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Nixon Shock Series: Getting Off Gold

by Kathleen Packard,  The Gold Standard Now, Lehrman institute

See also:  LEWIS E. LEHRMAN,  The Nixon Shock Heard 'Round the World

I - Haldeman Remembers,  August 2, 2011

This is the first in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window.  

 Harry Robbins Haldeman,

National Archives & Records Administration,

January 21, 1971

On Thursday, August 12, 1971, Treasury Secretary John Connally phoned White House Chief of Staff  H.R. Haldeman.  Connally announced that he was flying back to Washington from his Texas vacation because a run in the gold market had caused a request from the British government to redeem $3 billion for American gold.  France had already redeemed of $191 million for gold.

Haldeman wrote in his diary that night that Connally

“came on up and met with the P[resident] at 5:30 today,  after which P. called me while I was out to dinner to say that they had decided to go ahead on the whole move on Monday and that we were going to pack up the key people, including Arthur Burns and the key Treasury and economic group, go to Camp David tomorrow afternoon, spend the weekend there and get it worked out, and make the announcement on Monday.”

Haldeman anticipated “quite an earthshaking operation,” but perhaps not one so earthshattering as the one that Connally would propose.

The first meeting of the economic group included Federal Reserve Chairman Arthur Burns, Office of Management and Budget Director George Shultz,  Council of Economic Advisors (CEA) Chairman Paul McCracken,  CEA member Herbert Stein, Treasury official Paul Volcker, domestic advisor John Ehrlichman,  and Assistant to the President for International Economic Affairs Peter Peterson.  

They met at Aspen Lodge for four hours Friday afternoon under conditions of strictest secrecy imposed by President Nixon.  John Connally sat to Nixon’s right.

Once the meeting was turned over to Connally, the Treasury Secretary argued:

“It’s clear that we have to move in the international field, to close the gold window, not change the price of gold, encourage the dollar to float. If we close the gold window, we’ll need an import tax of 10 / 15 percent.”  

Connally then proposed a series of economic measures, each designed to mitigate the deleterious consequences of the one before.  But all proposals were predicated on the fact, according to Connally, that “the international gold situation” was “the main problem.”

Apparently without any sense of irony for a comprehensive and revolutionary program designed over a single weekend, Connally concluded:

“Such a program will leave a clear impression  that this has been analyzed in depth, not just a reaction to pressure.  It will be an act of great awareness, great statesmanship, and great courage, and must be presented to the people this way.”  

The irony doubled later that afternoon when Connally recommended

“that we talk as if we have alternatives, but we don’t have alternatives, we have to recognize the problem and face it.”

Fed Chief Burns argued against “closing the gold window” on both international political and domestic economic grounds.  He received some support from Treasury’s Paul Volcker, but Connally remained adamant that the action must be taken immediately and unilaterally. Even after the meeting ended, Burns continued to press President Nixon “against floating the dollar,” but Nixon was reluctant to buck Connally, whom he admired so much that he wanted Connally to succeed him.

By early Saturday morning, Nixon had dictated notes for his speech to the nation.  By late that afternoon, the decision to “close the gold window” had definitively been made.  On Sunday night, August 15, it would be announced on television.

II - President Nixon's Version of "the best thing", August 05, 2011

This is the second in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window.                                                                                                            

“I have directed Secretary [John] Connally to suspend temporarily the convertibility of the dollar into gold,”

announced President Richard Nixon on August 15, 1971.  Nixon’s memoirs run to nearly 1100 pages – his recitation of the momentous events that came to be known as “Nixon Shock” take up just four pages.

Connally occupied a special place in the Nixon cabinet.  In his memoirs, Nixon Domestic Advisor John Ehrlichman wrote:

“As everyone knows, John B. Connally was Nixon’s darling boy.  Of all his Cabinet and staff, Nixon saw only Connally as his potential successor.”  

As Ehrlichman noted, the standard orders for handling Connally “were to do it the way he wanted it done.”  

Another White House staffer wrote:

“‘The Boss is in love’ was a statement familiar to the Old Nixon Hands, because it was a process that happened periodically, and often in the spring.”  

