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U.S. President Donald Trump would probably have delighted in the straight-talking Texan swagger of John Connally, President Richard Nixon’s second secretary of the Treasury. Connally’s policies foreshadowed a number of Trump’s favored positions. He presided over the imposition of an import surcharge in 1971, which he argued would show the administration’s support for struggling workers in the U.S. auto industry. He hammered U.S. allies for not spending enough on their own defense, much as Trump did in Brussels earlier this year. And his rhetorically belligerent style on the international stage was nothing if not Trumpian. His famous line “The dollar is our currency, but it’s your problem” seems straight out of Trump’s “America first” playbook.
Indeed, Trump has sketched a remarkably similar vision of economic nationalism. His calls for more aggressive trade protections, fairer exchange-rate policies, and greater defense burden sharing echo those of Connally’s tenure. The Trump administration has also adopted Connally’s bombastic approach to international negotiations. In August, for instance, U.S. Trade Representative Robert Lighthizer said that the North American Free Trade Agreement had “fundamentally failed many, many Americans.” Trump doubled down on that remark, tweeting later in the month that NAFTA was the “worst trade deal ever made.” The president has also threatened to withdraw the United States from its free trade agreement with South Korea, just as that country, a U.S. ally, descends deeper into crisis with its neighbor to the north.
The trouble is that this aggressive strategy didn’t work. Connally’s sharp-elbowed approach impressed Nixon, but it failed to advance U.S. economic interests abroad. As the Trump administration begins pursuing its economic agenda in earnest, it is worth comparing Connally’s record with that of George Shultz, his successor as Treasury secretary. Shultz’s strategy—selective, discreet engagement with key allies and an overarching vision of a liberalized financial system built around the United States—served the country better. U.S. officials should heed the lessons of this natural experiment in “America first” economic policy.
NO NEW FRIENDS
Connally’s economic nationalism had two prongs: unilateral action and forceful rhetoric. In 1971, when Paul Volcker, then the undersecretary of the Treasury, and Arthur Burns, the chair of the Federal Reserve, argued that closing the gold window, or prohibiting foreign governments from exchanging U.S. dollars for gold, would anger the United States’ allies, Connally responded simply: “So other countries don’t like it. So what?” In 1973, The New York Times characterized his approach to the 1971 Smithsonian Agreement, which pegged major foreign currencies to the dollar within defined ranges, as “strong-arm diplomacy.” Connally “infuriated other countries, it was said, but he got his way in the end.”
Yet Connally’s approach failed to make lasting economic gains or win many friends for the United States. In November 1971, Nixon’s assistant for international economic affairs, Pete Peterson, reported to Nixon that he had begun receiving worried calls about the effects of Connally’s combative stance on the stock market, asking the administration to stop the “saber rattling” and drop its “don’t give a damn attitude.” Although the stock market has performed well under Trump thus far, there are few better ways to squander those gains than impulsive trade policies.
Just before Shultz’s appointment at the Treasury was announced in 1972, National Security Council staffer Bob Hormats wrote in an internal memo that after the announcement of the closing of the gold window and New Economic Policy, Connally’s aggressive posture–which focused on improving the United States’ balance of payments at the expense of its trading partners–had “produced little real benefit” for the United States and subjected the country “to strong foreign criticism.” When Shultz succeeded Connally in 1972, the stability of the international economic system had barely budged from its 1971 nadir. If Connally’s tenure had a lesson, it was that the bully pulpit is a poor platform for making international economic policy.
SANTA CLAUS IS DEAD
Like his predecessor, Shultz was not afraid to throw the United States’ economic weight around. In 1972 and 1973, he urged Nixon not to intervene in international currency markets to prop up the dollar. “If they don’t go along with it,” he told the president, “they will have to struggle in their currency markets, and we won’t help them.”
Like Connally, Shultz became famous for a pithy elucidation of U.S. currency policy: “Santa Claus is dead,” he said in 1973, doubling down on the United States’ refusal to intervene in currency markets. But unlike Connally, Shultz grounded his financial realism in multilateralism where required and a clear vision for how the international financial system should evolve. He sought to reshape the international economy in ways that would benefit the United States as the world grew more connected over the long term. Instead of fighting other countries over U.S. balance-of-payments deficits, for example, he sought to make exchange rates more flexible to force those states to either adjust the value of their own currencies or take on dollar liabilities. If Connally’s style could be called “America first and only,” Shultz’s was “America first among many.”
Shultz’s record has two main lessons for today’s policymakers. First, Shultz came to office with an ambitious and well-articulated agenda to move the global economy away from rigid centralized management and toward floating exchange rates and the free movement of capital. These broader objectives lined up with Shultz’s view of Washington’s economic interests: a liberalized international financial system with the United States at its center. Such a system would help address the balance-of-payments crises that arose under the Bretton Woods fixed-exchange system and give the United States—with its deep and stable financial markets—a leading role in the rapidly globalizing financial system.
So far, the Trump administration has articulated its international economic goals in narrow terms: improving the terms of U.S. trade with China, scrapping the Trans-Pacific Partnership, renegotiating NAFTA, and the like. Unless it forms an overarching objective, as Shultz did, the Trump administration will be doomed to tit-for-tat battles that do little to address the causes of many Americans’ economic problems, from stagnating wages to declining business investment.
Second, Shultz eventually came to eschew unilateral declarations, instead favoring selective, private engagements. When he sought to devalue the dollar against the Japanese yen and major European currencies in 1973, for example, he dispatched Volcker to negotiate with the relevant governments in secret. He also created the Library Group of finance ministers—an informal body that included representatives from France, Germany, the United Kingdom, and the United States—to coordinate international economic policy. It eventually grew into the G-7.
In a 1973 conversation with Nixon and Henry Kissinger, Nixon’s secretary of state, Shultz shared the thinking behind this approach. His strategy had two components, he said: a “negotiating track; [in which] people are stating positions,” and a “reality track of what is actually taking place.” “Our trick,” he said, “is to so manage the reality that it conforms more and more to the idea that we’re putting forward until they begin to touch each other in important places.”
Shultz went on to serve as secretary of state under President Ronald Reagan and continued to shape the trajectory of global governance, to great acclaim. Connally, although a dedicated public servant throughout his career, left the administration to work on Nixon’s reelection campaign and later ran unsuccessfully for the 1980 Republican presidential nomination on a platform of protectionism, among other things. It was during that election that Reagan proposed what would eventually become NAFTA. By then, aggressive economic nationalism had fallen out of fashion.
The Trump administration has now brought nationalist economic policy back to the fore, laying out an international economic agenda as ambitious as any since the post–Bretton Woods reform of the international monetary system. So far, however, its tactics have lacked the nuance required by that subject’s delicacy.
Improvements in trade relationships and exchange rates require partners, whether willing or grudging. Shultz knew this. He focused on building a multilateral economic system that would benefit the United States by playing to its strengths—its deep financial markets and the dollar’s status as a reserve currency. If the Trump administration wants a foreign economic policy that is in the national interest—one that secures opportunities for U.S. workers, improves the terms of trade with crucial partners such as China, and preserves the United States’ leading role in the international economy—it should follow suit.