THE WEEK OF THE GREAT ULTIMATUM

Seven days in August in which Richard Nixon taught us two words — surcharge and please

WALTER STEWART March 1 1972

THE WEEK OF THE GREAT ULTIMATUM

Seven days in August in which Richard Nixon taught us two words — surcharge and please

WALTER STEWART March 1 1972

THE WEEK OF THE GREAT ULTIMATUM

Seven days in August in which Richard Nixon taught us two words — surcharge and please

WALTER STEWART

There are events in the life of every country more significant in form than content. Long after they have been exiled from the headlines by the passage of time and the unfolding of subsequent events, we remember them not for what they were — a pipeline debate, a cabinet minister’s romantic improprieties — but for what they revealed about ourselves. Such an event was the surcharge crisis of August, 1971.

In May, 1956, when the House of Commons exploded over an $80-million loan to a U.S.-controlled pipeline company, we learned about the corruptive influences on a political party of too much power, too long enjoyed. Ten years later, when the name Gerda Munsinger reverberated through the corridors of parliament, we learned about the petty human antagonisms that exist barely suppressed among even the most elevated political adversaries. And during the seven tumultuous days that followed President Richard Nixon’s announcement last August that his government intended to take steps to strengthen the American economy which would seriously weaken our own, we discovered a new truth about our “special relationship” with the United States.

It was not a reassuring revelation. We learned that the trading rules by which we live, and on which the health of our economy so greatly depends, could be suspended abruptly and unilaterally by the American President and that there was little our own government could do to retaliate. As it turned out, the Americans eventually found other solutions to their economic problems, and although we agreed to bargain on some key issues — removing the safeguards on the CanadaU.S. auto-trade pact, purchasing American defense equipment, increasing the duty-free exemptions for Canadian tourists returning from the United States — we seem to have emerged from the crisis relatively unscathed. Still, if our economy remains intact so, too, is the vulnerability that was revealed during the seven days of August 13 to 19. Our relationship with the United States is exactly as it was then: what can never be the same is our perception of that relationship.

Here is what happened day by day, detail by detail, during the week of the Great Ultimatum — and what it revealed about where Canada stands:

FIRST DAY. Just after 1 p.m. on Friday, August 13, a long black limousine pulled up to the secluded ramp entrance of the White House in Washington. A door opened and presidential speech writer William Safire and presidential economic adviser Herbert Stein scuttled out of the building and into the car. It rolled down Executive Avenue and onto Pennsylvania, on the road to Anacostia naval base, where a helicopter was waiting to lift the pair 65 miles north to Camp David, the President’s Catoctin Mountain retreat in Maryland. Since helicopters often take off directly from the White House lawn, it seemed to Safire a peculiar way to travel and he wanted to know, politely, what the hell was going on. Stein told him solemnly, “This could be the most important weekend in economic history since May 4, 1933.” That was the day Franklin Delano Roosevelt had unlimbered his New Deal. Safire was duly impressed.

He remained so two hours later, when he walked into the living room of Aspen, the President’s cottage at Camp David, where Nixon, in a soft-blue sports jacket, sat surrounded by all his top economic advisers. On his right was John Connally, the hard, handsome new Secretary of the Treasury, a man, according to White House gossip, Nixon not only respected but held in awe. Next to Connally was Arthur Burns, chairman of the Federal Reserve Board — the U.S. equivalent of the Bank of Canada — and an outspoken critic of the standpat economic policy then in vogue. George Shultz, chief of the budget bureau and architect of Nixon’s hands-off-the-economy policy, was there; so were Paul McCracken, then chairman of the Council of Economic Advisers, Caspar Weinberger, Shultz’ deputy, Paul Volcker, Connally’s deputy, and presidential aides Pete Peterson, H. R. Haldeman and John Ehrlichman. Suddenly the / continued on page 66

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ULTIMATUM from page 19

limousine ride to Anacostia made sense; if the White House press corps had seen this gathering of eagles leave the premises, the entire nation would have known within minutes that something momentous was brewing.

And so it was, as the President made clear soon after he had hoisted his feet onto a stool, leaned back to gaze out at the mountain panorama, and begun talking. The time had come, he said, to reorder the American economy and that was what they were going to do this very weekend. He laid out some of the issues.

