August 15 marks a special date in American history: it commemorates the fiftieth anniversary of President Richard Nixon’s suspension of Bretton Woods. With this decision, the United States stopped redeeming foreign governments’ and banks’ dollars for gold. Consequently, the world economy transitioned to unconstrained central bank discretionary monetary policy, an unprecedented era in monetary affairs.
The traditional justification for such a momentous decision utilizes highfalutin rhetoric and appeals to the public interest: the gold constraint restricted the ability of wise economic planners to fine-tune the economy. However, as I document in Cronyism: Liberty versus Power in Early America, 1607–1849 (forthcoming, Mises Institute, October 2021), the actual reasons for government policies are due to self-interested politicians rewarding themselves and favored business interests at the expense of the public. Bretton Woods is no exception: Nixon suspended gold convertibility to enhance his 1972 reelection chances and benefit the Rockefeller-dominated Chase Manhattan Bank and other expansionary banking interests at the cost of higher inflation. When it comes to government, privileged interests always come before the public.
Nixon is one of America’s most notorious presidents because of his resignation following the Watergate scandal. This infamous attempt to steal the 1972 election is not the only aberration in Nixon’s career; all his life he was paranoid about elections and wanted to win at all costs. The former vice president was convinced that Federal Reserve contractionary monetary policy denied him the 1960 presidential election against John F. Kennedy. Nixon also insisted that Fed restrictionism contributed to Republican setbacks in the 1970 midterms. He was so concerned about elections that after assuming office in 1969 he candidly told his White House advisers that “political considerations” will often override the “economic standpoint.” 1 At the top of his priorities was ensuring victory in 1972. To accomplish this, Nixon wanted the Fed to provide “a rate of monetary expansion sufficient to move the economy up on the desired path.” 2
Major banks also supported cheap credit. They maintained close links with the administration, particularly the Chase Manhattan Bank, which was dominated by the wealthy Rockefeller family and had the most assets ($31.7 billion) out of any financial institution in 1968. Although Nixon ran against New York governor Nelson Rockefeller in 1968, he cozied up with Rockefeller interests after becoming president. He offered Nelson’s brother David, the chairman of Chase’s board of directors, the secretary of the Treasury position multiple times. Although David declined, the job went to David M. Kennedy, a banker recommended by the Chase board. Under secretary of the Treasury for monetary affairs went to Paul A. Volcker, a former vice president of Chase. Rockefeller men also commanded the State Department, which played a role in international monetary affairs. Nixon’s first secretary of state was New York lawyer William P. Rogers, a law partner of John A. Wells, one of Nelson’s campaign managers. In 1973 the job went to Henry Kissinger, special assistant to the president for national security affairs. Kissinger had assisted Nelson in his presidential bid and later served as vice-chairman of Chase’s international advisory committee. Nelson even gave Kissinger $50,000 three days before he started working for Nixon to “ease the fiscal burdens” of political office. 3 In short, Nixon and Rockefeller went hand in hand. 4
But not all was well for Nixon and Chase Manhattan. The Federal Reserve had already printed too much money, and as a result of trade deficits and foreign aid the dollars were heading abroad. By 1971, foreign financial institutions had accumulated dollar claims of $36 billion—double the US’s $18 billion in gold reserves. To maintain convertibility and the Bretton Woods system, the Fed would have to raise rates, reducing Nixon’s reelection chances and raising big banks’ borrowing costs at the discount window. The situation was desperate: on August 2 secretary of the Treasury John B. Connally informed Nixon that “I don’t believe you can hold the position through the elections next year.” 5
Nixon had to choose: win the election or save the international monetary system. Pressed by the banking community, the president opted for the former, announcing to American audiences on August 15 that he would “suspend temporarily the convertibility of the dollar into gold” and institute short-term wage and price controls. 6 Although banks disproved the price controls (on the other hand, corporations lauded the decision, because it weakened unions), they supported the decision to scuttle gold. Rockefeller men subsequently emphasized that Nixon’s decision must become permanent. C. Douglas Dillon, a Chase Manhattan board member; close business partner of Laurance Rockefeller, brother of David and Nelson; and former secretary of the Treasury; informed the administration that “under no circumstances” should the US return to “convertibility into gold.” 7 David Rockefeller explained to Kissinger that he favored a “new international monetary system with greater flexibility” and “less reliance on gold.” 8 Kissinger, after meeting with David, explained to Nixon that “the old system was over.” 9 Appealing to Nixon’s election concerns, Kissinger advised the president that his chances for reelection would improve if he was known as “the man who created a new system of international finance.” 10
It was decreed; the US remained off the gold standard. In the Treasury, high-ranking officials let subordinates know “that 1972, by God, was going to be a very good year.” 11 The M2 money supply growth rate increased from 7 percent in 1970 to 12 percent in 1971 and 1972. Interest rates fell, pleasing Nixon and the bankers. But consumer prices shot up from 5 percent in 1970 to over 10 percent by 1973 and 1974. The US economy languished in the 1970s, with real gross domestic product per capita decreasing from 2.9 percent per annum growth between 1960 and 1971 to just 1.6 percent during 1971–82. For that, we have Nixon and the Rockefellers to thank. 12