Friedman and Nixon: Road to the “Shock”

Posting this as a note to myself and for anyone interested… the following quote comes from Milton Friedman’s confidential memorandum to President Nixon, titled “A Proposal for Resolving the Balance of Payment” options. The whole letter, a foreshadow to the complicated set of policies described best as the “Nixon Shock” – not to mention to the undoing of the post-War international order organized through Bretton Woods – can be read here.

The first few weeks of the new administration that takes over in January, 1969, will offer a unique opportunity to set the dollar free and thereby eliminate for years to come balance of payments restraints on U.S. economic policy. If this opportunity is not seized, it will not recur. Later events may force the administration to take the same measures that it could at first take voluntarily, but if so, the measures will then involve great political and social cost.

[…]

Shortly after the inauguration of a new President in January, preferably on the second or third Friday evening or Saturday thereafter (after the financial markets are closed but in time for the announcement to be absorbed over the weekend), he should proclaim the following measures:

1. All restrictions on foreign investment by U.S. corporations are abolished effective immediately and the bureaucratic apparatus for administering them will be dismantled as rapidly as possible.

2. Similarly, all restrictions on foreign lending by U.S. commercial banks are ended, effective immediately.

3. Congress is being asked to repeal the interest-equalization tax.

4. All other restrictions on payments and trade imposed on balance of payments grounds will be removed as quickly as possible.

5. The U.S. will engage in no further gold transactions. For the time being it will keep its gold stock constant, neither buying nor selling gold either from or to central banks of other countries or in the private market. (This is already almost the de facto situation since the establishment of the two-tier gold system last February, so this point merely makes the policy explicit and open.)

6. The U.S. will engage in no exchange transactions in order to affect the rate of exchange between the U.S. dollar and other currencies—neither to peg the rates of exchange at fixed levels nor to manipulate them. The only exchange transactions engaged in by official U.S. agencies will be to acquire the foreign exchange necessary for foreign governmental expenditures or to dispose of foreign exchange acquired in the course of foreign governmental activity. (This point will require an exemption by I.M.F. from present obligations. However, it is an exemption that has been granted to other countries and that can hardly be refused to the U.S.) The announcement of these measures should be accompanied by an explanation that, on coming into office, the new President was shocked at the state in which the preceding administration had left the balance of payments. Current difficulties are the product of complete mismanagement by the prior administration of both domestic and international financial policies. If someone had tried to devise deliberately a policy to make the dollar look as weak as possible, he could hardly have done better than the Johnson Administration did. The Johnson policies were policies of weakness not strength; of restrictionism not expansion; of government controls not reliance on the initiative of free men operating in free markets.

See also: Between the Transnational Capitalist Class and Global Civil Society