Richard Nixon's Economic Policies: Stagflation

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  • 00:01 What Is Stagflation?
  • 00:55 High Inflation
  • 2:27 Price Controls
  • 3:25 Ending Stagflation
  • 4:08 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Few economic situations are as disastrous to an economy as stagflation. This lesson teaches what stagflation is and how one of the worst cases of it in history hit the United States during the 1970s.

What is Stagflation?

For the macroeconomists who help to manage the economy of an entire country, it is a constant balancing act between too much unemployment or too much inflation. Neither are good for the economy, but in healthy economic environments, they can act to counterbalance the other. Note that I said 'healthy' economic environments. In unhealthy economic situations, such as the one that President Richard Nixon was faced with throughout his time in office, fixing the economy can be much more difficult. This is because sometimes high unemployment and high inflation rates can actually coexist. When this combination happens, it is known as stagflation, largely because the economy is in a stagnant state between high unemployment and high inflation.

High Inflation

Part of what made the economy so volatile during the Nixon years was the fact that inflation was so high, almost 5%. In fact, high inflation was not under the control of the American government. More than 30 years earlier, the United States had been a major signatory to the Bretton Woods System, which sought to stabilize global exchange prices between currencies. The United States made sure that the dollar was at the center of this new exchange, meaning that its foreign trade would forever have an advantage. However, because the dollar was the new peg for global trade, this meant that a lot of countries were buying dollars in order to execute international trade deals. As you might expect, this extra demand for the dollar meant that inflation was climbing more than it would have otherwise.

Yet it was in the 1970s that the inflation rate really took a hit. Nixon pulled America from the Bretton Woods System, citing the fact that other countries were threatening to sell their dollars for gold, which would have really hurt the American economy by devaluing the dollar too quickly. Until this point, countries could change their exchange rates with the dollar by buying or selling gold instead. However, Nixon recognized that this gave too much power to foreign states. By allowing currencies to float, meaning that they were no longer attached to gold or any other set standard, it meant that inflation would continue to rise. Now at least the American government had some control over it.

Price Controls

In order to cope with these higher prices, Nixon reluctantly agreed to use the price control mechanisms given to him by an opposition Congress. However, while these controls proved to be useful in the short term, another crisis loomed on the horizon. OPEC, the Organization of Petroleum Exporting Countries, refused to sell oil in 1973. This caused the price of oil to quadruple and led to high rates of inflation because more and more money was necessary to buy things.

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