Nixon was Funny: and Why the US should Care about Events in Europe

Timothy Geithner, US Treasury Secretary and Christine Lagarde, head of the IMF

Although President Obama and the US Federal Reserve are clearly worried about how the continuing debt crisis in the eurozone might impact the US market, past American presidents have assumed a more insouciant attitude toward European monetary issues. I’m currently plodding through David Marsh’s excellent book The Euro: the Battle for the New Global Currency. While discussing events surrounding the suspension of the dollar’s convertibility into gold and the introduction of “The Snake” (one of the precursors to the EMU and a mechanism by which European governments banded their currencies together through a system of controlled floating exchange rates), Marsh quotes this hilariously telling exchange between then US President Richard Nixon and his chief of staff, H.R. Haldeman:

Haldeman: Did you get the report that the British floated the pound?

Nixon:         No, I don’t think so.

Haldeman: They did.

Nixon:         That’s devaluation?

Haldeman: Yeah. Flanigan’s got a report on it here.

Nixon:         I don’t care about it. Nothing we can do about it.

Haldeman: You want a rundown?

Nixon:         No, I don’t.

Haldeman: He argues it shows the wisdom of our refusal to consider convertibility until we get a new monetary system.

Nixon:         Good. I think he’s right. It’s too complicated for me to get into.

Haldeman: [Fed chairman] Burns expects a 5 percent devaluation against the dollar.

Nixon:         Yeah, OK. Fine.

Haldeman: Burns is concerned about speculation about the lira.

Nixon:         Well, I don’t give a shit about the lira.

Now the lira was such a terribly pathetic currency that it’s hard not to sympathize with Nixon’s view here. A year later the Bretton Woods system would fall apart as the US went off the gold standard altogether. The irony of Nixon’s apparent disregard for all things Europeanly economic is how strongly events on the old continent were impacting the economic situation in the US. Sure a lot of other stuff was also going down w/r/t OPEC and political volatility in the Middle East, but still, massive speculative attacks were being flung at the dollar as currency was flowing out of the states (to finance wars and other balance of payment problems) and Europeans (mainly the French and the Germans) were in turn quickly trying to convert these dollars into gold.

Although there are reasons to be optimistic that Europe will get its house in order, there are still many ways the current crisis could affect the US. The central theme revolves around the impact constrained European lending could have on the ability of American households and businesses to finance themselves. Yglesias tightly lays out perhaps the most devastating scenario:

The punch will come, in other words, not because the collapse of the European banking system will cripple the European economy and thus indirectly hurt our ability to sell things to Europeans. Instead the collapse of the European banking system will directly cripple an American economy that depends on European banks to provide a fair share of our credit.

Such a scenario doesn’t even require a full collapse of the eurozone and the European banking system. Stricter leveraging requirements and austerity measures could effect this outcome as well.

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