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Your Guide to Washington and the World’s 2024 US Election Means
The author is Vice-Chair of Oliver Wyman, former head of Global Banks, and Morgan Stanley’s Diversified Financial Studies.
What will be the long-term financial impact of Trump’s tariffs? We may be on a 90-day hiatus, but the questions remain urgent. Looking back at Richard Nixon’s experience in 1971, it helps investors understand what will happen next.
Certainly the recent events share a distinctive feature with the “Nixon Shock” that occurred when the then president took the dollar away from the gold standard, enforced 10% import duties and introduced temporary price controls. The removal of this administration has resulted in a period of global economic instability and uncertainty. It not only caused a loss of business trust, but also led to stags. Nixon prices and wages will backfire grandly, causing product shortages and help promote wage prices spirals. The entire episode was a vital contributor to the huge inflation of the ’70s.
Like Trump’s tariffs, Nixon was introduced to cudgel countries to change trade terms to change US trade terms. His biggest concerns were Japan and Germany. “My philosophy is that the president is that all foreigners are trying to ruin us, and it’s our job to ruin them first,” John Connally told him.
In today’s high finance world, we have already seen how bond markets can force politicians’ hands more quickly. It took four months in 1971 for Nixon’s tariffs to be removed via the Smithsonian Agreement. However, the shock has already done enough to catalyze extraordinary changes in finance, leading to the creation of new equipment to bet in the direction of interest rates and hedge currency risk, including forex futures and options.
The pain of stagflation in the banking system has prompted a major shift in financial behavior and financial regulations. Investors have shifted their asset allocations to gold and actual assets to maintain value. Meanwhile, businesses and depositors have moved their activities more and more from banks to the bond market. Bank lending as a full share of borrowing in the economy has been declining ever since. In short, modern finances were built in the early 1970s.
There are similarities in countries other than the US that are currently worried about tariffs. In 1971 there was also a tinsel treatment for the US closest allies. Nixon attacked Canada with tariffs despite the currency already floating. Like Prime Minister Mark Carney today, Canadians did not retreat, and the tariffs were eventually removed. That could be even worse. Connally also wanted the US to withdraw from a long-standing agreement with Canada for automobiles and auto parts. However, according to his memoirs, it corrected it by encouraging State Department officials to tear the final page of every press release that mentioned it.
Ultimately, the need to stabilize international relations with allies helped to balance out the tariffs. Henry Kissinger, then-national security adviser, said “we were worried about the uneasy effects of a long-term conflict on Allied relations.”
Nixon also put a lot of pressure on the Fed for expanded monetary policy to offset the shock. Nixon’s speechwriter William Sapphire says how the administration can keep anonymous leaks, maintain leaks to Pressure Fed Chair Arthur Burns, and fill the committee with supportive new members, including floating one proposal to expand the size of the Federal Reserve.
When it all ended, Nixon’s four-month tax may have helped to promote a revaluation of the dollar, but it had not reached the desired target and had no identifiable impact on imports. However, the economic shock wave of this movement has spread over decades. Even the creation of the euro is inhabited from there. Could a digital euro or deeper European capital market be next? Although it is not yet clear, history suggests that fallout from this latest shock will be felt for years to come.
