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Nixon Showed What Not to Do in an Economic Crisis

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
August 12, 2011
Providence Journal

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Head for Camp David. Convene meetings. Take advice from economists, your Cabinet, all the experts. Then put forward a giant new economic program, maybe including some dramatic form of shock therapy that will calm financial markets and create jobs.

That's the kind of response Americans are used to seeing in a president when the nation is confronted with bad news like last week's market turmoil and the U.S. credit downgrade by Standard & Poor's. But the results of such a response to economic alarm 40 Augusts ago suggest this isn't the way to go.

In 1971, President Richard Nixon convened his experts only to produce a protocol that ended up ruining the economic prospects of the decade.

The urgent case that sent Nixon to Camp David that August was the dollar. At the time, the U.S. was on the gold-exchange standard, under which the price of gold was fixed at $35 an ounce and foreign governments could withdraw gold from American banks. The U.S. had long held the position it would maintain $10 billion in gold stock. Foreigners were concerned that U.S. growth was sluggish and began to take gold elsewhere. “Monetary Reserves of the U.S. Declined $505 Million in May,” read a June headline.

 

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