Richard Nixon, the 37th U.S. president, is more known for the scandals that led to his resignation in 1974. What is less popularly known, but no less studied, are the various economic policies pursued by Nixon to curb the rate of inflation. Inflation is the growing cost of consumer goods, commodities and production without a equal growth of wages and profits. High inflation can eventually stifle an economy to the point of depression as the costs of commerce become unprofitable. Nixon felt that the inflation rate left over from the previous administration was to high to maintain a healthy U.S. economy. Unemployment at the time was at a all time high, partially supported by the high levels of government spending. In order to curb inflation Nixon took fiscal action: he cut government spending. This policy worked to slow the rate of inflation, yet unemployment inevitably rose. The unemployment rate jumped from 3.5% to 6% in only two years and 2.5 million people were thrown out of work.

CS Question #1: How did Nixon combat inflation?

Inflation was only slowed by Nixon's actions. Due to rising oil prices and other problems in overseas trade inflation continued to slowly creep upward, weakening the American dollar overseas and furthering hampering trade. Nixon also had the problem of facing a re-election campaign after overseeing a rise in unemployment. Often American voters look to the state of the economy just before an election to judge the actions of the incumbent candidate. Nixon worked the magic of politics and the political business cycle to increase his chances for re-election. First, Nixon took harsh measures to stop inflation. He froze wages and prices for 90 days and then regulated any increases afterwards. A wage and price control is a law or regulation which seeks to define wages and prices. An employer would have to pay a wage set by the government and could only sell products at a similarly set price. The purpose of wage and price controls was to force stability on the economy, making it impossible to inflate wages and prices any further. This created a closed system were a constant amount of available currency was worth the prevalent costs of living. He also cut the dollar off of the gold standard. This allowed the government, and not fluctuating gold prices control the value of the dollar within it's domestic economy.

To help win reelection Nixon had to cut the unemployment rate. Nixon as a policy maker believed that the cost of full employment was inflation, and that inflation was the greatest threat to an economy. Yet to stay in power he softened his position. Just prior to the 1972 campaign Nixon increased government spending to curb unemployment. At the Fed Nixon had Chairman Arthur Burns to use monetary policy to increase the money supply in the nation's economy. The purpose was to stimulate short-term employment and growth, but to also keep inflation in check. The policy has been attacked as being short-sighted, since any increase in employment would quickly be wiped out by the rate of inflation. Nixon won re-election, but the economy suffered from the effects of his pre-campaign policies. Unemployment continued to rise and inflation also rose to a high of 12.1%.

CS Question #3: How was Nixon's policy part of the political business cycle?

Price controls, such as one used by Nixon are extremely rare in the U.S. economy. Usually fiscal or monetary policies are pursued in order to adjust the economy and keep it running smoothly. Nixon was trying to create prosperity by simply keeping inflation low. Inflation, most economist agree, is very dangerous in the long term economy, as it weakens the value of currency and investments, and makes new investment unattractive. Unemployment curbs inflation by cutting the amount of consumer spending. Wage and price control was attempted to achieve the same effect. With wages and prices frozen, then profits would freeze as well. With less money circulating in the market, and more in investments and savings, eventually inflation should have fallen. The costs of this policy were immense as unemployment troubled the U.S. economy until the early 1980's and growth of the economy slowed.

CS Question #4: How does unemployment effect inflation?

Further Thought:

1. Was Nixon's use of the political business cycle effective?
2. What are the costs of price controls?
3. By influencing the economy, Nixon was able to win a second term as president of the U.S.. How ethical do you think it is for politicians to use the economy to remain in power?