In the spring and summer of 1971, Nixon was in love with John Connally.

The nation’s break with gold was a decision pushed by Connally and accepted by Nixon because he admired Connally.  Connally biographer James Reston wrote:

“The Camp David decision had come about largely because of Connally.  He had pushed for the bold, comprehensive plan since February.  His collusion with Nixon had given the president the confidence to cut across the economists and to make the political considerations of an economic decision paramount.”  

Nixon liked bold, and Connally was bold, even reckless.

Nixon recalled  that economic conditions were deteriorating over the summer of 1971 but  

“an unexpected development forced us to accelerate dramatically our economic timetable.  In the second week of August the British ambassador appeared at the Treasury Department to ask that $3 billion be converted into gold.  

Whether we honored or denied this request, the consequences of our action would be fraught with danger: if we gave the British the gold they wanted, then other countries might rush to get theirs.  If we refused, then that would be an admission of our concern that we could not meet every potential demand for conversion into gold.  

Connally deferred giving his answer, but we knew that we would very soon have to confront a major crisis concerning the economic position of the Untied States.”

Nixon invited fifteen “economic experts, White House staff members, and a speechwriter” to Camp David for discussions to start on Friday, August 13.  

“These were the men who understood the complexities of economics: John Connally, Arthur Burns, George Shultz, Paul McCracken, and Herbert Stein from my Council of Economic Advisers; Peter Peterson, head of the Council of International Economic Policy; and Paul Volcker, Treasury Undersecretary for Monetary Affairs.”

Nixon recalled that he began the meeting by insisting on absolute secrecy and

“then turned the meeting over to Connally, who succinctly described the actions that the experts had been working on: closing the ‘gold window’ and allowing the dollar to float; imposing a 10 percent import tax that would be mainly a bargaining chip to discourage foreign countries from depressing their currencies in order to promote their exports; reinstating the investment tax credit to stimulate the business community; providing new income tax relief; and repealing the excise tax on automobiles to encourage higher sales.”

Two days later, Connally’s ideas became policy.  Nixon announced closing the gold window on Sunday night, August 15.  On the helicopter ride back to the White House that morning, Nixon told his speechwriter:  

“You know when all this was cooked up?  Connally and me, we had it set sixty days ago.”

III - Advisor Stein and the Politics of the Nixon Shock,  August 8, 2011

This is the third in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window.

The decision in 1971 to take the United States off gold  was essentially made by Treasury Secretary John Connally.  

Connally was a man without any firm economic beliefs.  Herbert Stein, who became chairman of the White House Council of Economic Advisors in 1972 and was a member of the Council in August 1971, noted that Connally

“did not take office with...any preconception in favor of any particular policy.  One of his favorite expressions was:

‘I can play it round or I can play it flat, just tell me how to play it.’”

In his book on Presidential Economics, Stein wrote of Connally:

“As Secretary of the Treasury he was primarily responsible for the international financial position of the United States.  That position had been deteriorating for over ten years.  That is, the United States had been running deficits in its balance of payments... the amount of foreign-held dollars outstanding had become far larger than the value of the U.S. gold stock at that price [of $35].  So there was a tacit understanding among foreign treasuries and central banks not to ask for gold lest doing so precipitate a run.”

In his book, Stein does not give any details of the August 13-15 meetings in which he participated.  In Nixon’s memoirs, however, Stein is quoted as remembering:

“The tense psychological condition in the country, the remoteness and beauty of the Camp David setting, the orderly and disciplined conduct of the business there, and the surprising and sweeping character of the decisions taken make the August 13-15 meeting one of the most dramatic events in the history of economic policy.”

In Stein’s own book, he justified what was considered and what was decided.  Stein maintained:

“The government was becoming greatly exercised over the ‘Japan’ problem.  The United States was running a deficit in its balance of trade with Japan, and, more significant politically, a number of industries were complaining about Japanese competition.  Ideas of quotas or other restraints on Japanese imports were being seriously considered.  To the free market people in the government, closing the gold window and allowing the dollar to decline in value relative to the yen was a much better solution.”

