Tucket News HubNew Zealand and the global community have been there before when it comes to international trade and monetary turmoil generated by actions of the incumbent in the White House.
In August of 1971 President Richard Nixon ordered a 10 percent import tariff labelled a “surcharge” for three months, along with a 10 percent fall in foreign aid, a 90-day wage and price freeze and a closing of the gold window under which the US dollar was freely convertible to gold.
Announcement of these measures was initially made by the then Secretary of the Treasury, John Connally, a tough-talking former governor of Texas, who later in the year, while negotiations continued on the fall-out from the decision, declared: “The dollar is our currency but it’s your problem.”
The spark that unleashed these actions was recognition that the US dollar was over-valued when pegged at a rate of exchange of US$35 for one ounce of gold – a rate set by the US congress. A surplus of dollars arising from the scale of American aid, foreign investment and military expenditure had contributed to the situation, along with enthusiasm of foreign governments to increase their gold holdings.
There were deep concerns that the US did not have enough gold to cover the volume of American dollars in global circulation at the $35 an ounce rate of exchange. Effectively, Connally and Nixon wanted the rate up to US$38 an ounce or comparative revaluations of other major currencies.
In particular, just as the US is incensed at its trade imbalance with China today, its trading cause celebre in the last 1960s and 1970s was Japan. But Tokyo resisted the White House pressure until, along with European industrial powers, it was forced to react to imposition of the surcharge.
The similarities of the situation in 1971 and today are clear from a paper written in November, 2024, by one of President Trump’s major influencers, Stephen Miram, chair of the Council of Economic Advisers.
He wrote: “The root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets. As global GDP grows, it becomes increasingly burdensome for the US to finance the provision of reserve assets and the defence umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs.”
In 1971 a prolonged series of meeting of finance ministers through the IMF, the G-10 group of industrial powers and bi-lateral exchanges led to resolution of the turmoil by dropping the US dollar link to gold. Floating currencies were agreed within three months at rates agreed between the major countries of the era, and the 10 percent tariff surcharge dropped.
During the lead-up period to agreement the New Zealand finance minister at the time, Sir Robert Muldoon, and the Australian head of Treasury, John Stone, consistently argued against global floating exchange rates. They would be bad for smaller countries, they argued, because they had fewer reserves to defend their currencies than the big powers of Europe and Asia.
The new floating rates initially agreed were signalled to the world unofficially in a news item jointly put together by the New Zealand Press Association (NZPA) and Reuters in Washington. The source of much of the information arose from friends of mine in the Washington Rugby Club at the time.
Billions of dollars changed hands on international money markets, just as occurred following Trump’s changes to the scale of his initial tariff cuts. Further international meetings and agreements resulted in the system of floating exchange rates being cemented in during 1973.
These signalled the end of the Bretton Woods monetary deal agreed internationally following the end of the Second World War under which the US$35 price was set as the peg for all currencies.
Summaries of the American position in 1971 note that Connally, on behalf of the Nixon administration, consistently argued that exchange rate realignment was long overdue, better opportunities were needed for American exporters and that there should be a better sharing of defence expenditure and development assistance among the Western powers.
Connally was a passenger in the car when former President John F Kennedy was assassinated and was himself seriously injured by two bullets. His forceful presentations led Japanese political figures to christen him “Typhoon Connally”.
There is a slight difference between his demands and those of Trump today, with a greater emphasis now on cheap imports, especially those of China driving American manufacturers out of business, rather than on export opportunities.
And just as Trump today frequently resorts to hyperbole to describe his actions as “the greatest”, Richard Nixon did not 54 years ago forget to declare the importance of the currency agreement reached in 1971. “It was,” he said, “the most significant monetary agreement in the history of the world.”
This time around, the Chinese have more substance in their bargaining position than the Japanese had when faced with the Texan Typhoon. History is again “in the making”.
Bruce has been an economics and business editor, political and foreign correspondent in Washington, London and Hong Kong. He recently retired as CEO of the Building Industry Federation.
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