Gold Standard & Nixon Increased Domestic Spending War on Poverty Vietnam War spending Increased deficits The result was increasing inflation in the United States and the value of the dollar did not decline The Dollar is the unofficial reserve currency of the world Shortage of Dollars
Gold Standard and Nixon But Dollars could be exchanged for gold Gold was increasingly used instead of dollars French hoarded dollars and then traded dollars for gold to boost the Franc This created a serious run on the dollar Foreign Arbitrage and Payments Richard Nixon in 1971 ended direct convertibility of the United States dollar to gold Ended the Bretton Woods system of international financial exchange
Abandoning the Standard Balance of Payment deficit More money leaving the United States than coming in Trade deficits More imports than exports Less important than the Balance of Payments The result is there are more dollars leaving than coming in threatening the value of the dollar Solution Let the dollar float
Nixon Shock President Nixon imposed a 90-day wage and price freeze 10 percent import surcharge Ended convertibility between the dollar and gold Slowed inflation and allowed the dollar to float relative to other currencies Boosted American exports Made imports more expensive
Krugman on Fiat While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible--and, in some countries, they have been quick to take the opportunity
Oil Shock OPEC Oil ministers had not readjusted oil prices in the face of inflation Oil prices were tied to the dollar As the dollar devalued so did oil Oil Embargo of 1973 OPEC raised oil prices 70% to $5.13 a barrell Cut production 5% Oil demand did not decrease No readily available alternative
Oil Shock Oil prices quadurpled The retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. State governments requested citizens not put up Christmas lights Oregon banned Christmas and commercial lighting Politicians called for a national gas rationing program. Nixon requested gasoline stations to voluntarily suspend gasoline sales on Saturday nights or Sundays 90% of owners complied, which resulted in lines on weekdays.
Stagflation Stagflation is the situation when both the inflation rate and the unemployment rate are high. A state of inflation and economic stagnation occurring simultaneously cannot happen in standard macroeconomic policy. So what do you do?
Stagflation Richard Nixons imposition of wage and price controls on August 15, 1971, an initial wave of cost-push shocks in commodities was blamed for causing spiraling prices. The second major shock was the 1973 oil crisis, when the Organization of Petroleum Exporting Countries (OPEC) constrained the worldwide supply of oil.
Stagflation Combined with the overall energy shortage that characterized the 1970s the result was an actual or relative scarcity of raw materials. The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fueling stations and increased production costs for industry. Increased costs coupled with labor inflexibility undermined economic growth while increasing inflation
Result Stagflation undermined faith in a Keynesian consensus renewed emphasis on microeconomic behavior attempt to root macroeconomics in microeconomic formalisms. The rise of conservative theories of economics, including monetarism to combat stagflation or explain it to the satisfaction of economists and policy-makers.
Result Federal Reserve chairman Paul Volcker sharply increased interest rates from 1979-1983 "disinflationary scenario." These interest rates were the highest long-term prime interest rates that had ever existed in modern capital markets. The American economy also dipped into recession. Starting in approximately 1983, growth began a recovery. Both fiscal stimulus and money supply growth were policy at this time.
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