Stein,  who was no fan of the gold standard,  blamed “Nixon’s personality”  as a major reason for the “drastic action” that was agreed  on that fateful weekend.  

“He had a great longing for the dramatic gesture, for which he found a perfect support in John Connally.  He also tended to worry exceedingly about his reelection prospects and so feel impelled to extreme measures to assure his reelection.”

Extreme measures, indeed.  For the sake of politics, the gold standard was sacrificed.  By 1972, Treasury Secretary Connally resigned – to head “Democrats for Nixon.”

IV - Speechwriter Safire Took Notes, August 9, 2011

This is the fourth in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window. Next: National Security Advisor Henry Kissinger.

On August 13, 1971 Nixon speechwriter William Safire was ordered to go to Camp David, He was told not to inform anyone, not even his wife, of where he was going. Safire’s assigned car-mate on the way to a nearby helipad was White House economic advisor Herb Stein.

Safire had no idea was what the meeting and the secrecy were about.  Stein was better clued in.

“This could be the most important weekend in the history of economics since March 4, 1933,”

Stein told Safire, who remained clueless about the significance of the day that FDR had ended America’s gold standard.

Stein then gave Safire another clue:  

“I would not be surprised if the President were to close the gold window.”

In his memoir of his White House service, Before the Fall: An Inside View of the Pre-Watergate White House, Safire admitted he was still clueless at that point:

“I did not have the foggiest notion about what the ‘gold window’ was.”

Safire, however, did not want to reveal his ignorance. After they were airborne in the helicopter, a Treasury official asked the speechwriter what was going on.

Safire sagely suggested that the gold window might be closed.

“My God!” responded the official – helping Safire recognize “that this could be a bigger deal that I thought.”

Safire asked Stein how to explain the significance of closing the gold window to the average American “in one-syllable words.”

Stein answered in mostly one-syllable words: “-- I wouldn’t try. That’s why you’re along.”

Indeed, that’s why non-economist Safire was joining the administration’s foremost economic officials so that economic policy could be put into simple non-economist language.

Safire admitted that President Nixon occasionally ordered administration economists to “put that in simple terms so Safire can understand.” It may also have been so that Nixon could understand.

As Safire remembered the meeting, Nixon went first and emphasized secrecy. Connally went second and presented policy proposals. Then Nixon spoke again:

“About closing the gold window – we cannot know fully what effect it will have,”

he admitted.

Nixon was committed to comprehensive new economic policy in response to the $3 billion British call on U.S. gold reserves. Safire wrote that

“the President insisted that when he moved it would be on a comprehensive, across-the-board basis. Nixon was not about to stick his thumb in the dike and wait for another hole to appear elsewhere. He wanted a whole new dike.”

Safire reported that some participants on Friday afternoon expressed concern about closing the gold window although only Fed Chief Arthur Burns opposed the move. Treasury’s Paul Volcker worried that Allied governments would be upset. The White House’s Pete Peterson thought “folks” would “worry.” Council of Economic Advisors Chairman Paul McCracken said:

“People’s reaction to closing the gold window would be negative.”

Volcker contended:

“Everybody who speculates in gold will seize on this to make a mint. We have to come up with a proposal to demonstrate gold is not that important. Maybe we should sell some.”

After the big meeting in the afternoon, there was a smaller meeting of principals called the “Quadriad” along with Paul Volcker to discuss closing the gold window. The decision was final. Burns admitted to speechwriter William Safire at dinner that night:

“You know, I argued pretty strenuously against the gold move – that’s the only difference I have with the whole policy. But even on that I don’t feel so cocky – nobody can be sure. When it was decided, I told the President he would have my wholehearted support.”

Nixon himself concentrated on the politics and the packaging for the next two days. Like Safire, he stayed up much of the night writing a draft of his speech. As Nixon wrote out the notes for his speech about the impact of closing the gold window:

“Let me lay to rest the bugaboo of devaluation. Will this action reduce the value of the dollar? The long term purpose and the effect of this action will be to strengthen the $ – not weaken it.”

The president, particularly concerned about the impact of his comments on TV, complained:

“I have not had anybody working for me in the press area who understood the value of TV.”

