¹ They demanded depreciation without devaluation. Depreciation can be defined as a decline in the price of a currency measured in another currency or currencies. E.g., from $1.00 = 4 DM to $1.00 = 3 DM. Devaluation can be defined as a decline in the value of the currency declared in terms of some numéraire. E.g., from $1.00 = 1/35 ounce of gold to $1.00 = 1/40 ounce of gold.

² Strange, Susan, “International Economic Relations, I: The Need for an Interdisciplinary Approach,” in The Study of International Affairs, ed. Morgan, Roger (New York: Oxford University Press, 1971), p. 73.Google Scholar

³ Friedman, Milton, “The Case for Flexible Exchange Rates,” Essays in Positive Economics (Chicago: University of Chicago Press, 1953), pp. 157–203. Friedman did not predict that governments would adopt floating rates. But his work suggests one theoretical basis from which to formulate an explanatory-predictive hypothesis about policy.Google Scholar

⁴ See, e.g., Maisel, Sherman J., Managing the Dollar (New York: Norton, 1973), p. 217.Google Scholar

⁵ The remaining four approaches reflect theory in a much less rigorous sense than economic theory. The political analysis from which they are drawn permits identification of causal variables that may contribute separately to explanations. But beyond these concepts it does not provide us with more precise causal hypotheses or predictions of government behavior. Thus this study does not test hypotheses in the usual, stronger sense.

⁶ Gilpin, Robert, “The Politics of Transnational Economic Relations,” in Transnational Relations and World Politics, ed. Keohane, Robert O. and Nye, Joseph S. (Cambridge: Harvard University Press, 1971), pp. 59–60.Google Scholar

⁷ E.g., on the Soviet Union see Gaddis, John L., The United States and the Origins of the Cold War, 1941–1947 (New York: Columbia University Press, 1972)Google Scholar, and on Vietnam, see Ellsberg, Daniel, “The Quagmire Myth and the Stalemate Machine,” Public Policy 19 (1971): 217–274.Google Scholar

⁸ The classic view on pressure groups is associated with Schattsneider, E. E., Politics, Pressures and the Tariff (New York: Prentice-Hall, 1935)Google Scholar. These groups' effects are often overrated, in the conclusion of Bauer, Raymond A., Pool, Ithiel de Sola, and Dexter, Lewis A., American Business and Public Policy, 2d ed. (Chicago: Aldine-Atherton, 1972).Google Scholar

⁹ Gardner, Richard N., Sterling-Dollar Diplomacy (Oxford: Clarendon Press, 1956).Google Scholar

¹⁰ Russell, Robert W., “The Politics of International Monetary Reform,” in What Government Does, Sage Yearbooks in Politics and Public Policy, vol. 1, ed. Holden, Matthew and Dresang, Dennis (Beverly Hills: Sage, 1975), pp. 15–50.Google Scholar

¹¹ Bergsten, C. Fred, The Dilemmas of the Dollar (New York: New York University Press, 1975)Google Scholar. Also see Susan Strange, “The Dollar Crisis 1971,” International Affairs 48 (1972): 204.Google Scholar

¹² Allison, Graham and Szanton, Peter, Remaking Foreign Policy: The Organizational Connection (New York: Basic Books, 1976), pp. 30–32 and 141–164Google Scholar. But individual and ideological variables, on the one hand, and institutional variables on the other are partially independent, and classifying the former as part of “organization,” as this book does, makes analysis unnecessarily fuzzy. See Schilling, Warner, “The Politics of National Defense: Fiscal 1950,” in Strategy, Politics, and Defense Budgets, eds. Schilling, W., Hammond, Paul, and Snyder, Glenn (New York: Columbia University Press, 1962), pp. 15, 21–22Google Scholar, and Art, Robert J., “Bureaucratic Politics and American Foreign Policy: A Critique,” Policy Sciences 4 (1973): 467–490.CrossRefGoogle Scholar

¹³ Hammond, Paul, “Super Carriers and B-36 Bombers,” in American Civil-Military Relations, Stein, Harold, ed., cited by Allison, Graham, Essence of Decision (Boston: Little, Brown, 1971), pp. 160–161, 176.Google Scholar

¹⁴ Huntington, Samuel P., The Common Defense (New York: Columbia University Press, 1961).Google Scholar

¹⁵ Keohane, Robert O. and Nye, Joseph S., “Transgovernmental Relations and International Organizations,” World Politics 27 (1974): 39–62.CrossRefGoogle Scholar

¹⁶ Russell, Robert W., “Transgovernmental Interaction in the International Monetary System, 1960–1972,” International Organization 27 (1973): 431–464. In one exceptional case, the West German Economics Ministry hinted at a committee meeting of the Organization for Economic Cooperation and Development that a favorable recommendation from this transgovernmental committee would aid the Ministry on a matter already rejected by the German Cabinet. The committee made the recommendation, and the German Cabinet then accepted it.CrossRefGoogle Scholar

