President Richard M. Nixon's Economic Policies
How Nixon Destroyed the Dollar
Richard Milhouse Nixon was the 37th president, serving from 1969 to 1974. He is infamous for resigning from office in the wake of the Watergate scandal, for which he was almost impeached. But Nixon also 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.
Nixon's Policies Hurt the Dollar
Those well-publicized events overshadow how Nixon almost destroyed the U.S. economy. To cure mild inflation, he imposed harmful wage-price controls. That move bypassed America's free-market economy. Even worse, Nixon ended the gold standard that tied the dollar's value to gold.
This move 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 the dollar's value would fall indefinitely. How did that happen?
Balance of Payments Deficit
In 1968, President Johnson's spending on the Vietnam War and the Great Society boosted economic growth to 4.9%. But it sent inflation to a disturbing 4.7%. As Americans prospered, they imported more goods, paying in dollars. That created a huge 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. In 1968, the United States had over $45 billion in federal reserve note liabilities, but held only about $10 billion in gold. It wasn't enough to redeem the liabilities. 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%.
But the run on gold continued. It boosted inflation to 6.2% in 1969, Nixon's first year in office. The Fed defended the gold standard by raising rates to 9.19%. 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%.
Nixon's Focus on Re-election Changed the World Forever
With his re-election looming, Nixon attacked this mild type of inflation and unemployment. He announced the "Nixon Shock" in an 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, Nixon ordered a 90-day "...freeze on all prices and wages throughout the United States.” He created a Pay Board and Price Commission to control increases until well after the 1972 election.
Wage and price controls don't work in a free market economy. 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 increases. They can't lower wages, so they reduce hiring and, consequently, demand.
Second, Nixon closed the gold window. This 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.
Four-Month Import Tax
Third, Nixon imposed a 10% import tax to reduce the balance of payments. It only lasted four months and forced America's trade partners to raise the price of gold to $38 per ounce. This was only a $3 increase, but it also sent the value of the dollar down. That made imported goods more expensive and created more inflation. It also destroyed the trust needed for global trade. Our allies began printing more of their own currency and raising interest rates to boost their value.
Nixon's actions were popular at home, propelling him to victory in 1972. He won every state but Massachusetts. He went on to achieve his most notable foreign policy accomplishments. He went to Beijing, signed the Strategic Arms Limitation Treaty, and ended the Vietnam War. But he also sowed the seeds of stagflation.
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. It ended the 100-year history of the gold standard.
Wage-price controls created a recession in November 1973. Nixon eliminated them in April 1974, but the damage was done. There were three consecutive quarters of negative gross domestic product growth:
- Q3 1974, down 3.7%.
- Q4 1974, down 1.5%.
- Q1 1975, down 4.8%.
Unemployment hit 9% in May 1975. Inflation hovered stubbornly between 10 and 12% from February 1974 through April 1975. The OPEC oil embargo is typically blamed for causing the recession by quadrupling prices. But it only added fuel to an already raging fire, one of the worst in the history of recessions.
Nixon's Other Economic Impacts
Two of Nixon's other decisions created long-lasting, although not as obvious, economic impacts.
On July 25, 1969, Nixon stated that the United States 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 United States would train and arm local forces.
The Nixon Doctrine had a more long-lasting economic impact. It provided an entry into involvement in the Middle East. It outsourced protection of the oil supply in the region to the Shah of Iran and Saudi Arabia. Between 1970 and 1979, the United States delivered almost $19 billion in arms to the two countries to defend against communism. The arrangement continued until Russia invaded Afghanistan in 1978 and the Shah was overthrown in 1979.
The Doctrine laid the groundwork for the War in Afghanistan and the Iraq War. These wars 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. It wasn't a record, compared to the debt of other presidents. But his Doctrine made his long-term impact on the debt much more significant.
In 1972, the Committee to Re-elect the President authorized a break-in. It was 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 the 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. This wasn't a diplomatic affair nor did it secure the national interest.
Rather than be impeached for Watergate, Nixon resigned on August 9, 1974. But the recession he created didn't end until 1975 after the Fed lowered interest rates. This move only spurred the inflation Nixon had created when he ended the gold standard.
To combat inflation, Federal Reserve Chairman Paul Volcker steadily raised the fed funds rate to 20%. Unfortunately, this contractionary monetary policy triggered the worst recession since the Great Depression. It lasted from July 1981 to November 1982. The unemployment rate peaked at 10.8%, the highest in any recession. It remained above 10% for almost a year.
Watergate eroded public confidence in government, as the country felt betrayed. In 1964, polls showed that 75% 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.
Nixon's Early Years
Nixon was born in California in 1913. His first job was working at his father's grocery store. Yet, he grew up in poverty, and two of his 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 convicted him of perjury. This verdict 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. He became vice president under President Eisenhower in 1953.
In March 1960, while Nixon was running against John F. Kennedy for president, Arthur Burns warned him that the economy would weaken before the November election. Nixon wrote that Burns “urged strongly that everything possible is 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 significant recession brewing. JFK defeated Nixon in 1960. Nixon said his loss was due to high unemployment, which became his focus 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 1972.
Nixon's salary as president was $200,000. It would be worth $1.4 million today.
