When Richard Nixon Wrecked the Economy

When Vice President Kamala Harris announced her first major policy plank — new crackdowns on alleged price gouging in supermarkets and grocery stores — the impetus was clear. Still reeling from pandemic-era inflation, Americans remain frustrated by steadily rising food prices, which are 20 percent higher today than when Harris and President Joe Biden took office.

But her proposals have sparked contention. Donald Trump has attacked “Comrade Kamala” for embracing “socialist price controls.” Harris’ supporters claim that she did not endorse price controls on groceries, but rather ordinary crackdowns on gouging that exist in other areas of the economy.

In fairness to both sides, the vice president’s proposal was more conceptual than specific. But Democrats have good reason to deny, and Republicans to argue, that she plans to impose price caps. While price controls played an important role in helping the U.S. mobilize during World War II, they were disruptive to the economy and, eventually, broadly unpopular.

In fact, the last time a president attempted to quell runaway inflation was in the early 1970s when Richard Nixon — a Republican — imposed temporary ceilings on food and gas prices. The results were economically ineffective and politically disastrous, with massive unintended consequences. It’s history that Harris should remember as she continues her campaign — and as she governs, if she wins.

After nearly two decades of post-war prosperity featuring robust growth and low inflation, by the late 1960s, wages and prices began to accelerate more quickly.

Between 1965 and 1968 federal spending increased by 60 percent — in large part a result of America’s military buildup in Southeast Asia — and pushed inflation up to an annual rate of 5.5 percent. Liberals in Lyndon Johnson’s White House generally embraced the writings of the famed Cambridge University economist John Maynard Keynes and attributed such “cost-push” inflation to the dramatic hike in government expenditures.

By this logic, government fiscal policy (in this case, increased war spending) primed the nation’s economic pump, creating low unemployment. In turn, the tight labor market encouraged workers to exact generous pay increases from their employers, who responded by boosting prices to cover new labor costs. At the same time, workers equipped with more expendable cash competed for a limited supply of products, further edging prices upward. Good Keynesians all, LBJ’s advisors convinced the president to secure congressional approval of a temporary, 10 percent tax increase, a measure that would theoretically reduce aggregate demand and slow the steady climb of wages and prices. But the tax surcharge did not have its desired effect. “When we were able to call the policy tune,” said Arthur Okun, LBJ’s chief economic advisor, “the economy did not dance to it.”

Such was the economy that Richard Nixon inherited. In his first two years in office, inflation hovered between 5.5 percent and 6.6 percent — modest by comparison to what would follow in the mid-1970s, when inflation moved into double digits, but still alarmingly high by recent historic standards. By late 1970, Nixon was eager to own the issue and drive prices down. Which is where John Connally came in.

A conservative Democrat and onetime protégé of Lyndon Johnson, Connally served from 1971 to 1973 as Nixon’s Treasury secretary. Best known for catching one of the bullets intended for President John F. Kennedy in November 1963, he was entirely self-made — a son of sharecroppers who rose to become student body president at the University of Texas, then secretary of the Navy under JFK, and finally, a three-term governor of Texas. Henry Kissinger noted that “Connally’s swaggering self-assurance was Nixon’s Walter Mitty image of himself. He was the one person whom Nixon never denigrated behind his back.”

A man of few ideological commitments and even fewer fixed notions about political economy, Connally liked to brag, “I can play it round or I can play it flat, just tell me how to play it.” After surveying the landscape, in August 1971 he convinced the president to enact what came to be called the New Economic Policy (NEP), a two-pronged plan which first took America off the gold standard that year, thus deflating the dollar and arresting the outflow of gold to foreign nations that held large reserves of U.S. currency; and second, a move to check inflation by imposing 90-day wage and price controls — something that no American president had done since the 1940s. NEP also included a temporary 10 percent surcharge on all imports. Together with the devaluation of the dollar, this step boosted American exports and helped revive the struggling manufacturing sector.

Initially, it was a political success; 73 percent of Americans applauded Nixon’s imposition of wage and price controls, and for a time, NEP seemed to work. But as Herb Stein, one of the president’s chief economic advisers, later admitted, “We had no plan for getting out of … the ninety-day freeze.” Improvising, in October 1971 the administration introduced “Phase II” of the NEP, which kept certain controls in place until January 1973. With prices and wages thus locked into a holding pattern, the administration’s high-spending budget and the Fed’s expansionist monetary policy heated up the economy in time for the 1972 presidential election. Unemployment only dipped modestly from 5.9 percent in 1971 to 5.6 percent in 1972, but inflation dropped to a manageable 2.9 percent, providing a stable enough environment for Nixon’s last electoral campaign and his landslide win against George McGovern.

In 1973, just as Watergate began spinning out of control, the economy came crashing down. The Fed’s easy money policy and the administration’s budget had so overheated the economy (GNP grew at a real rate of 8.7 percent during the first quarter of 1973) that Americans engaged in an orgy of consumption, creating shortages of raw materials like chemicals, paper, steel and copper that soon drove wholesale and retail prices through the roof. The end of Phase II in January and the introduction of Phase III, which retained mandatory controls on only a handful of sectors (namely, health care, food and construction), exacerbated the problem.

Had cost-push inflation been the only source of economic woe, the president’s troubles would have been bad enough. But a series of events — some coincidental, others owing to Nixon’s ineptitude as a manager — conspired to create what economists call “supply shock” inflation, particularly in the all-important food and energy sectors.

First, heavy snows in the Soviet Union destroyed much of the country’s wheat harvest, while warm water currents in the Pacific Ocean flowed to the Peruvian coastline, decimating the anchovy harvest. Anchovies were a key ingredient of high protein feed grain, a necessary staple for U.S. livestock farmers.