¹⁷ Snyder, Richard C., Brack, H. W., and Sapin, Burton, eds., Foreign Policy Decision-Making (New York: Free Press, 1962)Google Scholar; George, Alexander, “The ‘Operational Code’: A Neglected Approach to the Study of Political Leaders and Decision-Making,” International Studies Quarterly 13 (1969): 190–222CrossRefGoogle Scholar; Steinbruner, John D., The Cybernetic Theory of Decision (Princeton: Princeton University Press, 1974)Google Scholar; Holsti, Ole, “Foreign Policy Formation Viewed Cognitively,” in Structure of Decision, ed. Axelrod, Robert (Princeton; Princeton University Press, 1976), pp. 18–54Google Scholar; Jervis, Robert, Perception and Misperception in International Politics (Princeton: Princeton University Press, 1976).Google Scholar

¹⁸ Jervis, Perception and Misperception, chap. 1.

¹⁹ Schlesinger, Arthur Jr, “The Origins of the Cold War,” Foreign Affairs 46 (1967): 25–52.CrossRefGoogle Scholar

²⁰ Robert Art, “Bureaucratic Politics.”

²¹ Jervis, Robert, “Hypotheses on Misperception,” World Politics 20 (1968): 455.CrossRefGoogle Scholar

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²³ International financial commentary often recognizes the importance of the psychological factor of “confidence.” Keynes was certain that “the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”

²⁴ These decisions are analyzed in John Odell, “The United States in the International Monetary System: Sources of Foreign-Policy Change” (Ph.D. dissertation, University of Wisconsin-Madison, 1976).Google Scholar

²⁵ Interview. Many official participants in these decisions others were interviewed in 1975, including George Shultz, Herbert Stein, Paul Volcker, and Henry Fowler, but most interview evidence cannot be attributed to particular persons. Some text statements attributing a viewpoint to an individual are supported by an interview with that individual, while others are based on other evidence.

²⁶ U.S. Congress, House Committee on Foreign Affairs, The International Implications of the New Economic Policy: Hearings, 92d Cong., 1st sess., 09 1971, pp. 35–37.Google Scholar

²⁷ Interview. For Fowler's general rejection of laissez faire, see International Implications of the New Economic Policy: Hearings, pp. 35–37.Google Scholar

²⁸ Interview.

²⁹ U.S., Economic Report of the President 1972, p. 297.Google Scholar

³⁰ U.S., President, The United States in the Changing World Economy, Report by Peterson, Peter G., 2 vols., 1972, vol. 2, pp. 2, 7.Google Scholar

³¹ Peterson Report, vol. 2, chart 11.

³² Based on their public statements and interviews with their advisers.

³³ Interview.

³⁴ Interviews.

³⁵ Brandon, Henry, The Retreat of American Power (New York: Dell, 1972), pp. 220–236Google Scholar; Graebner, Linda S., “The New Economic Policy, 1971,” in U.S., Commission on the Organization of the Government for the Conduct of Foreign Policy, Appendices, 7 vols., 1975, vol. 3, pp. 160–184.Google Scholar

³⁶ Interview.

³⁷ Brandon, , p. 229.Google Scholar

³⁸ Interview.

³⁹ Interviews.

⁴⁰ Interviews. Connally was attracted to the surcharge for an additional reason, mentioned below. The Connally-Volcker diagnosis of the deficit was not widely disputed by August 1971, but Connally's diagnosis of foreign government behavior was probably close to unique.

⁴¹ For Burns's views see Safire, William, Before the Fall: An Inside View of the Pre-Watergate White House (Garden City, N.Y.: Doubleday, 1975), pp. 513–524. Supplemented by interviews.Google Scholar

⁴² Quoted by Whalen, Richard J., “The Nixon-Connally Arrangement: The Continuing Adventures of a Trader in Horses and Presidents,” Harper's Magazine, 08 1971, p. 29.Google Scholar

⁴³ Bergsten, , pp. 91–93.Google Scholar

⁴⁴ Interviews. One Connally associate insists: “Connally was interested in more activist steps, but he did not think the value of the dollar was something you could casually change for employment purposes.”

⁴⁵ Safire, , p. 514. This, the only available written account of the deliberations, and interview evidence are consistent with each other.Google Scholar

⁴⁶ Suggested by an interview with a Camp David participant.

⁴⁷ Suggested by a different participant. This interpretation is confirmed by Shultz, George P. and Dam, Kenneth W., Economic Policy Beyond the Headlines (New York: Norton, 1977), p. 117.Google Scholar

⁴⁸ Safire, , pp. 513–514.Google Scholar

⁴⁹ Safire, , p. 514.Google Scholar

⁵⁰ Academic advocates of greater flexibility did debate with policy makers sporadically after the mid-1960s, and bankers and business leaders protested controls on capital outflow. For discussions of this activity and other channels of interest group effect, see Odell, chap. 6.

⁵¹ Assistant to the President. Peterson discussion with Jonathan D. Aronson, Harvard Business School, 21 January 1976. Notes provided by Aronson.

