discussions between John Connally and the President in early and mid-July. In the middle of July, Connally visited Shultz at his office and gave him a general outline of the August 15 plan. From later discussions, Shultz inferred that Connally and the President had already talked it over. Following the initial meeting between Connally and Shultz, the two met with the President a number of times to discuss the package.

Meanwhile the wage situation continued to deteriorate. The steel workers settled with a pay increase similar to the previously won aluminum and can workers agreements of 31 percent over three years plus a cost-of-living increase in 1972 and 1973. Within a day, steel companies announced that they would be forced to raise prices significantly. The steel settlement was particularly disappointing to the Administration since the White House had intervened directly in counseling both management and labor about the necessity of there being a non-inflationary settlement without a strike. And the outlook in wage negotiations was worse: nearly 900,000 workers were covered by contracts that would be expiring in the fall, many workers in industries such as coal, aerospace, and railroads were looking for large increases. It is not clear how influential these domestic developments in July were, but by August 1, the President had decided to implement the plan. A target date of September 15 was set.

Then in the second week in August, the international monetary crisis exploded, forcing immediate and decisive action. The root cause of the crisis was the over-valued dollar which had remained uncorrected because Europe and Japan refused to revalue and America was reluctant to devalue unilaterally. It was feared that devaluation without an accompanying conciliatory gesture would strain American military and economic alliances. The Europeans blamed American domestic inflation rather than structural weaknesses in the monetary system for the weakening of America's trading position. The imposition of the Freeze, a dramatic and highly visible "attack" on inflation, would be responsive to European and Japanese demands for effective action to quell inflation in the U.S. Mr. Nixon also was reluctant to be the first President since Franklin D. Roosevelt to devalue the dollar. A comprehensive and dramatic package would attract broader domestic support. Including a freeze in the package, then, was desirable for diplomatic and political reasons. A September date had been set for its implementation, but the release of the Joint Economic Subcommittee on Exchange and Payments' report sparked a crisis that made immediate implementation of the plan essential.

The Subcommittee's report, released on August 6, found that the dollar was over-valued and recommended that it be allowed to float

downward relative to other currencies. The foreign money markets viewed this as an Administration-inspired trial balloon for a potential float. Massive dollar conversions ensued. The European central banks were forced to absorb hundreds of millions of over-valued dollars in exchange for their local currency in an attempt to keep the dollar's value steady. The Bank of France bought $200-300 million. The Bundesbank bought $43.5 million. The National Bank of Belgium absorbed $11 million. The capital outflow became a deluge. Within a week nearly $4 billion had fled the United States.

Pressed by his economic advisors to put the Freeze package decision into effect, the President decided to meet with his top economic advisors at Camp David to determine the details of the plan. Tight security was maintained: some of his economic advisors were told of the meeting August 13, the day of the meeting; others were simply told to bring a packed suitcase to work. As the participants gathered for that meeting, the largest money run in history culminated with a request from the Bank of England for a guarantee against devaluation of its dollar holdings, amounting to $3 billion. In effect, the Bank was asking that approximately one-fourth of all U.S. gold holdings be set aside for Britain in case of a dollar devaluation. With the situation deteriorating the President and his advisors met at Camp David to determine the specifics of the New Economic Policy.

CAMP DAVID

In early August, when the Freeze package was still in a generalized form, George Shultz had instructed Arnold Weber to prepare two memos: the first, to be an analysis of recent incomes policy experiences in Europe and the various stabilization policies used in the United States since World War I; the second to be a discussion of the various options open to the Administration. Weber was told that these memos were to be used in Shultz's testimony before the Joint Economic Committee in September.

After he had finished these two memos, Weber was told to prepare a third memo discussing the operation of a freeze.

These three memos that Weber prepared were the principal background materials available to the economic advisors at Camp David; hence, they are reviewed in some detail here.

The Weber Memos

Experiences with Incomes Policies in Europe and America

Weber found that incomes policies in Europe were adopted in economic circumstances similar to the present state of the American

economy: inflation coupled with high unemployment. The programs were successful in the short-run, but failures in the long-run, and their removal was followed by large wage and smaller price increases. Compliance had to be largely voluntary. Hence, the cooperation of labor was essential. When labor's support was removed, the programs collapsed. In the United States' experience with controls, Weber found that unambiguous statutory authority was desirable; that controls should be imposed quickly and comprehensively; that their administration must be centralized; and that they must be complemented with fiscal and monetary measures. Again, voluntary compliance was essential, and this was dependent on the cooperation of labor and management. From his analysis of CISC, he concluded that the major ingredient for wage-price stabilization was the tacit agreement of labor and management that some stabilization was necessary. But, at the same time, there was a need for legal sanctions for nonparticipation, so that parties could accept being "forced" to participate in the stabilization process.