Inflation was on the rise; in the single month of July industrial wholesale prices had jumped .7%, the fastest monthly increase in nearly six years. The U.S. was running a deficit in her balance of payments, because of Vietnam, foreign aid and capital expansion abroad. Vietnam alone had drained five billion dollars a year out of the country for years; during the first half of 1971, the overall imbalance was running at an annual rate of more than $20 billion. Now even U.S. exports were in trouble. In 1971, for the first time in nearly a century, the country would be in the red on merchandise trade.

As a result, the American dollar was under attack from speculators who surmised that it would have to be devalued. The run on the dollar was approaching crisis proportions; U.S. gold reserves were down to $10 billion, and yesterday, August 12, Britain had asked for four billion dollars of that. If other nations followed suit, demanding gold for U.S. dollars, America would be bankrupt abroad.

There was trouble at home, too; 5,330,000 Americans were unemployed, stock prices had declined 100 points on the Dow Jones index since April, and consumer confidence, as reflected in spending intentions, was evaporating fast. This gloom had been gathering for some time, and all the while the President’s closest economic adviser, George Shultz, had been counseling him to hold fast and eschew direct intervention in the economy. Up until now he had listened, but there were political developments that cut much closer to the bone.

A Gallup poll in early August had shown the Democrats with a two-toone advantage over Republicans on economic issues; a private poll by Albert Sindlinger had shown that only 27% of respondents named Nixon as their first presidential choice for 1972, and 70% thought he was doing “nothing” about the economy. Congress was getting restless, too. The Senate’s Wednesday Club, a group of moderate Republicans, had advocated a wage-price commission, and over at the House of Representatives, Wilbur Mills, chairman of the Ways and Means Committee, was said to be brewing up his own remedies.

Strong medicine was required, and Nixon proceeded to administer it. Weeks earlier, those advisers who opposed the steady-as-she-goes approach had begun collecting evidence and ideas. John Connally, for one, had asked his staff to write him memos about “anything that occurred to them” to improve the U.S. position. Spurred by the run on gold, Nixon meant to act now on the proffered advice with three proposals, which he laid before the Camp David meeting.

First, there would be a 90-day freeze on prices and wages to check inflation (later, the freeze would be replaced by a set of administered guidelines). Secondly, the U.S. would no longer convert dollars into gold, and that would ease the immediate pressure on shrinking gold reserves (it would also, in effect, devalue the dollar). Thirdly, there would be a number of steps to encourage American

“We were in a bind,” said a U.S. official, “but you wouldn’t talk. The surcharge meant you damn well had to.”

spending and protect domestic markets from foreign competition, and that would restore confidence and bring foreign payments back into balance. There would be tax concessions, a “buy American” policy, removal of the excise on U.S.-produced autos and a 10% surcharge on foreign goods entering the U.S. market. This last step would have the double effect of protecting the home market and, by threatening world trade, bringing other nations to the bargaining table to discuss a new international monetary structure. (A senior Treasury official later told me, “We were in a bind and other countries, including your own, kept saying, ‘Yes, yes, we’ll talk about it.’ But you wouldn’t talk. When the surcharge went on, you damn well had to talk.”)

These major decisions were not open for debate; the President had already made them. The Camp David meeting was called to implement them. Nor was there much discussion of the impact of the new program on Canada. Japan was a worry, certainly; the Japanese would not be happy. The Canadians, well, they wouldn’t be happy either, but what could they do? As it happened, we didn’t even know anything needed doing, not yet. Friday, August 13, was the day Prime Minister Trudeau, his wife, Margaret, Michael Pitfield, deputy secretary to the cabinet, and an RCMP guard left Ottawa for a 25day work-and-holiday cruise to begin in Dubrovnik, Yugoslavia. Mitchell Sharp, Secretary of State for External Affairs, was holidaying in Scotland, and Finance Minister Edgar Benson was on his way to Nijmegen, in the Netherlands, his wife’s hometown. Treasury Board President C. M. Drury was the acting prime minister, and he would spend the weekend at a cottage in the Gatineau Hills. Even the Canadian ambassador to the U.S. was away fishing, 100 miles north of Ottawa. Canadian officials knew of the pressures on the U.S. economy, of course, but no one expected any action so tough, so decisive, or so soon. Canada slumbered in peace.

