How Nixon Destroyed the Dollar (2024)

Richard Milhouse Nixon was the 37thpresident, servingfrom 1969 to 1974. He is infamousfor resigning from office in the wake of the Watergate scandal, for which he was almost impeached. But Nixon also endedthe Vietnam War in 1973 and opened traderelations withChina. He negotiated a treaty withRussian leader Leonid I. Brezhnev to limit strategic nuclear weapons.

How Nixon's Policies Hurt the US Economy

Those well-publicized events overshadow how Nixonalmost destroyed the U.S. economy. To cure mildinflation, heimposed harmfulwage-price controls. That move bypassed America'sfree-market economy.Even worse, Nixon ended thegold standardthattied the dollar's value to gold.

Thismove createda decade ofstagflation. It was only cured bydouble-digit interest rates, causingthe devastating1981 recession. Ending the gold standard permitted the U.S. government to print dollars to solve every economic woe. That ensured the dollar's value would fall indefinitely. How did that happen?

Balance of Payments Deficit

In 1968, President Johnson'sspending on the Vietnam War and the Great Societyboosted economic growth to 4.9%. But it sentinflationto a disturbing4.7%. As Americans prospered, they imported more goods, paying in dollars.That created ahugebalance of paymentsdeficit.

The excess of dollars threatened the gold standard. That's where the Federal Reserveredeemed $35 foran ounce of gold.In 1968, the United States had over $45 billion in federal reserve note liabilities, but held only about $10 billion in gold. It wasn't enough to redeem the liabilities. Foreign holders turned in their dollars for gold, depletingcentral banks' gold reserves even more.To make the dollar more attractive to hold, the Federal Reserve raised interest rates to 6%.

But the run on gold continued. It boostedinflation to 6.2% in 1969, Nixon's first year in office.TheFed defended the gold standard by raisingratesto 9.19%. Unfortunately, it also created a mild recession that started later that year.By the end of 1970, theunemployment ratehad risento6.1%.

Nixon's Re-Election and Economic Policies

With his re-election looming, Nixon attacked thismild type of inflation and unemployment. He announced the "Nixon Shock"in anAugust15, 1971, speech.

Prosperity without war requires action on three fronts: We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators.

Worthwhile goals, but thesolutions were devastating. First, Nixon ordered a 90-day"...freeze on all prices and wages throughout the United States.”He created a Pay Board and Price Commission to control increasesuntil wellafter the 1972 election.

Wage and price controls don't work in afree market economy. Workers can nolonger get raises, giving them less money to buy goods and services. That lowersdemand.Businesses can'tlowerprices to boost demand. Neither can they raise prices,even though the cost of their imported materialsincreases. They can't lower wages, so they reduce hiring and, consequently, demand.

Second, Nixon closed the gold window. This dropped an economic bomb on the allies who had signedtheBretton Woods AgreementafterWorld War II. TheFed simplystopped redeeming dollars with gold. In other words, the United States would no longer honor its agreement to support the dollar's value with the gold standard.

Four-Month Import Tax

Third, Nixon imposed a 10% import tax to reduce the balance of payments. It only lasted four months and forced America's trade partners to raise the price ofgold to $38 per ounce. This was only a $3 increase, but it also sent the value of the dollar down. That made imported goods more expensive and createdmoreinflation.It alsodestroyed the trust needed for global trade.Our allies began printing more of their own currency and raising interest rates to boost theirvalue.

Nixon's actions were popular at home, propellinghim to victory in 1972. Hewon every statebut Massachusetts.He went on to achieve his most notable foreign policy accomplishments. He went to Beijing, signed the Strategic Arms Limitation Treaty, and ended the Vietnam War.But he also sowedthe seeds of stagflation.

Nixon's Policies and the 1973-1975 Recession

In 1973, Nixon devalued the dollar even further, making an ounce of gold worth$42. As the dollar devalued, people sold their greenbacks for gold. By late 1973, Nixon decoupled the dollar from gold completely. The market quickly sent the priceof theprecious metal to $120 per ounce.Inflation was in the double digits.It ended the 100-yearhistory of the gold standard.

Wage-price controls createda recessioninNovember 1973. Nixon eliminated them inApril1974, but the damage wasdone. There were three consecutive quarters of negativegross domestic product growth:

• Q31974, down3.7%.
• Q4 1974, down1.5%.
• Q11975,down4.8%.

