The Reincarnation of John Connolly: Could Trump's crude, bullying global shocks play the same role as the Connally/Nixon shocks did in 1971?

• Author: Bergsten, C. Fred

On August 18, 1971, three days after President Richard Nixon announced the cessation of dollar convertibility into gold for foreign monetary authorities and an across-the-board import surcharge, rocking the world economy and essentially ending the original Bretton Woods system of fixed exchange rates, I and three other economists from outside government--the late Richard Cooper, Harry Johnson, and Henry Wallich--were invited to the U.S. Treasury Department to meet with Secretary John Connally and his top lieutenants including Under Secretary for Monetary Affairs Paul Volcker. Connally, who was Nixon's chief adviser on these issues and the major proponent of the new U.S. strategy, began the session by indicating "You know what we have done. Please advise us on what we should do next." It was clear that he did not know what to do next, so we outsiders were immediately extremely worried.

The discussion, led throughout solely by Connally, lasted for six hours. Cooper and I urged the officials to use the new environment to promote lasting reform in the international monetary and trading systems, which needed major improvements. But it became increasingly clear that Connally had no interest in systemic reform. At about 4 p.m., the Secretary indicated that it was time to close and that he wanted to share his own philosophy with us before departing: "The foreigners are out to screw us. It is our job to screw them first. Thank you for your help."

I immediately reported this encounter to National Security Adviser Henry Kissinger, whose deputy for foreign economic policy I had been until six months earlier. I warned him that he was dealing with a powerful xenophobe at Treasury, who would severely jeopardize his entire foreign policy. Kissinger was then planning to broker detente with the Soviet Union and the historic opening to China. Both of those initiatives required full support from America's traditional allies, who were outraged by the Nixon shocks and refused to even meet with Nixon until the economic crisis was resolved. Kissinger eventually orchestrated that resolution.

The Nixon shocks, and these underlying attitudes in at least some key quarters of his administration, were a watershed in the evolution of U.S. foreign economic policy. They severely disrupted the global financial system and indeed the entire world economy for a couple of years. Both of the key policy steps, though they could arguably be justified in legal terms, violated fundamental norms of the extant international economic order: convertibility between the dollar and gold...