As much as a “New Economic Policy,” Nixon and his subordinates were scripted a political drama and an economic tragedy.

V: National Security Advisor Kissinger’s Version, August 12, 2011

This is the fifth in a series of blogs on the history of the "Nixon Shock" of August 15, 1971 that closed the gold window.

In his memoirs, Henry Kissinger in effect took partial credit for the series of economic actions announced by President Nixon on Sunday, August 15, 1971.  Kissinger, then National Security Advisor, also disclaimed any convictions about whether the policies would work.

Although acknowledging that the agenda of policy decisions known as "Nixon Shock" was taken at Camp David  on a weekend without him,  Kissinger wrote that they had been based on the ideas generated by his staff.  About the impact of the Nixon Shock, Kissinger professed to be an agnostic:

"At the time...I did not trust my judgement enough to take a position on the merits of the new measures."

Kissinger maintained that the "New Economic Policy" conformed with recommendations from the National Security Council that he headed.   However, wrote Kissinger:

“The fact was that a decision of major foreign policy importance had been taken about which neither the Secretary of State nor the national security adviser had been consulted.”  

Not that Secretary of State William Rogers much cared; Rogers admitted that summer that he was "bored stiff" with economic discussions.

President Nixon alluded to the upcoming policy changes in a phone call to Kissinger on Saturday, August 14.  Kissinger wrote:

“In a favorite technique for breaking news his interlocutor might not like, Nixon was elliptical.  He mentioned in passing that he would make major speech on economic policy the following night.  With his finely honed skill in avoiding unpleasant subjects he ran his planned surcharge on imports by me so lightly that its impact did not hit me until afterward.”

In his memoirs, Kissinger acknowledged that the proposals advanced by Treasury Secretary John Connally and approved by Nixon were

"all of the measures that my [National Security Council] staff was putting forward as alternatives."  

Although much of the program was about domestic economics – like imposition of wage and price controls –  Kissinger acknowledged:

"The real thrust of the new program...was in the measures to defend the dollar abroad and to rectify our balance-of-payments deficits.  Nixon announced a 10 percent reduction in foreign economic assistance, a 10 percent surcharge on all imports, and suspension of the convertibility of the dollar into gold or other reserve assets."

In taking Treasury Secretary Connally's advice on the program, Nixon succumbed to his weakness for big, bold action – the kind he initiated when he sent Kissinger to China to pave the way for diplomatic relations.  

After all, later observed George P. Shultz, then director of the Office of Management and Budget, Kissinger and Nixon

"didn't like economics that much.  When I was in the process of proposing a whole new monetary system for the world, it was hard to get his [Nixon's] attention."  

In his memoirs, Kissinger admitted:

"Even in my most meglomaniacal moment, I did not believe that I would be remembered for my contributions to the reform of the international monetary system."

In his speech on Sunday night setting out the "New Economic Policy," Nixon contended that his administration was

"going to take action, not timidly, not half-heartedly, and not in piecemeal fashion."  

He was dismantling what remained of the gold standard.  In the words of Nixon biographer Stephen Ambrose:

"From that moment on, the dollar floated, like other currencies, requiring the creation of a whole new world monetary order."

It was a world monetary order about which America’s top diplomats had not been consulted.

 

Fed Chairman Arthur Burns Objects, August 15, 2011

This is the sixth in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window.

                                 

When Richard Nixon named Arthur Burns  to chair the Federal Reserve Board in 1970,  the president said that he hoped Burns would

“independently conclude that my views are the ones that should be followed.”  

Burns, who had been a domestic counselor to the president, considered Nixon to be a friend.  Nixon preferred Burns to be a follower.

When the components of the “Nixon Shock” of August 15, 1971 were discussed the previous two days at Camp David,  the

“strongest opposition came from Arthur Burns,  Chairman of the Federal Reserve Board.  He wanted us to wait,”

recalled Richard Nixon in his memoirs.  

“Even if all the arguments were right, he said,  he still felt that there was no rush.  He warned that I would take the blame  if the dollar were devalued.  

‘Pravda would write that this was a sign of the collapse of capitalism,’

he said.  

