's value is tied to gold and every other major currency is tied to the dollar. So by cutting that link, Nixon is threatening to set adrift not only his own currency, but all of his allies' currencies as well in a chain reaction.

**Robin Wigglesworth** (3:15)
This announcement would become known as the Nixon shock in a single, seemingly innocuous sentence. Whether he realized it or not, the US president had just upended the entire post-war global monetary system that underpinned a quarter century of rapid economic growth.

**Gillian Tett** (3:35)
And the thing to stress is until that afternoon, nobody knew it was coming, apart from Nixon and a tiny band of his very closest political allies who just spent the weekend together holed up in a secret meeting in a forest retreat in Maryland.

**Robin Wigglesworth** (3:51)
So how did it all come about?
How did it go down with America's allies? What would the consequences be? Not least for the US dollar.

**Gillian Tett** (4:00)
And these are questions that keep reverberating through history. And we're going to be talking about this now in The Story of Money from the Financial Times with me, Gillian Tett and me, Robin Wigglesworth.
So in today's episode, we'll be combining high finance with international monetary policy and the sometimes grubby inner workings of the Nixon administration. And to tell this amazing story, we have the perfect guest, Jeffrey Garten. Jeffrey, welcome to the show.

**Jeffrey Garten** (4:37)
Thank you, it's a pleasure to be here.

**Gillian Tett** (4:39)
We're so pleased to have you.

**Robin Wigglesworth** (4:41)
Yeah, I mean, Jeffrey, you personally embody three different strands of the story because you worked in high finances as a managing director of Lehman, long before it went bust, of course. You worked on sovereign debt restructuring, a subject close to my heart. You worked at the Blackstone Group. And you're also an academic economist with a focus on international trade, finance and business. And you're currently Dean Emeritus at Yale.