SECOND DAY. There was little change on Saturday, August 14. Prime Minister Trudeau arrived in Vienna, changed planes for the flight to Belgrade, and made the last leg of the trip to the Adriatic coast in President Tito’s private jet. At Dubrovnik, a 71-foot yacht, the Panonija, had been rented by our embassy for the PM’s holiday use. Finance Minister Benson arrived in the Netherlands, and External Affairs Minister Sharp was preparing to leave Scotland for home. In Ottawa, it was a sunny day, with a temperature in the 80s.

In Washington, the newspapers were picking up hints of the Camp David meeting and running speculative stories about the economy, though no one knew the critical decisions were already being planned.

THIRD DAY. By the morning of Sunday, August 15, the bulk of the Camp David planning was done. The advisers signed the guest book, received commemorative jackets adorned with the Camp David crest and, shortly after noon, returned to Washington.

Back in the capital, Nixon aides began to telephone a list of 100 important business and political leaders to tip them off to the speech coming on television at 9 p.m. At 8 p.m., the White House press corps was locked into a briefing room and told about the new program. They would not be released to spread the word until after the broadcast. About the same time, Secretary of State William Rogers called Premier Sato of Japan to give him advance warning.

In Ottawa, all was quiet. That afternoon, John Young, chairman of the Prices and Incomes Commission,

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visited a friend’s cottage, where they argued about the state of the U.S. economy without coming to any firm conclusions. Mitchell Sharp arrived back from Scotland and went straight home to bed. Awake or asleep he became, automatically, acting prime minister. The real prime minister spent the day relaxing aboard the Panonija, off the Yugoslav coast.

At 8:55 p.m. U.S. Secretary of State Rogers woke Sharp with a telephone call and advised him to catch the Nixon broadcast five minutes later. Within 20 minutes, Nixon had laid down his nation’s economic woes and the steps he planned to meet them. Sharp grasped at once the significance of the surcharge, and began to make calls of his own, for a meeting to frame Canada’s response.

FOURTH DAY. At 9 am. on Monday, August 16, eight men gathered in the boardroom of the Department of Finance, a stone’s throw from Parliament Hill. Chairing the meeting was Simon Reisman, the deputy finance minister; he was backed by Stephen Handfield-Jones, director of the international finance division. Marshall Crowe and Denis Hudon represented the Privy Council Office, Klaus Goldschlag, director-general of the bureau of western hemisphere affairs, spoke for External, Deputy Minister Jake Warren for Industry, Trade and Commerce, and Bill Lawson for the Bank of Canada. John Young, whose advising duties seem to run far beyond prices and wages, was also on hand.

This was a meeting equivalent to the Camp David gathering, though it lacked a presidential presence. Theoretically, the technocrats would make no decisions — those are the prerogative of the politicians — but in fact they agreed on three fundamental points, which still seem to serve as the underpinning for Canada’s approach to the new Nixonomics.

1. There was immediate, sympathetic acceptance both of the American need to act and of most of the action taken. As one of those who attended said, “We knew that the U.S. trouble was our trouble, if only by infection, and anything we could do to help we wanted to do.” It might have been argued that the U.S. woes were seated in her own drive to be the first among all nations, but no one said that. No responsible Canadian ever suggested to Nixon that he trim his foreign spending to fit, rather than try to gouge the funds out of his trading partners by reworking the balance of payments in America’s favor.

2. There was agreement, too, that Canada would take no retaliatory measures. The auto-trade pact was often cited as a reason why we were running a favorable balance in merchandise trade with the U.S. (though, when invisibles such as dividends, interest, salaries and royalties are included, we are still in deficit). In July, a full month before Nixon decided to impose the surcharge, a preliminary meeting had taken place in Washington to discuss removal of the safeguards protecting Canada in the trade pact. We did not withdraw from those talks to establish a stronger bargaining position. Nor was any consideration given to any of the other steps available to us — artificially depressing our dollar to offset the surcharge, applying discriminatory taxes to U.S. firms here, or using resource exports as a bargaining lever. We began with the position that we would take no countermeasures and, having given away all our chips, sat down to bargain with the Americans.

