People who were alive in 1941 can tell you right where they were on Pearl Harbor day. I can tell you exactly where I was when I heard that President Kennedy had been shot. We all remember 9/11. Another day that I sticks in my memory just as clearly is one that is now remembered by few: Sunday, August 15, 1971.
There was no internet in those days and no cable news channels, so I was mercifully spared the news until the following morning at 8:15 when I opened my motel room door in Huntington Beach and saw the L.A. Times on the doorstep with a headline that said something like “Nixon Imposes Price Controls.”
I was shocked and disgusted for two reasons: though I was employed as an aerospace engineer, I was beginning to learn about free markets, having attended a FEE seminar the year before at which Mises and Hazlitt – now saints of Austrian economics – lectured. And I had voted for Nixon in 1968, naively believing the Republicans were the party of free markets. The following year I signed up with the new Libertarian Party and never looked back on the Republicans until 2008 when Ron Paul ran.
Here is a video recording of Nixon announcing a 90-day “freeze” on prices and wages. Note the Orwellian references to the evils of price controls even as he imposes them.
So what was the big emergency that prompted such a drastic response? Unemployment was running about 6%; price inflation at about 5%. Nixon’s problem was that an election was coming up in the following year. He remembered bitterly his narrow loss to Kennedy in the 1960 election which he attributed to a mild recession of that year. Now he was determined to goose the economy and get himself re-elected. Like FDR, Nixon loved dramatic strokes and never mind the consequences. Earlier that year the man who had made his reputation as an implacable anti-communist had made a sudden and dramatic overture to communist China. So on that sleepy Sunday Nixon delivered another bold stroke, in an end run around the Democratic opposition. Perhaps it worked: he won 49 states in the 1972 election with considerable help from his bumbling opponent, George McGovern.
His action was quite popular. The stock market surged that Monday morning and polls showed a 75% approval rate. But Milton Friedman was right when he predicted “utter failure and the emergence into the open of suppressed inflation.” Another freeze was imposed in 1973 but this time the damage to the economy became evident. As explained in the excellent video series “The Commanding Heights,” “ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.” Inflation reached a peak of about 14% before the decade was out and before the powers that be accepted the fact that excessive money creation is the main cause of price inflation. George Schulz, Nixon’s economic advisor and a vigorous opponent of price controls consoled himself with the thought that Nixon had demonstrated dramatically how not to fight inflation.
Nixon wasn’t finished. During that same Sunday broadcast he slapped a 10% tariff on imported goods, accompanied by some blather about fairness. More significantly, he ended the Bretton Woods international monetary system. That arrangement, conceived in 1944, had the U.S. dollar convertible into gold at $35 per ounce, but only for foreign central banks. Not only could private banks and private citizens not convert their dollars, it was even illegal to own gold (with exceptions for dentists, jewelers, etc.). I made a point of violating that particular law on principle before the prohibition was lifted in 1974.
In all fairness, the Bretton Woods system was doomed long before that August. The gold exchange standard had persisted only because of a gentlemen’s agreement that European central bankers would refrain from exercising their redemption rights to any significant degree. So many new dollars had been created to finance Lyndon Johnson’s war in Vietnam and his “Great Society” at home, and so many of those dollars were parked overseas as a result of trade imbalances, that the U.S. government could not come close to honoring its Bretton Woods obligation in full. The French under de Gaulle and his gold-bug advisor Jacques Rueff had become increasingly strident about the situation, but in early August the British ambassador showed up with $3 billion to be redeemed, and that may have been the straw that broke the camels back.
So on that same Sunday Nixon slammed the gold window shut (video here) pushing us out of the frying pan of Bretton Woods, under which numerous wrenching devaluations had wracked international trade, into the fire of floating exchange rates, the system we have now. The devaluations are gone but the wild swings in currency values, something that was not foreseen by Milton Friedman who was an early advocate of currency markets, are almost as bad. Now, wonder of wonders, there is resurgent talk of some sort of gold standard.
Reagan tempted me with with some pretty inspiring rhetoric in his 1980 campaign about getting the government off our backs. Not enough to vote for him, but I was glad he got elected and with the help of Fed chairman Paul Volcker he did break the back of inflation, but he never got spending under control and he didn’t deserve as much credit as he got for the fall of communism, which had been rotten at its core for decades. But Bush I was terrible and in hindsight Clinton wasn’t all bad, yet I confess I was relieved when Bush II beat Gore in 2000. I needn’t remind anyone what a disaster GWB was with his wars, his unfunded medicare expansion and his bailouts (OK, thanks for the tax cut).
I’m voting for Gary Johnson who won’t win, and I really don’t care who wins. Gridlock is the least bad outcome, even if that means the despicable Obama stays in office facing a Republican congress.