Three Days at Camp David

Upheavals from President Donald Trump’s tariff announcements are likely to be long-lasting. The quantum and scope were unexpected, the methodology flawed, the formula bizarre and trade in services excluded. After negative market reaction, the pattern has been for dramatic announcements to be quickly followed by extended postponements. 

What is certain is that the word of the year for 2025 will be ‘uncertainty’.

America’s stated objectives are clear: reduce ever-mounting trade deficits, retain technological and defence superiority, revive manufacturing, cut reliance on China and combat national security threats. How well thought-through are these tariffs? What could be the scale of damage and disruption? And what about the unstated policy of weakening the US dollar?

No one knows.

But an excellent book, Three Days at Camp David by Jeffrey Garten – a former dean of Yale School of Management and an undersecretary of commerce in the Clinton administration –provides useful insights into a significant event in monetary history.

A historic precedent

Through much of the 20th century, as the economic and political power of the US grew, America ran huge trade surpluses, such as in the aftermath of World War II when it aided the reconstruction of a decimated Europe through programmes such as the Marshall Plan. The US dollar became the dominant reserve currency, taking the crown from the British pound.

In 1944, after the Bretton Woods conference, America joined the newly created International Monetary Fund (IMF) with a commitment to convert the dollar for gold at a price of $35 per ounce. The British pound, Japanese yen and West German mark were linked to the dollar at a fixed rate with a 1% move permissible either way. This agreement was driven by a desire for stability, and a response to the dislocations from tariffs, quotas, the Great Depression of the 1930s and the destruction of World War II.

Then, in August 1971, two days after intense deliberations at Camp David, President Richard Nixon unilaterally severed America’s commitment to gold convertibility. As Garten notes: “He was in essence telling the world that the near-omnipotent role the US had played since the war was over. The days in which America shepherded Western Europe and Japan’s recovery post the war – an era in which it had opened its markets to imports without receiving reciprocal treatment, the years in which it funded a disproportionate amount of common military defence, the quarter-century in which it held up the global monetary system with its gold – all that was now going to change.” 

“Washington was not asking its allies to enter a new age of burden sharing; it was forcing them to accept it.” 

Then, as now, the thinking was that reducing trade deficits meant a drastic change in terms of trade and a far lower dollar exchange rate. The alternative was for the US to raise interest rates, contract demand, slash its budget deficit and reduce imports. That would mean higher unemployment and possibly a recession. Nixon could not tolerate that. Nor can Trump. The burden has to be shared across allies and foes alike.

The key figures

Garten describes in great detail the philosphical bent of key individuals involved in the momentous decision that weekend. On Nixon, he quotes mid-1970s US secretary of state Henry Kissinger who said that, once Nixon was convinced of a course, he would try to take the most sweeping solution presented to him or that he could otherwise invent. Nixon once told Senator Bob Dole: “I just get up every morning to confound my enemies.” Bryce Harlow, one of Nixon’s closest senior advisors, put it this way: “Nixon went up the walls of life with his claws.” 

Secretary of Treasury John Connally (“the US dollar is our currency but your problem”) was schooled in politics by Lyndon B. Johnson. Connally once told another political operative: “You and I, we are like termites. If the sun shines on us we die.” He was an exceptionally tough opponent and negotiator.

Arthur Burns was chair of the Fed for most of the 1970s. Nixon valued his loyalty and believed he could influence him to adopt monetary policies that aligned with his political goals. Though Burns opposed closing the gold window, fearing it would destabilise the international monetary system, he assured Nixon of his support for the new economic program. This included suspending dollar convertibility to gold, implementing wage and price controls and imposing import surcharges. Many blamed him and his expansionary policies for persistent inflation and economic volatility in the 1970s.

Paul Volker was the undersecretary for monetary affairs who knew the international monetary framework inside out. He was a firm believer in the Bretton Woods agreement and that money neded an anchor; an exchange rate fixed to gold served that purpose. But he went along with Nixon’s decision and had to inform counterparts at foreign central banks.

Connally’s successor as Secretary of Treasury, George Shultz, was a true conservative Republican who believed in the power of markets. He wanted the US dollar and all currencies to immediately float with no anchor and let the market determine fair value. Though government interference was anathema to him, he agreed to freezing wages because Nixon did not want inflation to be an election issue.

Kissinger played a peripheral role in the events. Yet, in November 1971, he told Nixon: “We are uniting all those countries against us by not telling them what we want. If we screw everybody in the free world, we will undermine the whole structure of free world competition.” 

Negotiations on how much each currency should appreciate against the US dollar were as haphazard as today’s tariff negotiations. Connally met a Japanese delegation demanding a 19.2% revaluation of the yen. When the Japanese resisted, he retreated to 17%. Not ready to budge, the Japanese pointed out that, in 1930, one of their finance ministers had revalued the yen by 17%, which led to a recession and might have resulted in the minister’s assassination. 

Connally paused for a second. He understood the power of superstition. “How about 16.9%?”, he asked. The deal was done.

Similarities to Trump’s US

As the scope of controls became broader and deeper, a sprawling bureaucracy emerged. Fair treatment of business and labour, and handling hundreds of requests for exception to the rules, complicated effective enforcement. Not surprisingly, in 1974 when controls were lifted, repressed prices were unleashed and inflation returned, eventually with a vengeance.

It’s best not to know how a sausage is made. What I took away from this book is that monarchic power and deep-seated beliefs are not new to the US. Decisions that look sound in theory collide with human nature, geopolitical rivalry and feedback loops from bond and equity markets. Even the smartest brains invariably underestimate the nuances and complexities of an interconnected world. 

The decade of the 1970s was jarring in every sense but, looking at events with the benefit of hindsight, despite momentous changes and disruptions through the 1970s, the US and the world did adjust and recover in the years thereafter.  

If you think President Trump and his advisors are acting in a monarchic fashion, the difference from yesteryear is only in the nuance. Power corrupts; absolute power corrupts absolutely.

China’s rise, though like Japan and Germany’s rise after WWII, is different in scale and ideological pursuit. The Soviet Union was never an economic superpower, while China has cribbed from capitalism’s best playbook. American consumers and equity markets have been mollycoddled by the generous benefits and the Fed ‘put’ at moments of economic instability. Debt levels and financial leverage in the US (and globally) are unprecedented. And we are at the cusp of massive disruption from AI.

Asset allocators confront the direction of the US dollar (consensus is weaker) and worry about concentration risk in US equities (a reversal is positive for Asian equities), yet there is a recognition that, if trade wars and tariffs persist long, the detrimental effects on global economies, profits, growth and employment could be dire.

My bias is towards a positive view on Asian equities, but really, no one knows.

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