3. A decision was made at once to press for an exemption to the surcharge. “We didn’t even think about it much,” said one participant, “it was a

Canada decided to press for an exemption. “It was,” said one Canadian official, “a conditioned reflex.”

conditioned reflex.” There was not much hope of getting such an exemption, but the experts felt that not to ask for it would anger Canadian voters. That decision left us in no position to quarrel either with the U.S. right to impose a penalty on her trading partners or her wisdom in doing so. The strongest cry we raised came down to: “Don’t hit me. Hit Billy.”

The consensus of that morning meeting was advanced to the cabinet committee on economic planning — attended by cabinet ministers in economic portfolios and their civil service aides — and later to the full cabinet. By late afternoon, Canada’s essential position was laid down, and decisions were made to call Benson home and to request a meeting with Connally to press for the exemption.

In Washington, Monday was the day the administration began to sell its new package. The President called in administration officials for a brief pep talk, then signed the official orders imposing the wage-price freeze and the surcharge. At noon, Connally met the press to explain why the government had suddenly reversed itself and, in the meantime, the Office of Emergency Preparedness, which normally deals with such natural disasters as earthquakes, set up improvised offices to receive complaints about violations of the freeze. The first call in Washington came from a consumer faced with a sudden 20-cent hike in the price of a carton of cigarettes. By nightfall, the OEP had a catalogue of cases, all taken under advisement for possible action at some future date.

FIFTH DAY. On Tuesday, August 17, the selling of the program continued with a White House meeting between Nixon and leaders of the Congress. Nixon nodded affably at Ways and Means Chairman Mills. “Wilbur,” he said, “these are some of your ideas.” Mills smiled wanly at the small joke. The President’s action had certainly forestalled any moves on Mills’ part. As Eliot Janeway, the New York economist and soothsayer, put it, “Nixon had slipped into the Democrats’ closet and walked off with their shirts and shoes.”

At 7 p.m. the President flew to New York to address the Knights of Columbus and tell them that he had unleashed America, which had had to fight before with one arm tied behind its back by “unfair foreign competition” — he meant that other nations were keeping their currencies pegged low to give them a trading advantage. He would make the same point often over the next four days on a five-state selling tour. He took along his daughter Julie for support and decoration, and they were well received with signs that read NIXON IS HIP, NIXON IS COOL and NIXON MAKES SENSE.

In Ottawa that day, the serious business of evaluating the cost of the surcharge began. Experts in the Department of Industry, Trade and Commerce, armed with tariff lists and the surcharge regulations, began an item-by-item study of the impact to come. They concluded that about $2.8 billion in Canadian trade would be affected annually. That, faced with a sudden 10% cost boost, many of our goods would lose their hold in the U.S. market and that we could lose 90,000 jobs as a result. I later raised this figure with a Treasury official in Washington who had just finished saying that “neither of our two countries has the right to solve its economic problems at the expense of the other.” He replied that the surcharge was not permanent — and, indeed, the President referred to it from the first as temporary — and that “if our economy is suffering, yours suffers too; in the long run, our action is for your own good.”

While the experts reckoned the cost of Nixon’s speech, External Affairs was dispatching its text to the absent

Prime Minister. Cultural Affairs Secretary Murray Fairweather flew from the embassy in Belgrade to Dubrovnik, rented a launch and intercepted the Panonija as it cruised the Adriatic. Later, Michael Pitfield radioed ashore to the Hotel Excelsior in Dubrovnik, where Senate Leader Paul Martin happened to be on holiday, and the Prime Minister and the senator met to discuss the crisis. Trudeau appeared not to be worried. When Robert Reguly of the Toronto Star ran him to earth and asked for a statement, Trudeau replied, “I never comment to the press while I am on vacation.”