⁵² The monetary changes themselves might also be traced partly to domestic pressure against imports if policy makers expected that dollar depreciation would satisfy or silence domestic critics by helping to check imports, and if this was a relatively salient consideration for them on the monetary question. The need to undercut a possible shift in Congress to a more protectionist trade policy was a major factor persuading Paul Volcker to accept dollar depreciation. But there is no such evidence for Nixon and Connally, and it seems unlikely that Connally was searching for ways to defeat protectionism.

The fact that the Republican party took control of the executive branch from the Democrats probably added a weak background influence in favor of a shift in exchange rate policy. Republican party leaders' attitudes tend more toward removing economic controls and yielding to “market” forces than those of Democratic party leaders. In 1971 Democratic leaders might have given more attention to managing new U.S. exchange rates with U.S. foreign-exchange market intervention rather than abandoning defense of the dollar altogether. But the major policy shift was due to much more than party change.

⁵³ A different interpretation might argue that “international” and “domestic” influences cannot be separated in these decisions. It is true that Connally was concerned with the competitive strength of U.S. business vis-à-vis producers in other countries. But the international economic situation and domestic politics may not covary perfectly. One can imagine a trade deficit without successful domestic protectionism (Britain in the late nineteenth century) or the opposite, a trade surplus with successful pressure for protection (Japan in recent years). An election could add an independent element to policy choice. While it is often difficult to disentangle forces present in a single case, I believe it is useful for analytical purposes to retain this traditional distinction.

⁵⁴ Safire, , pp. 514–515.Google Scholar

⁵⁵ Interviews.

⁵⁶ Interview.

⁵⁷ Interviews.

⁵⁸ New York Times, 7 08 1974, p. 47. Appointing advisers with different beliefs into the same organizational structure and process, for example the later Under Secretary of State Richard Cooper in place of Connally or Kissinger, would likely have influenced policy more than changing the structure.Google Scholar

⁵⁹ Interviews.

⁶⁰ For a different interpretation, see Kohl, Wilfred L., “The Nixon-Kissinger Foreign Policy System and U.S. European Relations: Patterns of Policy Making,” World Politics 28 (1975): 37–40.CrossRefGoogle Scholar

Most members of congress were silent on monetary issues, but a few contributed indirectly to policy change. Congressman Henry Reuss and Senator Jacob Javits of the Joint Economic Committee held hearings to investigate “The Balance of Payments Mess.” Their report, released on 7 August 1971, called for a depreciation of the dollar, either through an international conference or if necessary by unilateral U.S. action to go off gold. This news helped touch off the speculative wave that convinced Volcker and Shultz that it was time to act on plans already under consideration. Congress ratified the change in the dollar's gold value in 1972.

⁶¹ American Banker, 13 02 1973, p. 1Google Scholar. For these events see also Coombs, Charles A., “Treasury and Federal Reserve Foreign Exchange Operations,” Federal Reserve Bank of New York, Monthly Review 55 (1973): 47–65Google Scholar; Economist, 27 01 1973, p. 71Google Scholar; Wall Street Journal, 5 02 and 12 02 1973.Google Scholar

⁶² The course chosen, the second dollar devaluation, has been strongly criticized for needlessly shaking confidence in the dollar and aggravating inflation. See Yeager, Leland B., International Monetary Relations: Theory, History, and Policy, 2d ed. (New York: Harper and Row, 1976), p. 597Google Scholar; Martin, William McC., “Statement before the Sub-committee on International Finance of the Committee on Finance, United States Senate” (1 06 1973)Google Scholar; Laffer, Arthur B., “The Bitter Fruits of Devaluation,” Wall Street Journal, 12 01 1974Google Scholar; Coombs, Charles A., The Arena of International Finance (New York: Wiley, 1976), pp. 225–239.Google Scholar

⁶³ Interviews; Volcker testimony before Senate Committee on Banking, 27 02 1973, rpt. in U.S., Annual Report of the Secretary of the Treasury on the State of the Finances 1973, p. 467.Google Scholar

⁶⁴ Interviews.

⁶⁵ Interviews; New York Times, 14 02 1973Google Scholar; Wall Street Journal, 14 02 1973.Google Scholar

⁶⁶ Interview.

⁶⁷ Salant, Walter S., “The Post-Devaluation Weakness of the Dollar,” Brookings Papers on Economic Activity, 1973, pp. 481–496.CrossRefGoogle Scholar

⁶⁸ Interviews; New York Times, 4 03 1973.Google Scholar

⁶⁹ New York Times, 9 02, 10 02, 12 02, 17 02, 1973Google Scholar; Wall Street Journal, 12 02 1973.Google Scholar

⁷⁰ Interview.

⁷¹ Interviews.

⁷² Keohane, Robert O. and Nye, Joseph S., Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 1977), p. 152.Google Scholar

⁷³ Keohane, and Nye, , eds., Transnational Relations and World Politics (Cambridge: Harvard University Press, 1971).Google Scholar