President Richard M. Nixon's Economic Policies

How Nixon Destroyed the Dollar

Soviet leader Leonid Brezhnev signs an agreement to prevent nuclear war with President Richard Nixon June 20, 1973 at Camp David, MD. Photo by Dirck Halstead/Getty Images

Richard Milhouse Nixon was the 37th President, serving from 1969-1974. He is infamous for the Watergate scandal, for which he was nearly impeached. But he ended the Vietnam War in 1973 and opened trade relations with China. He negotiated a treaty with Russian leader Leonid I. Brezhnev to limit strategic nuclear weapons. 

But those well-publicized events overshadow how Nixon nearly destroyed the U.S. economy.

To cure mild inflation, he imposed harmful wage-price controls. That bypassed America's free market economy.  Even worse, he ended the gold standard that tied the dollar's value to gold. 

This created a decade of stagflation. It was only cured by double-digit interest rates, causing the devastating 1981 recession. Ending the gold standard permitted the U.S. government to print dollars to solve every economic woe. That ensured its value would fall indefinitely.

How did that happen? In 1968, President Johnson's spending on the Vietnam War and the Great Society boosted economic growth to 4.9 percent. But it sent inflation to a disturbing 4.7 percent. As Americans prospered, they imported more goods, paying in dollars. That created a large balance of payments deficit.

The excess of dollars threatened the gold standard. That's where the Federal Reserve redeemed $35 for an ounce of gold. Foreign countries held $45.7 billion in dollars, while the U.S.

 only held $14.5 billion in gold. It wasn't enough to redeem all of them. Foreign holders turned in their dollars for gold, depleting central banks' gold reserves even more. To make the dollar more attractive to hold, the Federal Reserve raised interest rates to 6 percent.

But the run on gold continued.

It boosted inflation to 6.2 percent in 1969, Nixon's first year in office. The Fed defended the gold standard by raising rates to 9.19 percent. Unfortunately, it also created a mild recession that started later that year. By the end of 1970, the unemployment rate had risen to 6.1 percent.  

Nixon's Focus on Re-election Changed the World Forever

With his re-election looming, Nixon decided to aggressively control this relatively mild inflation and unemployment. He announced the "Nixon Shock" in this August 15, 1971, speech.

Prosperity without war requires action on three fronts: We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators.

Worthwhile goals, but the solutions were devastating. First, he ordered a 90-day "...freeze on all prices and wages throughout the United States.”  He created a Pay Board and Price Commission to approve any increases until well after the 1972 election. (Source: "Remembering Wage-Price Controls," Cato Institute, August 15, 2011. "President Nixon Imposes Wage-Price Controls," The Econ Review.)

Wage and price controls don't work in a free market economy. That's because workers can no longer get raises, giving them less money to buy goods and services.

That lowers demand. Businesses can't lower prices to boost demand. Neither can they raise prices, even though the cost of their imported materials rise. They can't lower wages, so they reduce hiring and therefore demand.

Second, Nixon closed the gold window. It dropped an economic bomb on the allies who had signed the Bretton Woods Agreement after World War II. The Fed simply stopped redeeming dollars with gold. In other words, the United States would no longer honor its agreement to support the dollar's value with the gold standard. See a video of Nixon's speech.

Third, Nixon imposed a 10 percent import tax to reduce the balance of payments. It only lasted four months. It forced America's trade partners to raise the price of gold to $38 per ounce. It was only three dollars higher, but it also sent the value of the dollar down.

That made imported goods more expensive and creating more inflation. It also destroyed the trust needed for global trade. Our allies began printing more of their own currency, raising interest rates to boost their currencies' value. (Source: Douglas Irwin, "The Nixon Shock After 40 Years," World Trade Review (2013),12;1,29-56. "Fuss Over Dollar Devaluation," Time, October 4, 1971.)

Nixon's actions were popular at home, propelling him to victory in 1972. It was the largest Republican landslide of the Cold War. He won every state but Massachusetts. He went on to achieve his most notable foreign policy accomplishments, including the trip to Beijing, the signing of the Strategic Arms Limitation Treaty, and the end of the Vietnam War.  But he also sowed the seeds of stagflation. (Source: "Nixon," University of Virginia.)

Nixon Then Created the 1973-1975 Recession

In 1973, Nixon devalued the dollar even further, making an ounce of gold worth $42. As the dollar devalued, people sold their greenbacks for gold. By late 1973, Nixon decoupled the dollar from gold completely. The market quickly sent the price of the precious metal to $120 per ounce. Inflation was in the double-digits. For more, see History of the Gold Standard.

Wage-price controls created a recession in November 1973. Nixon eliminated them in April 1974, but the damage had already been done. There were three consecutive quarters of negative GDP growth

  • Q3 1974  (down 3.9 percent)
  • Q4 1974 (down 1.6 percent)
  • Q1 1975 (down 4.8 percent)

Unemployment hit 9 percent in May 1975. Inflation hovered stubbornly between 10-12 percent from February 1974 through April 1975. Although the OPEC oil embargo is typically blamed for causing the recession by quadrupling prices, you can see now that it only added fuel to an already raging fire.  For more, see History of Recessions

Nixon's Other Economic Impacts

Two of Nixon's other decisions created long-lasting, although not as obvious, economic impacts. 

