The End of Bretton Woods
In March 1969 the Wall Street Journal reported that the new Republican administration was eager to reduce the Johnson-imposed controls on foreign direct investment (FDI). 1 The Nixon approach was initially intended to be liberalization of capital controls combined with fiscal conservatism that would enhance the international position of the dollar. The Commerce Department issued new regulations increasing the amounts of investment exempt from control, particularly in mining and air transport, lowered the interest equalization tax (IET), and increased the amounts of foreign lending that could be made by U.S. banks.
However, Nixon's policy on capital controls was a far cry from the dismantling of controls he pledged to U.S. foreign investors during his campaign. Staff economists at the Chase Manhattan Bank believed that the effect of lowering the IET would be “minimal” because restrictive monetary policy made the cost of capital from U.S. investment banks uncompetitive. The Chase analysts also concluded that “it is probably premature to expect a complete dismantling of the controls, considering domestic inflation and the expected payments deficit.” 2
The balance-of-payments deficits for the next few years, as illustrated in the previous chapter, would exceed even the most pessimistic expectations. Further, inflation would worsen and the Nixon administration would, at least until after the 1972 election, be at pains to avoid the onset of recession. The perplexing combination of rising unemployment and increasing inflation that developed during the Nixon years confounded the search for coherent and ideologically acceptable policy within the established Keynesian framework. The continued worsening of inflation led to the famous imposition of domestic wage and price controls in 1971–1974. An administration that began with the intent of decontrolling international