Of politics, nonchalance and monetary policy
Book Review
The Euro
Originally Posted at Globe and Mail
By Neil Reynolds
April 17, 2009
On June 23, 1972, U.S. President Richard Nixon met with H.R. (Bob) Haldeman, his chief of staff, and ordered the cover-up of the bungled burglary, one week earlier, of the Democratic National Committee headquarters in the Watergate hotel in Washington. Tape recorders in the Oval Office preserved this conversation, subsequently famous as the “smoking gun” that forced Mr. Nixon to resign two years later. The same tape recorders preserved Mr. Nixon's response a year earlier to a British devaluation of the pound:
Haldeman: “Did you get the report that the British have floated the pound?”
Nixon: “No, I don't think so.”
Haldeman: “They did.”
Nixon: “That's devaluation?”
Haldeman: “Yeah….”
Nixon: I don't care about it. Nothing we can do about it.”
Haldeman: “You don't want a rundown?”
Nixon: “No, I don't.”
Haldeman: “[Presidential assistant Peter] Flanigan's got a report on it. He argues that it shows the wisdom of our refusal to consider [gold] convertibility until we get a new monetary system.”
Nixon: “Good. I think he's right. It's too complicated for me to get into.”
Haldeman: “[Federal Reserve Board chairman Arthur] Burns expects a 5-per-cent devaluation against the dollar.”
Nixon: “Yeah. OK. Fine.”
Haldeman: “Burns is concerned about speculation about the lira.”
Nixon: “Well, I don't give a [deleted] about the lira.”
As it happens, Mr. Nixon didn't give a [deleted] about the German mark, the franc or the dollar, either. Nor did his predecessor, Lyndon Johnson, who precipitated the currency crisis by choosing to finance U.S. spending on guns and butter with inflated dollars. By 1970, U.S. gold reserves covered only 22 per cent of the dollars in circulation, down from 55 per cent a few years earlier. One by one, the major European countries tested the U.S. Treasury. In July, 1971, Switzerland delivered $50-million (U.S.) to the United States, demanding gold in return; France dumped $190-million. Germany made a formal request for a $500-million swap.
The world had lost faith in the greenback. In May, 1971, Fed foreign exchange chief Charles Coombs concluded, in an internal note, that Europe was getting ready for the U.S. “to close the gold window.” He calculated that private investors could, at any time, sell billions of dollars in equities to buy gold, “triggering a virtual collapse of the New York Stock Exchange.” The British, he advised, were set to dump dollars. “If the British … take gold for their dollars,” he said, “it's game over.”
In early August, Federal Reserve president Alfred Hayes warned Mr. Burns that confidence in the dollar had eroded so much that “the breakdown of the entire international financial system” could occur within a matter of weeks, if not days. When Mr. Burns warned Treasury Secretary John Connally that the Europeans might retaliate, Mr. Connally responded: “Let 'em. What can they do?” (Mr. Connally once told a contingent of foreign monetary authorities that the dollar was “our currency, your problem.”)
On Sunday, Aug. 15, Mr. Nixon pre-empted the popular prime-time TV show Bonanza to announce the end of the world's last legal currency connection to gold. He took Europe by surprise – and his own State Department, too. His closest advisers recalled later that, when they met to decide what to do with the falling dollar, they spent more time discussing the pre-emption of Bonanza than discussing the dollar itself.
British investment banker and financial writer David Marsh cites Mr. Nixon's conversation with Mr. Haldeman, in his new book on the 10th anniversary of the euro, to illustrate the president's remarkable insouciance toward Europe at a time of an approaching global crisis. Mr. Marsh's gripping work, The Euro: The Politics of the New Global Currency, encompasses – as its title promises – the extraordinary political drama that led ancient enemies to embrace the euro (introduced as an accounting function Jan. 1, 1999).
This book is not ideological or theoretical. The Euro is superbly researched journalism, based in part on more than 100 interviews with prime ministers, finance ministers and central bankers, based in part on unpublished archival material from six countries.
It isn't only American politicians who emerge diminished from Mr. Marsh's tale, which begins in the Second World War with France “[losing] its honour but [keeping] its gold.” In the postwar years, though, France lost its gold, too. French President Charles de Gaulle schemed for years to humble the German mark and the U.S. dollar but the franc was never up to the assignment. The Euro explores the intrigue that preceded the euro, the achievements of the new currency (which has behaved more or less decently, so far, for more than 20 countries) and the daunting tasks that await it.
It is not Mr. Marsh's explicit message but a reader of The Euro cannot escape the conclusion that money is far too important to entrust to politicians and bureaucrats. There must be a better way. Oh, yes, there is. But that's another story for another day.
The Euro will be published May 5 by Yale University Press.
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