Nixon Doctrine. On July 25, 1969, Nixon stated that the U.S. would now expect its allies to take care of their own defense, but would provide aid as requested. The doctrine's purpose was to respond to anti-war protests and get the United States out of direct combat in Vietnam. Instead, the U.S. would train and arm local forces. Read the speech here.

The Doctrine had a more long-lasting economic impact. It provided an entre into involvement the Middle East. It outsourced protection of the oil supply in the region to the Shah of Iran and Saudi Arabia. Between 1969-1979, the United States sent $26 billion in arms to the two countries to defend against communism. This arrangement continued until the Russians invaded Afghanistan in 1978 and the Shah was overthrown in the 1979 revolution. (Source: "Return of the Nixon Doctrine," Council on Foreign Relations, January 4, 2007. "Nixon Doctrine in the 21st Century," World Politics Review. "The Nixon Doctrine,"

The Doctrine laid the groundwork for the War in Afghanistan and the Iraq War. They added $1.5 trillion to the U.S. debt.  Nixon only added $121 billion to the $354 billion national debt during his term in office, but his Doctrine made his long-term impact much greater. To compare to other Presidents, see Debt by President

Watergate. In 1972, the  Committee to Re-elect the President authorized a break-in at the offices of the Democratic National Committee in the Watergate office building. A grand jury indicted seven of Nixon's aides. Nixon tried to divert the investigation, which led to calls for his impeachment. 

The special prosecutor for Watergate sought audio tapes of conversations recorded by Nixon in the Oval Office. Nixon refused, claiming "executive privilege" made him immune. In United States v. Nixon, the Supreme Court found that Nixon did not have the right in this case to withhold information to preserve confidential communications. That's because this wasn't a diplomatic affair nor did it secure the national interest. (Source: "U.S. vs. Nixon," U.S. Supreme Court.)

Rather than be impeached for Watergate, Nixon resigned on August 8, 1974. But the recession he created didn't end until 1975, after the Fed lowered interest rates. This only spurred the inflation Nixon created by ending the gold standard.

To combat inflation, Federal Reserve Chairman Paul Volcker steadily raised the fed funds rate to 20 percent. Unfortunately, this contractionary monetary policy triggered the worst recession since the Great Depression. It lasted from July 1981 - November 1982. The unemployment rate peaked at 10.8 percent, the highest in any recession. It remained above 10 percent for almost a year.

Watergate eroded public confidence in government, as the country felt betrayed. In 1964, polls showed that 75 percent of Americans believed elected officials in Washington could be trusted to do what was right for the country. By 1974, only a third believed so. This lack of faith in government led to Ronald Reagan's election in 1980. It created public belief in trickle-down economics, which in turn led to increasing economic inequality. (Source: "Watergate," CNN, June 17, 1997.)

Nixon's Early Years

Nixon was born in California in 1913. His first job was working at his father's grocery store. Nevertheless, he grew up in poverty, and his two brothers died of tuberculosis. Nixon graduated from Whittier College and Duke University Law School. He was a private practice lawyer until he joined the Navy in World War II. 

He became a Congressman in 1948. In August, Nixon brought former State Department official Alger Hiss to the witness stand of the House Un-American Activities Committee. The committee accused Hiss of being a Soviet agent and was convicted of perjury. This catapulted Nixon into national attention. It helped him become a California Senator in 1950.

In 1952, Nixon denied charges of improper use of campaign funds. He said the only gift he kept was his dog Checkers. Watch the "Checkers speech."  He became Vice-President under President Eisenhower in 1956. 

In March 1960, while he was running against John F. Kennedy for President, Arthur Burns warned him that the economy would weaken before the November election. Burns “urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately: by loosening up on credit and, where justifiable, by increasing spending for national security.” Eisenhower would not use fiscal policy to affect the election unless there was a major recession brewing. Nixon was defeated by JFK in 1960. He said it was due to high unemployment, and focused on that from then on.  

He defeated both Vice-President Hubert Humphrey, and third-party candidate George Wallace, to become President in 1969. He beat George McGovern in 1973. (Source: "Richard Nixon," White House.) 

Nixon Presidency by Year

YearInflation (Dec)Unemployment (Dec)Fed Funds Rate (Dec)GDP (Year)Events That Affected Economy
19684.7%3.4%6.0%4.9%Fed raised rates
19696.2%3.5%9.0%3.1%Nixon took office
19713.3%6.0%5.0% (3.5% in Feb, 5.75% in Aug)3.3%Wage-price controls 
19738.7%4.9%11%5.6%Gold standard and Vietnam War end
197412.3%7.2%8% (13% in Jul)-0.5%Recession


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