In August 1971, US President Richard Nixon must decide how to respond to a growing "run" on the US dollar. Declining confidence in the dollar has led some national trading partners to redeem dollars for gold at the US Treasury's gold window. Nixon has convened an urgent conference with his economic advisers at Camp David to consider a response. The two dominant policy alternatives are (a) gradual intervention proposed by central banker, Arthur Burns; and (b) "shock treatment" (devaluation of the dollar by abandoning the commitment under the Bretton Woods Agreement to convert dollars into gold at the rate of $35/ounce) proposed by Treasury Secretary John Connally. The task for the student is to assess the situation and recommend a course of action. The A case describes the Bretton Woods system, the run on the dollar, and Nixon's policy dilemma. The B case gives the text of Nixon's 1971 address outlining his New Economic Policy. This A and B abridged case, which has been taught successfully in Darden in-person and online classes, shortens the total presentation by eliminating some of the quoted material; the student task in this case is to analyze Nixon's decision and decide on next steps. The C case presents a brief epilogue.
1. Consider why the Bretton Woods system International Monetary Fund (IMF) was established and how the system was meant to work. What problems was this system meant to resolve? And how would it resolve them? 2. Review the age of multilateralism, reflected in the post-World War II creation of institutions, agreements, and informal understandings that sought to promote global peace and prevent the occurrence of another Great Depression. An important subtext of the case is why and how structured interdependence among nations can help to achieve such aims. 3. Confront the instability latent in the Bretton Woods system, as summarized in the Triffin dilemma and the impossible trilemma. 4. Review the fall of the Bretton Woods system, taking into account the indicators of financial stress and the dynamics of the unfolding crisis. Nixon's New Economic Policy, announced on August 15, 1971, effectively doomed the gold reserve standard and forced radical change upon the IMF and the Bretton Woods system.