Exactly 40 years ago, the president of the United States turned the economic world upside down in a prime-time televised speech.
I vividly remember the events of Aug. 15, 1971. My family had a party that afternoon to celebrate my paternal grandparents’ 50th wedding anniversary. We also marked my younger brother’s 11th birthday. Richard Nixon took over the airwaves at 9 p.m. Eastern time to drop multiple bombshell announcements: He froze all American wages and prices for 90 days; he slapped a 10 per cent tariff on all imported goods, and he “temporarily” suspended the right of foreign central banks to exchange their dollar holdings for gold. That suspension proved to be permanent, ending the $35-an-ounce peg to gold that Franklin D. Roosevelt had established.
“As a result of these actions, the product of American labour will be more competitive, and the unfair edge that some of our foreign competition has will be removed,” the president assured us. That slap against allegedly unfair foreign competition was one of many elements of Nixon’s speech that foreshadowed our current financial difficulties, though China, which was then in the midst of Mao’s Cultural Revolution, was not on anyone’s economic radar in 1971.
Like President Obama today, Nixon was desperate to get the economy off the table before voters decided his re-election. Unlike Obama, however, Nixon was armed with congressional authority to do pretty much whatever he wanted to the economy. This authority came from the Economic stabilisation Act of 1970, which authorised the president to “stabilise” wages, prices, rents, dividends, interest rates and almost anything else he saw fit.
It was an ingenious political solution to the problems of uncomfortably high inflation, which briefly touched 6 per cent in 1970 and hovered near 5 per cent when Nixon spoke, and unemployment, which was also near 5 per cent at the time.
Congress did not want the blame for the mess, so it told the president to fix it. The president was confident that he could bring down unemployment with a stiff dose of deficit spending together with a protectionist tariff against imports, but both moves would aggravate inflation. So, in Executive Order 11615, he established a Cabinet-level Cost of Living Council to implement the freeze and a set of follow-up regulations that were to keep a lid on cost pressures once the 90-day period was up. Raw agricultural products were conspicuously exempted. Farmers and farm states were a key constituency for Nixon, one he would not want to alienate before his re-election campaign even got started. His price freeze would apply to food processors and grocers, but no further up the supply chain.
Nixon conceded that a weaker dollar would mean higher costs for buyers of foreign goods or travellers who did their business or vacationing abroad. “But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today,” he promised.
It seemed to work – for a little while. Under the threat of government sanctions, producers and retailers kept a lid on prices, while unions could do little to win or enforce improvements in their contracts. The Amalgamated Meat Cutters union challenged the executive order in federal court and lost.
But you can’t decree prosperity, at least not for very long. Inflation came roaring back shortly after the 1972 election. A second try at price controls flopped in 1973, as consumers emptied store shelves to avoid anticipated price rises, while producers and sellers held back new product because they could not recoup their costs. It took a stiff recession in 1974-75 to halt the resurgent inflation, and again the halt was only temporary. By the end of the decade, prices were again rising at double-digit rates despite stubbornly high unemployment. “Stagflation” entered our lexicon.
It seems odd, looking back, that a self-described conservative Republican like Nixon would have experimented so deeply with a command-style economy. Nixon himself said it went against his instincts.
As I see it, Nixon was both a product and a prisoner of his time. His was the generation that experienced the Great Depression and the New Deal credited with ending it, even though the Depression dragged on through all of FDR’s first two terms. His was the generation that accepted price controls, ration cards and confiscatory tax rates as part of the effort to win World War II. Nixon himself, in fact, had worked in the wartime Office of Price Administration as a young attorney. He helped administer the tire-rationing program.
The idea that government could set rules that might bend the economy to its will was widely accepted in both parties 40 years ago. It would be another decade before Ronald Reagan declared that government was the problem, not the solution. While Reagan started the accelerated accumulation of national debt that has just cost Washington part of its AAA rating, he also ushered in a general restructuring of the relationships between business, labour, taxation and regulation – creating an America that was more efficient, more productive, more competitive and faster growing than at any other point in my lifetime.
Though it provided no lasting benefit apart from creating today’s system of floating exchange rates, Nixon’s gambit helped him win re-election. President Obama can only dream of the compliant Congress and broad powers Nixon enjoyed. He is going to have a much harder time bending the economy to his wishes, even long enough to appease next year’s voters.
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