Currency Wars_ The Making of the Next Global Crisis - James Rickards [48]
Nixon and Connally did not really seem to care; having closed the gold window, the price of gold seemed somewhat irrelevant, and devaluation by whatever method was all just a means to an end. By the end of the IMF meeting, it seemed that some combination of continued upward revaluation of most currencies against the dollar on foreign exchange markets, some flexibility on timing of trade deficit reduction by the United States and a U.S. willingness to explicitly raise the dollar price of gold might form the basis of a lasting currency realignment consistent with Nixon’s goals.
By early December, the endgame had begun with another G10 meeting, convened at the ornate Palazzo Corsini in Rome. This time, Connally was ready to deal. He proposed an average revaluation of foreign currencies of 11 percent and a devaluation of the dollar against gold of 10 percent. The combination of the two meant an effective increase of over 20 percent in the dollar price of foreign exports into the United States. In exchange, the United States would drop the 10 percent surtax.
The Europeans and Japanese were in shock: a total swing of perhaps 12 percent to 15 percent might have been acceptable, but 20 percent was too much to bear all at once. Moreover, the members of G10 began to position themselves against one another. A 20 percent swing against the dollar would be one thing if all countries did it at once, but if, for example, the UK revalued only 15 percent while Germany did the full 20 percent, then Germany would be disadvantaged against the UK and the United States. France wanted to limit the size of the dollar devaluation against gold so that more of the adjustment would be pushed onto a German revaluation in which France would not fully participate. And so it went.
By now the negotiations were almost nonstop. A few days after the Rome meeting, President Nixon met one-on-one with President Georges Pompidou of France in the Azores, where Pompidou pressed the case for an increase in the dollar price of gold as part of a package deal. Nixon conducted the negotiations in a sleep-deprived state because he had stayed up most of the night to follow a Washington Redskins football game in local time. In the end, Nixon agreed to the French demands and Pompidou returned to France a hero for having humbled the Americans in the delicate matter of the dollar and gold. Still, Nixon did not leave empty-handed, because Pompidou agreed to push for significant reductions in the stiff tariffs on U.S. imports imposed by the European Common Market.
The tentative agreements reached at Palazzo Corsini and in the Azores were ratified two weeks later by the G10 in a meeting held in the historic red castle of the Smithsonian Institution, adjacent to the National Mall in Washington, D.C. The venue gave its name to the resulting Smithsonian Agreement. The dollar was devalued about 9 percent against gold, and the major currencies were revalued upward between 3 percent and 8 percent against the dollar—a total adjustment of between 11 percent and 17 percent, depending on the currency. Important exceptions were England and France, which did not revalue but still went up about 9 percent relative to the dollar because of the devaluation against gold. The Japanese suffered the largest total adjustment, 17 percent—even more than the Germans—but they drew the least sympathy from Connally since their economy was growing at over 5 percent per year. The signatories agreed to maintain these new parities in a trading band of 2.25 percent up or down—a 4.5 percent band in total—and the United States agreed to remove the despised 10 percent import surtax; it had served its purpose. No provision for a return to the convertible gold standard was made, although technically gold