On the economic side  he worried that the negative results  would be unpredictable;   the stock market could go down; the risk to world trade would be greater  if the trade basis changed; and there might be retaliation by other countries.”

Soon after John Connally became Treasury Secretary,  President Nixon decided to push Burns off  on Connally:  “Just tell Arthur to report to Connally.”    Nixon had declared Connally to be in effect his economic czar  at a White House meeting  on June 28.   Everyone else in the Nixon Administration was supposed to toe the line,  including the chairman of the Federal Reserve.

Nixon was famously infatuated with Connally,  who had no background in finance or economics.   “I can add” was Connally’s self-suggested qualification for being secretary of the Treasury.  That Nixon agreed with Connally’s proposals  should not have been surprising.  Domestic Advisor John Ehrlichman wrote:

“By the summer of 1971 it appeared that John Connally  was indeed a strong economic spokesman,  but the fact was that he was nearly drowned out  by all our other economic spokesmen,  who continued to speak out.  Our economic message was cacophonous.”

Ehrlichman maintained that  “Burns was every bit as much a politician  as he was an economist.”  Soon after Burns was appointed to the Fed,  Nixon informed Burns:

“My relations with the Fed will be different than they were with Bill Martin there.  He was always six months too late doing anything.  I’m counting on you, Arthur, to keep us out of a recession.”  

Nixon added:

“The Fed and the money supply are more important than anything the Bureau of the Budget does.”

Nixon had cynically claimed to admire Burns, but he planted humiliating press stories about him.  Burns had his own doubts about Nixon.  Burns recalled one meeting at the White House in March 1971:

“The President looked wild;  talked like a desperate man;  fulminated with hatred against the press;  took some of us to task  — apparently meaning me or [Chairman of the Council of Economic Advisors, Paul] McCracken or both — for not putting a gay and optimistic face on every piece of economic news,  however discouraging;  propounded the theory that confidence can be best generated  by appearing confident and coloring, if need be, the news.”

Burns was fighting a losing battle for influence  in the Nixon Administration.  On August 12, the day before the Camp David meeting t hat led to the announcement of “Nixon Shock,”  Burns wrote in his diary:

“My efforts to prevent the closing of the gold window – working through Connally, Volcker, and Shultz – do not seem to have succeeded.  The gold window may have to be closed tomorrow  because we now have a government that seems incapable, not only of constructive leadership,  but of any action at all.  What a tragedy for mankind!"

At the Camp David conclave the next day, recalled Connally deputy Paul Volcker,

“Burns, who was then chairman of the Federal Reserve Board, argued strenuously enough to suspend gold convertibility.  He was really the only one who vigorously took that view.”

Nixon sided with Connally over Burns:

“This was to be one of the few cases in which I did not follow his recommendations.  I decided to close the gold window and let the dollar float.  As events unfolded, this decision turned out to be the best thing that came out of the whole economic program I announced on August 15, 1971.”

As events unfolded, history proved otherwise.

VII: Fed Chairman Arthur Burns Remembers, August 17, 2011

This is the seventh in a series of blogs on the history of the “Nixon Shock” of August 15, 1971 that closed the gold window.  

Although Federal Reserve Chief Arthur Burns and President Richard Nixon were friends, Burns’ relationship with Nixon was rocky.  Nixon professed in his memoirs to give

“great weight to Burns’s opinions because of my respect for his superior intellect and because he always followed the practice he once described to me of

‘telling the President what he needs to hear, not just what he wants to hear.’”

In his memoirs, Nixon advisor John Ehrlichman recalled:

“In December 1970, Arthur Burns and the Fed were giving the President trouble.  Now that we had John Connally, he would issue an economic statement that would get Arthur back in line.  ‘He’ll be tough.’  Nixon told George Shultz and me, ‘He’ll take on the Fed and its monetary policy.’”

In the midst of the world financial crisis in the summer 1971, Nixon precipitated a mini-scandal in Washington.   A UPI wire story on July 27 suggested that Nixon was considering doubling the size of the Federal Reserve Board and added that Nixon had turned down Burn’s request for a 50 percent raise.  Within the White House there was a carefully orchestrated campaign to cut Burns down politically.  According to Nixon aide Chuck Colson, the orders came directly from President Nixon.