Unemployment hit9% in May 1975. Inflation hovered stubbornlybetween 10% and 12% from September 1974 through May 1975. TheOPECoil embargois typically blamed for causing the recession byquadrupling prices. But itonly added fuel to an already raging fire, one of the worst in thehistory of recessions.

Nixon's Other Economic Impacts

Two of Nixon's other decisions created long-lasting, although not as obvious, economic impacts.

Nixon Doctrine

On July 25, 1969, Nixonstated that the United States would nowexpectit* allies to take care of their own defense, but would provide aid as requested. The doctrine's purpose was to respond to anti-war protests and get the United Statesout of direct combat in Vietnam. Instead, the United States would train and arm local forces.

The Nixon Doctrine had a more long-lasting economic impact. It provided an entry into involvement inthe Middle East.It outsourced protection of the oil supply in the region to the Shah ofIranand Saudi Arabia. Between 1970 and 1979, the United States delivered almost $19 billion in arms to the two countries to defend againstcommunism. The arrangement continued until Russiainvaded Afghanistan in 1978 and the Shah was overthrown in 1979.

TheDoctrinelaid the groundwork for theWar in Afghanistanand theIraq War. These wars added$1.5 trillion tothe U.S. debt.Nixon only added $121 billion to the $354 billion national debt during his term in office. It wasn't a record,compared to thedebt of other presidents. But his Doctrine made his long-term impact on the debt much more significant.

Watergate

In 1972, theCommittee to Re-elect the President authorizeda break-in. It was at the offices of the Democratic National Committee in the Watergate office building. A grand jury indictedseven of Nixon's aides.Nixontried to divert the investigation, which led to calls for his impeachment.

The special prosecutor for Watergate sought audio tapes of conversations recorded by Nixon in the Oval Office. Nixon refused, claiming "executive privilege" made him immune. In theUnited Statesv. Nixon,the Supreme Court found that Nixon did not havethe right, in this case, to withhold information to preserve confidential communications. This wasn't a diplomatic affair nor did it secure the national interest.

Rather than be impeached for Watergate, Nixonresigned on August 9, 1974. But the recession he created didn't end until 1975 after the Fed lowered interest rates.This move only spurred the inflation Nixon had created when he ended the gold standard.

Tocombat inflation,Federal ReserveChairmanPaul Volckersteadily raisedthe fed funds rate to 20. Unfortunately, thiscontractionary monetary policytriggered the worstrecessionsince the Great Depression. It lastedfrom July 1981 to November 1982. The unemployment rate peaked at10.8%, the highest in any recession. It remained above 10% for almost a year.

Watergateeroded public confidence in government, as the country felt betrayed. In 1964, polls showed that 75% of Americans believed elected officials in Washington could be trusted to do what was right for the country. By 1974, only a third believed so. This lack of faith in government led to Ronald Reagan's election in 1980. Itcreated a public belief intrickle-down economics, which in turn led to increasingeconomic inequality.

Nixon's Early Years

Nixon was born in California in 1913. His first job was workingat his father's grocery store. Yet, he grew up in poverty, and two of his brothers died of tuberculosis.Nixon graduated from Whittier College and Duke University Law School. He was a private practice lawyer until he joined the Navy in World War II.

Hebecame aCongressman in 1947. InAugust 1948, Nixon broughtformer State Department official Alger Hiss to the witness stand of the House Un-American Activities Committee. The committee accused Hiss of being a Soviet agentand convicted him of perjury. Thisverdict catapulted Nixon into national attention. It helped him become a CaliforniaSenator in 1950.

In 1952, Nixondeniedcharges of improper use of campaign funds. He said the only gift he kept was his dog Checkers.Hebecame vice president under PresidentEisenhower in 1953.

In March 1960, while Nixon was running against John F. Kennedy for president,Arthur Burns warnedhimthat the economy would weakenbefore the November election.Nixon wrote that Burns “urged strongly that everything possible is done to avertthis development. He urgently recommended that two steps be taken immediately:by loosening up on credit and, where justifiable, by increasing spending fornational security.” Eisenhower would not use fiscal policy to affect the election unless there was a significant recession brewing. JFK defeated Nixon in 1960.Nixon saidhis loss was due to highunemployment,which became his focus from then on.

He defeated both vice president Hubert Humphrey and third-party candidate George Wallace, to become president in 1969. He beatGeorge McGovern in 1972.

Nixon'ssalary as presidentwas $200,000. It would be worth $1.4 million today.

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