That Richard Nixon announced that the United States was abandoning the Bretton Woods monetary system that anchored the dollar to gold at $35 an ounce, and added on a helping of wage and price controls to boot. Here’s my narrative of the scene from volume 1 of The Age of Reagan:
On a more substantive level, Nixon decided to do what he could to stimulate the economy with the federal budget. In January 1971 he submitted a big spending budget that would have made Lyndon Johnson blush. It deliberately planned for an $11 billion deficit. Budgets from the previous three years had come in with deficits as high as $25 billion on account of the war and deteriorating economic conditions, but none had set out to have a deficit as big as Nixon’s prospective 1972 budget. He explained himself to Howard K. Smith of ABC News: “I am now a Keynesian in economics.” It was like, an astonished Smith said later, “a Christian crusader saying, ‘All things considered, I think Mohammed was right.” But Nixon meant it; he explained that he planned to spend as much as would be spent were the economy at full employment—the classic Keynesian prescription. Nixon had clearly expressed a preference to downgrade the fight against inflation for the sake of economic growth (and re-election).
George Shultz and others in the White House still held out hope that steady monetary policy would lead to revived economic growth and a moderation of the inflation rate. “What we need now to complete the treatment,” Shultz told Friedman, “is the time and the guts to take the time, not additional medicine.” But the political pressure had become overwhelming, and time had run out for the gradual “steady as she goes” policy. Connally and several senior Treasury officials headed by Paul Volcker began quietly readying plans to impose a temporary wage and price freeze. All that remained was the timing of the plan.
Concern turned to panic in mid-August when rumors in the foreign currency markets that the U.S. might devalue the dollar touched off a run against the dollar very similar to what happened in March of 1968. The final straw came when Great Britain demanded a guarantee that its dollar holdings could be converted into gold by the U.S. at the existing fixed exchange rate of $35 an ounce. While Connally put off the British, Nixon hastily called for a weekend meeting of his economic team at Camp David to resolve the crisis. “This could be the most important weekend in the history of economics since March 4, 1933,” Herbert Stein told William Safire as they boarded the helicopter for Camp David. It happened to be Friday the 13th.
The package that emerged over the weekend included “closing the gold window” and allowing the value of the dollar to float in the international exchange market, some tax cuts for business, and a 10 percent tariff on imports. The final element of the package was the one that captured the headlines and the imagination of the public: a 90-day wage and price freeze. It was ironically the least debated feature of the package over the weekend: Shultz’s main argument against controls at the 11th hour—“how do you stop it when you start?”—was brushed aside as if it was a rhetorical question. Closing the gold window was the real centerpiece of the package, and represented the end of the post-World War II international monetary system known as Bretton Woods. Fed Chairman Arthur Burns opposed the move, predicting that the stock market would crash and that Pravda would have a field day by saying the abandonment of the gold standard was a sure sign of the collapse of capitalism. Above all, abandoning gold would signal the beginning of the rise of inflation over the rest of the decade.
Nixon stayed up all night on Friday the 13th writing his speech for national TV on Sunday evening. Though he hesitated about pre-empting Bonanza, he thought it was necessary to announce the freeze before the markets opened Monday morning. Nixon called his program the “New Economic Policy,” apparently oblivious to the irony that Lenin had used the same banner for his economic reversal in the 1920s. Nixon’s bold stroke caught everyone by surprise, and was a huge hit with the public. A Gallup poll found 73 percent of the public approved of the freeze. Editorial reaction was effusive. The Philadelphia Inquirer praised Nixon for “an act of courage and statesmanship unparalleled by any U.S. chief executive for at least a third of a century,” and the Baltimore Sun said Nixon had shown “an activist flexing of government muscles not seen since the early Roosevelt experiments.” Even the New York Times and the Washington Post approved. The Dow Jones Industrial Average jumped 32.9 points the day after Nixon’s announcement, the biggest one-day jump in history up to that point. Democrats who had been calling for strong measures, and who had granted Nixon the authority to impose a freeze through executive order, were flummoxed. It was as if, a Time reporter put it, Nixon had “opened their closet and stolen their shoes.” Having given Nixon the sole discretion and authority, Congressional Democrats were not in position to share any of the public credit for the bold move.
