Most Significant Events of the Twentienth Century: Part III
The 1970s--Nixon Era Price Controls
Whatever one might say about the success of the federal government's first efforts to take over the health care system, the same claims cannot be credited to the economic encroachments of the 1970s in the area of inflation control. Ironically, it was an early leader in the fight against Communism in the '40s and '50s whose name will forever be associated with the era of wage and price controls.
For most of his public career, Richard Nixon opposed government intervention in the economy. His scepticism of price controls dated from his days as a junior attorney with the Office of Price Administration during World War II; he blamed his narrow defeat for President in 1960 on a recession caused, according to him, by the Eisenhower Administration's focus on inflation control rather than unemployment. Over the course of the decade of the '60s, the same public that increasingly protested the government's total mismanagement of the war in Vietnam also increasingly expressed confidence in its competence in handling the economy; Nixon, flying in the face of public opinion, continued his opposition to government intervention, and was elected in 1968. Once in office, however, he gradually fell prey to the same anti-inflationary policy for which he had criticized Eisenhower.
Rapidly escalating prices over the last few years influenced his thinking on this subject. By 1971, he had gone so far to the left on economic policy that he was able to declare that he was now a Keynesian. Two important advisors now influenced him more than any other--Federal Reserve Chairman Arthur Burns, who was concerned over the power of corporations and labor unions to drive up wages and prices; and his new Treasury Secretary, John Connally, who had no central economic philosophy apart from his own self-interest, but who liked high-stakes plays and dramatic attention-getting moves. Nixon was also influenced by the looming issue of the value of the dollar, tied to gold prices that had been fixed at $35 an ounce since FDR was in the White House; at a time when foreign governments were literally hoarding billions of dollars in U.S. currency, there were fears that they would suddenly decide to cash in (pun intended) this currency for gold, which would be disastrous for the economy.
on August 15, 1971, Nixon unveiled the dramatic gesture favoured by Connally, a package titled the New Economic Policy (N.E.P., a name bearing an unfortunate resemblance to the economic reform plan passed by Soviet leader Vladamir Lenin during the 1920s); it became known simply as Phase I. It consisted of two major parts. The first was a 90-day freeze in wages and prices, a period designed to give the Administration breathing room to work on the unemployment problem without affecting inflation. The second part was more controversial, and opposed by Burns--a complete end to the gold standard, which meant that from now on, the dollar's value would no longer be fixed, but would fluctuate on the open market; this necessarily weakened the dollar and contributed to inflation, but this was viewed as a plus because it highlighted the importance of measures to keep inflation down.
The NEP proved very popular, and it actually worked in its first several months, as inflation dipped slightly. In November, Congress passed legislation for Phase II, which established a board to approve wage and price increases. In June 1972, prices resumed their upward course, and later that year Phase III was introduced under the direction of Connally's successor, George Schultz.. Phase IV, announced by Nixon in June 1973, brought new price controls, including restrictions on oil and gas prices in response to increasing pressures in this area. By this time, however, it was evident the program wasn't working, and the public had long since become disenchanted. By the time Phase IV went into effect, a kind of revolt was underway as farmers and ranchers stopped sending their produce to market, and farmers even drowned their chickens in protest; consumers were raiding the supermarkets in droves, emptying the shelves as fast as they could before prices could go higher. And prices did go up--more than 300 percent by December of 1974.
In April of that year, the first and only peacetime wage and price control system was ended, except for the controls on oil and natural gas, which ultimately led to gas shortages, long lines at the pump, and the cycle of dependence on foreign oil that continues today. (President Carter finally ended the oil and gas controls.) Wage and price controls, though they might have seemed like a good idea at first (to some), ultimately failed because wages didn't keep keep pace with inflation, and unemployment continued to be a problem that resisted government-imposed attempts at solution. Interestingly, starting in December 1974, inflation began falling, going down in two years almost to its August 1975 level of 4 percent. (This was the era of President Ford's grassroots "Whip Inflation Now" campaign.) Prices began to go up again in December 1976, shooting up to new highs in the next three years, which led to predictable calls for a renewal of government controls. However, since the mid-seventies inflation has largely been handled under the jurisdiction of the Federal Reserve with its authority to set interest rates; this, along with normal market forces, has kept it fairly under control in most cases.
The experience of government-imposed wage and price controls is unique in the nation's history. Had it not been for Watergate, this would almost certainly been the most important part of President Nixon's domestic legacy. (It can even be argued that Watergate was part of the reason for the failure of the program, given the detrimental effect it had on Nixon's ability to govern.) Have we learned any lessons? Well, President Obama has been reported to be considering similar controls on health care costs and insurance premiums. Too young to remember the decade of hyperinflation that resulted from Nixon's policies, perhaps he should take a turn at studying its history, especially if he is about to repeat it.