Nixon Presidency by Year
|Year||Inflation (Dec)||Unemployment (Dec)||Fed Funds Rate (Dec)||GDP (Year)||Events That Affected Economy|
|1968||4.7%||3.4%||6.0%||4.9%||Fed raised rates|
|1969||6.2%||3.5%||9.0%||3.1%||Nixon took office|
|1971||3.3%||6.0%||4.1% (3.7% in Feb, 5.6% in Aug)||3.3%||Wage-price controls|
|1973||8.7%||4.9%||10%||5.6%||Gold standard and Vietnam War ended|
|1974||12.3%||7.2%||8.5% (12.9% in Jul)||-0.5%||Recession|
Other Presidents' Economic Policies
- Donald J. Trump (2017 - 2021)
- Barack Obama (2009 - 2017)
- George W. Bush (2001 - 2009)
- Bill Clinton (1993 - 2001)
- Ronald Reagan (1981 - 1989)
- Jimmy Carter (1977 – 1981)
- Lyndon B. Johnson (1963 - 1969)
- John F. Kennedy (1961 - 1963)
- Harry Truman (1945 - 1953)
- Franklin D. Roosevelt (1933 - 1945)
- Herbert Hoover (1929 - 1933)
- Woodrow Wilson (1913 - 1921)
Office of the Historian. “Ending the Vietnam War, 1969–1973.” Accessed Sept. 14, 2020.
Office of the Historian. ”Nixon’s Foreign Policy.” Accessed Sept. 14, 2020.
Bureau of Economic Analysis. “Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.” Accessed Sept. 14, 2020.
Govinfo. “Table B–63. Changes in Special Consumer Price Indexes, 1968–2011.” Accessed Sept. 14, 2020.
Federal Reserve Bank of St. Louis. “Banking and Monetary Statistics 1941-1970,” Page 471. Accessed Sept. 14, 2020.
Congress.gov. ”Brief History of the Gold Standard in the United States,” Pages 12-13. Accessed Sept. 14, 2020.
U.S. Bureau of Labor Statistics. “CPI for All Urban Consumers (CPI-U),” Select "Time Period," "12-Month % Change." Accessed Sept. 14, 2020.
Federal Reserve Bank of St. Louis. “Effective Federal Funds Rate.” Accessed Sept. 14, 2020.
Federal Reserve Bank of St. Louis. “Unemployment Rate.” Accessed Sept. 14, 2020.
Federal Reserve Bank of St. Louis. “Full Text of Papers of Richard M. Nixon : Address to the Nation Outlining a New Economic Policy: The Challenge of Peace.” Accessed Sept. 14, 2020.
Federal Register. “Executive Order 11627: Further Providing for the Stabilization of the Economy,” Page 36 FR 20139. Accessed Sept. 14, 2020.
Federal Reserve History. “Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls.” Accessed Sept. 14, 2020.
Govinfo. “Proclamation 4074—Imposition of Supplemental Duty for Balance of Payments Purposes.” Accessed Sept. 14, 2020.
Federal Reserve History. “The Smithsonian Agreement.” Accessed Sept. 14, 2020.
Federal Reserve Bank of St. Louis. “U.S. / U.K. Foreign Exchange Rate.” Accessed Sept. 14, 2020.
Congress.gov. ”Brief History of the Gold Standard in the United States,” Page 13. Accessed Sept. 14, 2020.
World Gold Council. “Gold Prices.” Accessed Sept. 14, 2020.
Congressional Budget Office. “Incomes Policies in the United States: Historical Review and Some Issues,” Page xiii. Accessed Sept. 14, 2020.
Bureau of Economic Analysis. “Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.” Accessed Sept. 14, 2020.
U.S. Bureau of Labor Statistics. “(Seas) Unemployment Rate.” Accessed Sept. 14, 2020.
Office of the Historian. “29. Editorial Note.” Accessed Sept. 14, 2020.
Congress.gov. “Arms Sales in the Middle East: Trends and Analytical Perspectives for U.S. Policy,” Page 30. Accessed Sept. 14, 2020.
Congress.gov. ”U.S. War Costs, Casualties, and Personnel Levels Since 9/11,” Page 1. Accessed Sept. 14, 2020.
TreasuryDirect. “Historical Debt Outstanding - Annual 1950 - 1999.” Accessed Sept. 14, 2020.
Constitution Annotated. “ArtII.S126.96.36.199 Impeachable Offenses: Effort to Impeach Richard Nixon.” Accessed Sept. 14, 2020.
Library of Congress. “United States v. Nixon,” Pages 683-685. Accessed Sept. 14, 2020.
National Archives Catalog. “Richard M. Nixon's Resignation Letter.” Accessed Sept. 14, 2020.
United States Courts. “Historical Changes of the Target Federal Funds and Discount Rates,” Page 7. Accessed Sept. 14, 2020.
Pew Research Center. “Public Trust in Government: 1958-2019.” Accessed Sept. 14, 2020.
Richard Nixon Presidential Library and Museum. “Guide to the Nixon Family Collection (1909-1967),” Pages 5-7. Accessed Sept. 14, 2020.
Richard Nixon. "Six Crises." Simon and Schuster, 2013.