Milton Friedman was practically alone in dissenting over the freeze. He wrote in Newsweek that Nixon “has a tiger by the tail. Reluctant as he was to grasp it, he will find it hard to let go. The outcome, I fear, will be a further move toward the kind of detailed control of prices and wages that Mr. Nixon has resisted so courageously for so long. . . The result is likely to be more inflationary pressure, not less.” (About the only major newspaper that shared Friedman’s view was the Los Angeles Times, which worried “whether we might be starting down the road to a permanently regimented economy.”) But even Friedman came to admit later that political circumstances had become irresistible for Nixon. The public enthusiasm for price controls, Herbert Stein observed, “shows how shallow was the general support for the basic characteristics of a free market economy.” The free marketeers in the administration tried to put the best face on their defeat, telling Newsweek: “Well, we lost the race. But at least the people who are going to have to administer this whole mess—the controls and all—are people who genuinely believe in a free market and will try to get back to it as fast as possible.”
The obvious fallacy is that not even smart capitalists can make socialism work, and beneath the layer of public popularity, the freeze was a mess. The World War II Office of Price Administration (for which a young Richard Nixon worked briefly) required over 250,000 paid and volunteer employees to operate. Nixon hoped to avoid “the establishment of a huge price control bureaucracy,” and instead hoped to rely “on the voluntary cooperation of all Americans.” This was a sham. If you didn’t voluntarily comply, the government had the legal authority to make you comply. Among other federal agencies mobilized to police the freeze was the IRS, though the principal government enforcement agency was the Office of Emergency Preparedness, which was woefully unprepared for this emergency duty. A light touch of fascism emerged, as when director of the Cost of Living Council said that “The citizen’s role in this program is to rat on his neighbor if his neighbor violated the controls.” And although the freeze ended after 90 days, price controls of various kinds were to last for three years. Soon the two government bodies (the Price Commission and the Pay Board) established to administer “Phase II” wage and price adjustments after the 90 day freeze ended were involved in arbitrary hairsplitting decisions about various kinds of products and whether their prices would be allowed to rise. Raw farm produce was exempted from the freeze and subsequent controls because of the seasonally fluctuating nature of the farm produce economy, but processed foods were not exempt. This led to some comic dilemmas that can only occur under bureaucratic control of the economy: raw cucumbers were exempt, but pickled cucumbers were not. Were shucked almonds considered “processed food”? (The answer was: maybe.) Oranges were exempt, but frozen orange juice would remain just that. The program was so complicated that the Price Commission received 400,000 requests for clarification in the first two weeks. As always, clever operators found easy ways to get around price guidelines. Manufacturers, for example, simply made small modifications to products, called them “new,” and charged a higher price. Some companies got around the wage guidelines through the simple expedient of “promoting” people to a new job description. There was no practical way the government could contain this kind of innovation and ingenuity in a modern economy.
In hindsight nearly everyone agrees that wage and price controls were a mistake. Nixon wrote in his memoirs that although controls were “politically necessary and immensely popular in the short run. . . in the long run I believe that it was wrong.” The irony of the episode is that the steady-as-she-goes policy of gradualism was about to pay off. Historian Allen Matusow wrote that “There was a logic at work that would have unwound inflation in the months ahead even without controls.” When inflation revived again in the months after the 1972 election, Nixon’s policies seemed all the more ineffective. But it was only a prelude for the downward spiral of the rest of the decade. As Matusow has observed: “Through most of the rest of the 1970s the 6 percent unemployment rate and 5 percent inflation rate of 1971 would seem less the evidence of a failed policy than an outcome devoutly to be wished.”
PAUL ADDS: I still remember where I was when word came of Nixon’s decision to abandon the Bretton Woods monetary system. I was in West Virginia at a retreat with a high school friend for radical economic professors and graduate students.
Many of those present thought that, with Nixon’s move, we had reached “the final crisis of capitalism.” A few cynics spoiled the fun by recalling some of capitalism’s previous “final crises.”