Second, in 1972, the Soviets had quietly cornered the U.S. grain market, using $750 million in American credits and $500 million in hard currency to buy up one-quarter of the American wheat harvest. Nixon had extended the credit and eased the way for the purchase in an effort to secure Soviet acceptance of arms control agreements that he believed (correctly) would bolster his reelection campaign. He never anticipated the economic fallout.

Third, in an effort to shore up his support in the farm belt during the campaign, in 1972 Nixon’s Agriculture Department had increased crop reduction subsidies, thereby driving up agricultural income ahead of the November election, but further contributing to the shortages that plagued the national economy the following year.

Finally, the devaluation of the dollar had indeed boosted U.S. exports, but that included agricultural exports. Thus, America entered 1973 with dangerously low reserves of grain.

Together, the twin natural disasters in the Soviet Union and Peru; the “Great Grain Robbery;” the devaluation of the dollar; and the administration’s crop reduction plan created massive raw material shortages and pushed meat and grain prices to historic highs. In the winter of 1973, the cost of food rose an astounding 30 percent, creating a hike in the consumer price index larger than any since the Korean War. For ordinary Americans, the effects were devastating. The price of meat climbed by 75 percent in just three months.

As if the administration had not displayed sufficient ineptitude, in June 1973 Nixon announced “Freeze II,” a 60-day freeze on wholesale and retail food prices, but not on the price of raw materials. Poultry, dairy and livestock farmers now faced an impossible situation: The cost of feed was rising at uncontrolled rates, but the prices they could charge for their product — eggs, milk, beef, pork and chicken — were locked. On June 23, American television news viewers were stunned by images of a farmer in Joachim, Texas drowning 43,000 baby chickens in barrels of water. “It’s cheaper to drown ‘em than to … raise ‘em,” he explained.

In October 1973, matters went from bad to worse. The Nixon administration intervened in the latest Middle East conflict — the Yom Kippur War — by supplying Israel with badly-needed arms that helped it stave off near-defeat at the hands of Syria and Egypt. As a punitive response, on Oct. 20, just hours before Nixon’s “Saturday Night Massacre,” Saudi Arabia cut back oil production and imposed a temporary embargo on all exports to the United States. With 18 percent of U.S. oil consumption tied to the Middle East, prices were certain to go sky-high. Reserves might have helped cover the difference, but the NEP’s price controls on energy had posed a disincentive for refineries to produce stocks of home heating fuel.

Once again, the administration’s incompetence exacerbated problems whose origins were largely beyond its control. The president took to the airwaves in November to ask Americans to lower their thermostats by six degrees, ordered a 10 percent reduction in air travel and urged voluntary austerity. “We are heading into the most acute energy shortage since World War II,” he grimly explained.

At the time, Nixon scarcely knew the half of it.

In December the Persian Gulf oil ministers hiked the price of crude oil from $5.11 per barrel to $11.65 — an increase of 470 percent since the beginning of the year. Airlines and automakers announced new rounds of layoffs, schools closed early for want of heating oil, power plants cut their voltage output and motorists lined up for hours in search of precious, expensive gasoline to power their cars.

By February 1974 private rage began to boil over. The Annapolis Evening Capital reported that “long lines, long waits and the gas shortage teamed up yesterday to produce hot tempers and the first violence in customer lines at county gas pumps,” while in Miami, a frustrated driver tried to drive over a station attendant. “In the past month,” the New York Times observed, “people in metropolitan areas have become increasingly suspicious and angry, insecure, devious, often violent and seldom resigned, all because of the lack of gasoline.”

Both Keynesians and monetarists were accustomed to thinking of inflation and unemployment as functions of demand. In theory, they enjoyed an inverse relationship: As one went up, the other went down. How to achieve stable equilibrium was the defining question of post-war economics. Consequently, most experts in early 1974 suggested combating rapid inflation by cooling down the economy. Nixon chose a middle course, maintaining a small full-employment budget surplus and urging the Fed to hold the line on money growth. No contraction, but no expansion, either.

What the administration failed to appreciate was that the Great Inflation of 1973-1974 was not a function of excess demand; it resulted from supply shocks in the food and energy sectors — shocks that sopped up money in much the same way a tax increase or monetary contraction might have. In effect, supply shocks could create inflation and unemployment — or, in the common parlance of the day, “stagflation.”

Inflation would persist until oil and food supplies re-stabilized, which is precisely what happened in 1975. Reversing job losses, on the other hand, would require tax cuts, spending hikes or a flow of easy money. One study suggested that a $20 billion tax cut in early 1974 could have produced normal economic growth within a year. But Nixon went the opposite route, fighting inflation with traditional measures. In so doing, he made a bad situation worse. By May 1975 unemployment hit 8.7 percent.

If there is a lesson in this story, it’s that price controls are one lever, and only one lever, to address inflation — and in the absence of a fully coordinated economic policy, they can be ineffectual and carry unintended consequences.

In the same way that Nixon could not fully control the Fed or remedy global supply shocks — some owing to weather, others to politics — a potential Harris administration may prove no less able to anticipate the host of extenuating circumstances that might render price controls a poor tool to manage the economy. Certainly the recent experience of Covid-related economic disruption at the global level, much like the freak shortage of anchovies in 1972, is an example of how unexpected events can cause unexpected fallout.

To be fair, Harris’ plan leaves much to interpretation. But should she ascend to the Oval Office, the example of Richard Nixon, and his ill-fated experiment with price caps, is instructive. What’s good politics today might be bad policy — and bad politics — tomorrow.