Burns was hurt and concerned about his reputation being sullied by White House operatives.  He wrote in his diary:

“On Aug. 5 RN telephoned. The day before he held a press conference, and finally—he took a long week to do so—scotched the slur on my good name that had been engineered by anonymous [sources]... He explained that, quite contrary to the report in the press, I not only had not asked for a salary increase, but I had flatly refused it.  RN said I did so because I felt it was wrong at a time of inflation.”  

Nixon was clearly humoring Burns.

“Thursday evening Shultz called and informed me of the plans for the weekend—we would leave in the early afternoon of Friday and be ‘locked up’ at Camp David through Sunday,”

Burns wrote in his diary.   Secrecy was important.

“The departure was to be from the helicopter pad at the Pentagon; but Dwight Chapin called Friday morning to say that we would leave from the White House grounds. The President joined several of us from the helicopter; it was the first time I had seen him since the day when he and Connally launched their assault to quiet me. If there was any feeling of anger or annoyance still lurking in the President's mind, he did not show it – either then or at any time at Camp David. On the contrary, he was particularly deferential to my views; not only that, he kept referring to our old friendship, to this or that experience we had shared together, etc. Yet, he was concerned about my views; for both Shultz and Safire told me that he kept wondering whether I would go along with the decisions that had to be reached.”

Of the Friday afternoon meeting at Camp David, Burns wrote in his diary:

“This first meeting was long, but peaceful and harmonious—as such things go. The President set the tone of earnestness and decisiveness; decisions would be reached; their effect would depend on complete secrecy; no telephone calls were to be made; any leak would be treason. The drama of all this was excessive; but it helped to put everyone into a constructive mood.”

On August 22, Burns reported in his diary:

“The meeting at Camp David last weekend was not much of a surprise for me. On Aug. 4th the President opened the door to a new wage and price policy—not widely, to be sure, but he at least indicated that he might take another look. On Aug. 5th, when we talked over the phone, he stated – on his own initiative – that our differences were confined to the problem of wages and prices; that even on that subject we were not necessarily far apart – indeed, that he might surprise me one of these days.  Whereupon I told Helen [Burns] that I expected the President to order a wage and price freeze; my reasoning being, first, that the President loved to think of himself—as he also would have others think—that he is a bold innovator, second, that I (and others) had not urged a freeze publicly – thereby augmenting the chances of such a move being regarded as highly innovative, dramatic, etc.”

Burns continued:

“The meeting was also not much of a surprise for me because Shultz had come over with an urgent message—namely, that the President was thinking of making some major pronouncement on economic policy in the near future, and that the President wanted my views on the subject of wages & prices, taxes, govt spending, and balance of payments, etc. Shultz was obviously the messenger and no more in this instance; he listened intently to what I had to say on these subjects, repeated my views more than once to make sure that he would be reporting accurately; and as the next day proved, he reported my thoughts fully and accurately to the President – for the President summarized my views at the very start of the discussions on Friday.”

At the critical Friday afternoon meeting, Burns concentrated his opposition against closing the gold window to foreign countries. Economist Allan H. Meltzer, no fan of the gold standard, wrote in his History of the Federal Reserve that Burns’ “insistence is surprising.”  Burns had reportedly warned President Nixon in December 1970 that it might be necessary to take break the gold link.

First, Nixon tried to break Burns.  Then he broke the gold link for America’s currency.

VIII: Treasury Official Volcker Worries and Regrets, August 18, 2011

This is the last in a series of eight blogs on the history of the Nixon Shock of August 15, 1971.

                                                                                                           

Paul Volcker was on the fence – philosophically, politically, practically.  

“Would Americans be humiliated by going off the gold standard? This was the sort of thing I had worried about over the several months spent working on the policies,”

worried Paul Volcker, who was under-secretary of the Treasury for international monetary  affairs at the time of the Nixon Shock in August 1971.

