The Textbook Nixon : He Added a Key Date for Economics Students: 8-15-71


The top movie in town was “Klute,” starring Jane Fonda. “The Godfather” was being filmed on the streets of New York’s Little Italy. Sonny and Cher were scheduled to do their popular Sunday night variety show, but they were about to get preempted because President Richard Nixon had a bombshell to deliver on national TV.

That night, Aug. 15, 1971, Nixon wrote himself into the economics books by imposing wage and price controls on workers and businesses and taking the American dollar off the gold standard.

Economists and participants in the Nixon Administration recall the simultaneous moves as among the most popular steps Nixon ever took as President. As the country prepares for his funeral today, it is worth noting that his decision to let the dollar float in value against other world currencies is the foundation of the modern-day global financial market--certainly one of Nixon’s most enduring legacies.

“Everything (in the markets) today is about learning how to deal with fluctuating currencies,” says Herbert Stein, then a member (and later the chairman) of the President’s Council of Economic Advisers.

Nixon observers and his former advisers argue that few things exemplified his streak of practicality--and opportunism--as much as his economic policies.


“He was a pragmatist on economic affairs, which was very much to his credit,” says Robert Eisner, an economist at Northwestern University.

“With the wage and price controls, he assured a more rapid short-term economic recovery,” says Nobel Economics Laureate Paul Samuelson, “and he made it absolutely certain he would be the overwhelming victor in the 1972 election.” The morning after, as it happened, came during the Administration of his successor, Gerald R. Ford.

Nixon’s approach to business and economics exemplifies how hard he could be to categorize as a political being. As a Republican President, he established the Environmental Protection Agency and Occupational Safety and Health Administration, enduring Republican whipping boys as symbols of government regulation. He also tried to get welfare and health care reform through Congress but failed; this week, Hillary Rodham Clinton herself invoked his memory in promoting her own health care reform initiative.

Just as his overtures to China and the Soviet Union contradicted his image as a Cold War hard-liner, Nixon’s wage and price controls won him praise from liberals and curses from conservatives.

The Nixon Administration spanned a period of considerable economic uproar. He took office during a period of relatively high inflation and unemployment and spent the first two to three years of his term contemplating measures to stimulate the economy.

America’s balance of trade emerged for the first time in years as a major political issue: Administration critics were warning that the country was on the verge of recording its first foreign trade deficit of the century. The nation already had a trade deficit with Japan of $3.2 billion ($63.2 billion today).

Then in 1973 came the first of two “oil shocks” when the OPEC cartel decided to sharply raise the price of crude oil, leading to gasoline shortages and lines at the pump. But by that point, Nixon had made his stand.


On Friday, Aug. 13, 1971, he sequestered himself with his top economic and political advisers at Camp David. The group included Nixon speech writer William Safire, Council of Economic Advisers Chairman Paul McCracken, Treasury Secretary John Connolly and Stein, all of whom were set for working out details of the wage-price freeze and the end to the gold standard.

That Sunday night, Nixon went on television to inform the American public that the United States would “temporarily” suspend the right of foreign governments to trade their dollars for gold. The move, he said, would result in a “slight” devaluation of the dollar (in the event it sank by more than 10%).

The wage-price controls began with a 90-day period in which all wages, prices and rents were frozen. Under Phase 2, beginning Nov. 14, 1971, two government commissions had the right to set strict guidelines on price increases and wage hikes. The Price Commission limited price increases to 2.5% during 1972, for example. The Pay Board announced a plan to limit wage increases to 5.5% a year, but under pressure from organized labor, it subsequently approved some major contracts at higher rates.

“Nixon knew at the time that the freeze was an economic mistake, but he saw it as a political necessity,” says Stein, adding that the boldness of the move could be traced to Connolly, the former Democratic governor of Texas. “Connolly was a person for the dramatic gesture,” Stein says. The idea was that the freeze would enable Federal Reserve Board Chairman Arthur Burns to institute hugely stimulative policies without worrying about higher inflation.

