I.O.U.S.A - Addison Wiggin [114]
Q: Could you characterize the environment that led to Nixon wanting to devalue the dollar?
Arthur Laffer: In the 1970s, we had all sorts of economic problems. Infl ation was rising. We had a weakening of the dollar through Johnson and Nixon. Even before Johnson, we had a weakening with Kennedy. There were all sorts of restrictions on c17.indd 229
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trade. You may remember that Kennedy had a problem with France on the dollar and then, when Johnson came in, he, too, had them.
We had the Buy America program, the interest equalization tax, the voluntary foreign credit restraint program, all of these things aimed at improving the trade balance, the capital balance of the U.S. And, throughout this whole period, we had reduced our reserves of gold and we really had not used gold as the discipline that it should have been. That ’ s with the Bretton Woods agreement.
When we came into the 1970s with Richard Nixon, I was very involved — as you may know, I was the fi rst chief economist at the OMB when it was formed. In fact, I joined the government in October 1970. I was George Schultz ’ s right - hand person back then, his economist. My fi rst job was a trip to China. I was in charge of mainland China for the White House, which, for a kid my age back then, was pretty cool.
Q: How old were you?
Arthur Laffer: I was 29, maybe 30. At that time, we wanted to devalue the dollar and the French did not. John Connolly was our union representative and he was discussing this with Giscard d ’ Estaing, and Giscard d ’ Estaing was trying to explain to Connolly why they really could not allow the U.S. to devalue the dollar. This was just before the Smithsonian Accord. He said, “ Mr. Connolly, I don ’ t know if you understand the program from the standpoint of France, but you see, sir, we hold the dollars in reserves and, therefore, if we allow you to devalue the dollar against the French franc, we will suffer the capital loss on the reserves in France. That is what will happen. ”
And with that, Connolly takes his unlit cigar, swirls it in his mouth, puts his foot up on the table with boots on, points that cigar at Giscard, and says, “ Well, hell, Giscard, we have more dollars than you do. ” And, of course, everyone bursts out laughing.
But going off gold and devaluing the dollar was a very big mistake.
It caused a decade of hyperinfl ation, high interest rates, and the collapse of the world economy. We raised tax rates dramatically under Nixon and we devalued the dollar. We caused this c17.indd 230
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hyperinfl ation. It was a double whammy, and it led to one of the worst 15 - or 16 - year time periods in the U.S.
After the Kennedy go - go 1960s, the Dow Jones Industrial Average peaked in February 1966 at just about 1,000. Sixteen and a half years later, in August 1982, the Dow Jones Industrial Average was about 800. Ouch. In 16½ years, the nominal value of America ’ s stock market fell by 20 percent, and that doesn ’ t count the trebling of the price level during that period. The average annual real rate of return from February 1966 to August ‘ 82 on the Dow Jones Industrial Average was minus 8 percent per annum compounded annually. That bear market was caused by Nixon ’ s devaluation of the dollar and by high taxes and by restrictions on trade.
In the ‘ 80s, we reversed those policies. Paul Volcker brought us back to sound money. Ronald Reagan gave us tax rate reductions and we had a prosperity that had not been seen on planet Earth for a long, long time. We cut tax rates, we had sound money, we had free trade, and we had minimal regulations. All the four grand kingdoms of macroeconomics were put in the right place. The Dow Jones Industrial Average in August 1982 was at 800. Today it ’ s at 13,500. That is a bull market. In the ’80s, we would have given our right arms to have an