Weber isolated five major options open to the Administration:

1. Jawboning with explicit criteria;

2. A tripartite review board;

3. A temporary freeze;

4. Selective industry controls; and

5. General wage and price controls.

The first two were rejected because they were not strong enough to be effective, especially in decentralized industries. Also, there were no major negotiations scheduled for two years, hence these measures would have little impact. General wage and price controls of the World War II sort, because of their bureaucratic weight, were rejected as a policy for these economic circumstances. A temporary freeze was viewed most favorably. It might, he felt, have a beneficial impact on the "inflationary psychology" of management and labor and allow time for the development of a more comprehensive program. Freeze Operations

Weber's plan was to announce a 60-day wage-price freeze, with food exempted because of the seasonal variation of food prices and their relative stability. The freeze would be monitored by a National Council on Economic Stabilization Policy (CESP), made up of Cabinet members. They would confer with the Productivity Commission and other interested groups and recommend further actions to reduce inflation and unemployment. CESP's activities would include planning the post-freeze program, reviewing industry sectors, determining freeze exemption procedures, engaging in a public education program

I

and maintaining stabilization policies consistent with fiscal and monetary policies.

The freeze would depend on voluntary compliance. To encourage cooperation, the President would make a strong appeal to labor and management. But violations would be prosecuted, either through the local U.S. attorney's office or through a special temporary unit in the Justice Department.

The Camp David Meetings; The Freeze Package

At the Camp David meeting, the President announced his decision to put his August 2 policies into effect; debate, then, centered on the character and scope of the Freeze and attendant policies. In essence, the elements of the August 2 strategy were firmly decided upon and details of implementation worked out.

There were three working groups. Paul McCracken, Arthur Burns, and Arnold Weber were in charge of working out the details of the Freeze. They accepted the blueprint in the second Weber memo but decided against recommending any post-freeze steps until the public reaction to the freeze could be measured.

A second group, led by George Shultz and Caspar Weinberger, developed the specifics designed to stimulate business investment and consumer spending. They also examined possible budget cuts to offset the loss in revenues.

Secretary Connally and Paul Volcker worked on the international aspects of the import surcharge and the currency devaluation.

As the meetings progressed, it became obvious to everyone that they were going to need some legal expertise in designing the programs, and Paul Volcker contacted Michael Bradfield, an attorney with the Treasury Department, to come to Camp David to help in drafting the Executive Order.

The President returned to his quarters to consider the different positions of his advisors. In the early morning hours, he decided to go with all four elements: freeze, tax cuts, closing the gold window, and the surcharge.

By early Saturday morning the three panels had finished their outlines and passed them on to the President. With respect to the Freeze, the President agreed to exclude raw agricultural products but wanted to extend the duration to 90, rather than 60 days, to allow more time for planning the next stage. He also agreed with delaying the decision on the post-freeze steps. Then he began development of the address to announce these dramatic decisions with the aid of William Safire. (It was then that the name "Cost of Living Council" rather than "Council on Economic Stabilization Policy" was selected.)

That afternoon the President and the Quadriad met and discussed possible questions which might be raised about the announcement.

General George A. Lincoln, the Director of the Office of Emergency Preparedness, was contacted at his Denver, Colorado ranch and instructed to return to Washington the following day. Other Presidential advisors were also contacted and informed of the decisions.

Mr. Bradfield began to compose the specific regulations for the Freeze on Sunday, August 15. The President returned to Washington late in the afternoon and delivered his historic address that night.

Phase II

INTRODUCTION

The Freeze had been imposed as a part of a comprehensive strategy aimed at restructuring the international monetary system without undermining American ties with Europe and Japan. Thus, the Freeze was a conciliatory vehicle on which a devaluation could be floated, as well as a tool to stabilize wages and prices. There were, of course, domestic pressures for such a dramatic move, and domestic political support for the international initiatives was necessary; and it was reasonable to expect that the Freeze would build popular support for the entire package. These mixed reasons for the Freeze made it exceptionally difficult to develop a clear economic rationale for a post-Freeze program-except to return to free market operation as soon as possible.

THE CAMP DAVID PLAN

At the August 12 Camp David meeting, a tentative plan for a postFreeze economic program, similar to Dr. Burns' notion of a WagePrice Review Board, was devised. Its objective, as Herb Stein described it in an August 18 memorandum, was "to move from freeze to free markets with reasonable price stability."

The Freeze, the advisors believed, would create expectations about the efficacy and desirability of controls. Before the Freeze's imposition, there had been mounting Congressional, labor and public pressure for an interventionist economic policy, specifically either a wageprice freeze or some less Draconian form of controls. While it imposed the Freeze to help solve an international, diplomatic problem, the Administration was opposed to controls as a solution to American domestic inflation. But once the Freeze was imposed, the public expected the