The country reacted with enthusiasm. The stock market soared, sending the Dow Jones industrial average up a then-record 32.93 points to 888.95 on record volume of 31.72 million shares. (By comparison, the Dow closed at 3,699.54 on Tuesday; New York Stock Exchange volume today averages nearly 10 times the 1971 level.)

“It was the most popular thing he ever did,” Stein says. “People thought, ‘Now someone will protect us from our butcher and our landlord.’ ”

Americans contemplating that era from today’s vantage point can be forgiven for wondering what all the fuss was about. The inflation rate in 1971 before Nixon’s speech was 4.6% and the unemployment rate was 5.9%.


The wage-price freeze did succeed in shutting down inflation--temporarily. The increase in consumer prices dropped to a 2.7% annual average from August, 1971, through June, 1972. But by then, wholesale price pressures were building throughout the economy. Food shortages began to appear as farmers kept goods off the market.

When the Organization of Petroleum Exporting Countries drove up oil prices in 1973, the Administration knew it had lost the price control battle. In 1974, the nation entered its worst recession since the 1930s; inflation reached 12.3%.

“I think the only good thing you could say about Nixon’s controls is that because of him, no one will try them again for a long time,” Stein says.

Taking America off the gold standard was a different issue. At the time, Americans were forbidden to privately own gold in bulk. Meanwhile, foreign countries owned so much U.S. currency that there was not enough gold in Ft. Knox to settle their claims if they all turned in their cash at the fixed rate of $35 per ounce.

The overvalued dollar made imports cheap and exports expensive, exacerbating the growing U.S. trade imbalance. To limit capital outflows, the government imposed heavy taxes on foreign investments by U.S. companies, which made American businessmen howl.

Closing the gold window ended all that. The dollar quickly fell by more than 10%. Within months, today’s system of floating exchange rates began to take shape. Its offspring govern the modern world of finance; the volume of world trade in goods and services in 1992 was about $3.7 trillion, but the value of foreign exchange transactions designed to finance that trade and to hedge fluctuations in currency rates was an astounding $220 trillion.

“Only with floating exchange rates could we possibly have had the explosion in world trade we’ve seen over the last 25 years,” McCracken says. “Without it, we’d just have been limping along.”


Nixonomics: The Greatest Legacy?

On August 15, 1971, President Richard M. Nixon made economic history by imposing wage and price controls and taking the American dollar off the gold standard. Here’s a snapshot of the way things were on that fateful day, compared to now.

Then Now Inflation 4.62% 2.51% Gold price $35.00 $374.30 Dow Jones industrial average 888.95 3699.54 U.S. trade deficit with Japan $3.2 billion $63.2 billion U.S. budget deficit* $24.787 billion $226.272 billion Unemployment rate** 5.9% 6.5%

* Yearly for totals 1971 and 1993, respectively

** Seasonally adjusted; August, 1971,and March, 1994, respectively

Sources: WEFA Group, Dept. of Labor, International Public Relations Inc.


Abandoning the gold standard: Nixon suspended the so-called Bretton Woods system under which world currencies were pegged to the dollar and through it to gold, thus maintaining fixed exchange rates. In suspending that system, Nixon wanted to let the dollar fall to a new level that more realistically reflected international assessments of the U.S. economy’s strength. He reasoned that such action would give the United States more flexibility in economy policy. But by 1973, inflationary pressures and volatile capital flows led governments to give up attempts to maintain fixed exchange rates. Floating exchange rates are now a foundation of the modern-day global financial market--perhaps Nixon’s most enduring legacy.

Wage and price controls: Nixon’s imposition of controls on wages, prices and rents was an unprecedented U.S. government intrusion into a peacetime economy. The initial 90-day freeze initially worked, as the vast majority of Americans cooperated and inflation was temporarily stemmed. But Nixon later abandoned the controls amid growing inflationary pressures--including those created by the 1973 oil embargo. In 1974-75, the nation endured its deepest recession since the 1930s, following the worst inflation in the postwar era.