SIXTH DAY. In fact, the Prime Minister’s vacation was about to end. At 3:15 on the morning of Wednesday, August 18, Finance Minister Benson flew into Uplands Airport at Ottawa, described the surcharge as “very upsetting” and worried that it “really cannot work to the benefit of the United States as far as Canada is concerned. It may very well undermine their ability to increase their exports to Canada.” He pointed out that we were not one of the nations competing unfairly with the U.S.; our currency had been floating upward since May, 1970.

At 10 a.m., a cabinet meeting named Benson and Trade Minister Jean-Luc Pepin to head the mission to Washington and resolved to call the Prime Minister home. He was contacted by a linkup between the East Block and the Panonija and he arranged to stay at Dubrovnik overnight, starting for Montreal early the next day.

In the U.S., Nixon stopped at the State Fair in Springfield, Illinois, and invoked the magic name of Lincoln in support of his new policies. He said Lincoln was “a very strong man . . . a very competitive man.” Being No. 1 remained high on the President’s order of priorities.

SEVENTH DAY. Two things happened about the same time on Thursday morning, August 19. John Connally, on NBC’s Today show, indicated that the Canadian mission to Washington scheduled for that afternoon was probably a waste of time. “I think it’s apparent that I’m not without some arguments to respond to their request for an exemption to the surcharge,” he said. He indicated that, in 1962, Canada had imposed a surcharge of its own, the U.S. had requested an exemption and had been refused. (As a matter of fact, that was not exactly true. We had imposed a surcharge, but no U.S. request for an exemption was ever made, and the measure was lifted as soon as the

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monetary crisis that inspired it had passed.) Just about the time Connally was misstating the facts, the Canadian delegation was filing aboard a jet in Ottawa to fly down to request something that we knew, and the Americans knew, we could not receive. In fact, Canadian legal experts had raised the point that even if Nixon wanted to give us an exemption he probably couldn’t under U.S. law. No matter, the point of the trip was political not economic, to convince Canadian voters everything possible had been done. The mission took off.

The 2Vi-hour meeting that afternoon in the Treasury Department ended with Connally’s promise to “consider” Canada’s case. Our ministers found him a difficult man to deal with. As one senior External Affairs man put it, “We had been used to dealing with New Englanders, and we didn’t know what to make of this Texas longhorn. New Englanders say, T’m not sure you are stating the facts fully.’ Connally says, ‘Aw, bull.’ What do you do with that?”

At a subsequent press conference, Finance Minister Benson called the meeting a partial success because at least the Canadian point of view was placed officially before* the administration. Marcel Cadieux, our Washington ambassador, makes the point that “the government was bound to be blamed whether a delegation came to Washington or not. It chose to be blamed for doing something rather than for doing nothing.”

By the end of that day, no great Canadian expectations remained. The delegation returned to Ottawa only minutes ahead of the Prime Minister, who was fetched from Montreal by Mitchell Sharp in a Department of Transport jet. He descended at Uplands airport looking tanned and fit and wearing sports clothes. He assured anyone who needed assuring that we were not mad at the U.S.

"Canada does not take issue with the decision of the United States to grapple with its economic problems . . . our message to the United States is quite simple: we understand your problem, we sympathize wholeheartedly with your goal of a healthy economy, we suggest only that the application of your surcharge to Canadian exports contributes in no way to the attainment of that goal.”

There would be, just in case anyone was worried, no Canadian retaliation.

The American actions of that week in August provoked a world monetary crisis that ended only in December, when the great trading nations agreed to revalue their currency upward to meet the U.S. demand for fairer international competition. Canadian currency, however, continued to float, and that was read as a triumph for Canadian shrewdness and skill, because it meant that we would retain flexibility in our trading. Finance Minister Benson argued before the crucial meeting of the Group of Ten of the International Monetary Fund that Canada, because of its close ties to the U.S., must be allowed flexibility to react to U.S. changes. It was a strong argument, but not the telling one, as Treasury Secretary Connally made clear. The U.S. didn’t mind Canada keeping a floating dollar, he said, because he thought it would float upward. That would leave us at a disadvantage with U.S. traders.

But the issue had long since ceased to be the decimal variations in our currency; it had become the degree of our dependency on American goodwill for economic survival. Benson's argument was an acknowledgment of our dilemma, a final pointer to the constraints we had been facing since the whole jolting exercise began. ■