Within the Nixon Administration, Volcker was the point person in dealing with America’s many unhappy trading partners.  Although the core of Nixon’s “New Economic Policy” announced on August 15 was to take the U.S. off the gold standard, Nixon also implemented a series of other measures to adjust America’s balance of trade. Volcker noted that one of the key objectives of the program was a

“10% import surcharge on textile products. The president, who had made an election pledge to protect the American textile industry, was irritated at Japan because it would not agree to limits on textiles exported to the U.S.”

U.S. trading partners like Japan needed to be informed of the U.S. move – information that Nixon dictated could not be shared until just before his Sunday night speech.   Volcker was in the hot seat because he would have to assuage their concerns.

Volcker’s administration colleagues at Camp David that weekend understood how hot was his job.  Nixon speechwriter William Safire recalled that at dinner at Camp David on August 13, 1971,

“the men in the room knew that Volcker was undergoing an especially searing experience.  He was schooled in the international monetary system, almost bred to defend it; the Bret[t]on Woods Agreement was sacrosanct to him; all the men he grew up with and dealt with throughout the word trusted each other in crisis to respect the rules and cling to the few constants like the convertibility of gold.”

At the Administration’s super-secret conclave at Camp David on the afternoon of August 13, Volcker questioned the policy of  his Treasury Department boss, John Connally,  who adopted a damn-the-foreign-allies-full-speed-ahead approach, especially on closing the gold window.  “I hate to do this, to close the window,” said Volcker to Connally.  

“All my life I have defended exchange rates, but I think it is needed.”  

Volcker pushed for international cooperation:

“But don’t let’s close the window and sit – let’s get other governments to negotiate new rates.”  

Connally’s response was straightforward: “So the other countries don’t like it.  So what?”

“The dollar is the center of the financial system, convertible into gold, with other countries having a fixed exchange rate against the dollar,”

remembered Volcker in a September 2000 interview on PBS.  

“That whole framework had come under great pressure, and it was clear that something had to be done,”  

Volcker indicated the desperation of Washington policy-makers in 1971:

The United States finally faced up to the fact that something had to be done about the international monetary system against a background of this continuing inflationary problem. So the two dimensions came together, the external dimension leading to a suspension of the gold convertibility of the dollar, which itself raised, in an orthodox way, inflationary questions with the devaluation of the dollar and stalled the depreciation of the dollar. There was a good deal of pressure for vigorous action to have some kind of controls, some kind of income policy, something.

Regarding the Camp David discussions on August 13 that ended gold convertibility, Volcker recalled that

“most of... us who were involved thought the time had come and some approach had to be taken, and that the only practical move internationally was to suspend gold convertibility, which would lead to a depreciation of the dollar.  It was not a permanent solution, in my mind, but it was a necessary transitional step. The president, I think, had become pretty well convinced before he was up there. The surprise to me was the way it was politically shaped, with Mr. Nixon and Mr. Connally presenting it to the world as a great triumph.”

In his 1990 book, Changing Fortunes: The World's Money and the Threat to American Leaders, Volcker expressed regret for closing the gold window and evinced an understanding that a grave mistake had been made:  

"Now, twenty years later, I wonder" if it had indeed a triumph.  

"It was, after all is said and done, in some ways a defeat.  The inflationary pressures that helped bring down the system did not abate for long; they got much worse as the controls came off and plagued the country for a decade or more. The monetary system has not been put back together in a way that really seems to satisfy anyone.  And somehow we are still complaining about unfair military, aid, and trade burdens."

Writing in his diary several days after the Camp David meeting, Federal Reserve Chairman Arthur Burns concluded: “In the end, those who wanted to end convertibility had their way.”   President Nixon had explained that he wanted to take any political hits for changes in economic policy early.   Burns noted:

“The President explained that he had a way of dealing with crises — taking a tough decision, accepting immediate criticism, but reaping the harvest of approval later on.  So it would be also with the gold matter under discussion.  All this seemed to assume – though nothing was said to this effect – that the dollar would be allowed to float until after the election.  When I later pointed this out to Volcker, he became truly frightened and he has been doing penance for his recommendation to close the gold window – ever since.”

The dollar has floated – and the nation itself has paid the price – ever since.