TIME: Almanac of the 20th Century

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<text> <title> (1970s) Fighting Inflation </title> <history> TIME--The Weekly Newsmagazine--1970s Highlights </history> <link 11394> <link 11930> <link 11933> <article> <source>Time Magazine</source> <hdr> Fighting Inflation </hdr> <body> [The U.S. economy in the 1970s became more inextricably entwined with that of the rest of the world than ever before-and more vulnerable to pressures from abroad. The gigantic engine that had lifted the whole world on the tide of its own prosperity in the 1950s and 60s finally began to falter as a result of spending on the Vietnam war and on the massive social and economic programs of the Johnson Administration. Richard Nixon, who inherited an ominous legacy of swiftly rising prices, growing budget deficits and foreign pressure on the dollar, at first pursued a conservative strategy of tight money and high interest rates to slow things down. The strategy did not have the intended effects.] (December 14, 1970) In April 1969, when the Administration was just setting out to fight inflation, the consumer price index was rising at an alarming rate of 7.2% a year. As a result of purposeful policies of slowdown since then, the nation's factories have been forced to pare production 5 1/2%, and stock and bond markets have shuddered through their worst crisis in three decades. The jobless rate, which was 3.5% then, jumped last week to 5.8% as the November figures were issued-the highest monthly level since 1963. All together, 4,600,000 Americans are out of work, and 21% of the people queried in a recent Harris Poll reported that they have felt the pangs of layoffs, loss of overtime or reductions in regular work weeks. Yet at last count during the month of October, consumer prices were still rising at the same annual rate of 7.2%. Measured against the Government's commonly used 1957-59 average, the buying power of the dollar dropped to 73 cents. [y the following summer, things were so bad that an about-face seemed called for.] (August 30, 1971) President Richard Nixon reversed his own and his party's policies with a swiftness and style that is virtually unmatched in modern American politics. Casting aside "the game plan" he has so long and implacably pursued, the President announced "the most comprehensive New Economic Policy to be undertaken by this nation in four decades." The claim was merited. A show of firm leadership was clearly needed in order to get the U.S. industrial machine running smoothly once more. He indeed laid out the most sweeping changes since the Hundred Days of the New Deal in 1933, when Franklin Roosevelt took the U.S. off the gold standard and began to get the Depression-racked economy into gear. The Nixon program had immediate and dramatic impact at home: on the first day the Dow-Jones average took a record jump on the New York Stock Exchange. The program the President has asked Congress for separates into eight parts: The U.S. will no longer convert foreign-held dollars into gold; temporarily, at least, the dollar will no longer be the foundation of international monetary dealings, as it has been since 1944. With minor exceptions, all prices, wages, rents and dividends are frozen at present levels for 90 days. A Cabinet-level Cost of Living Council, headed by Treasury Secretary John Connally, will preside over the freeze. Government spending will be reduced by $4.7 billion. Federal payoffs will be cut 5%; foreign aid will be pared by 10%; and the effective dates of Nixon Administration programs for revenue sharing and welfare reform will be pushed back. The 7% excise tax on automobiles will be repealed retroactive to Aug. 15; that means an average saving of $200 per car, which should be passed along to the buyer. Industry will get a 10% tax credit on new investment for one year; the credit will thereafter become 5%. A $50 increase in the federal personal income tax exemption will take effect at the beginning of 1972 instead of a year later; this should release an extra $2 billion to consumers next year. Most imports will be subjected to a 10% surcharge, which in most cases will make U.S. goods more competitive in the domestic market with those from overseas. (November 22, 1971) After a last-minute flood of economic directives ironically reminiscent of the New Deal, the nation finally enters Phase II of President Nixon's economic program this week. The new rules, which could govern American wages and prices at least until next Election Day, poured out of the President's Pay Board and Price Commission almost until the hour of Phase II's arrival at 12:01 a.m. on Sunday. Even so, having endured a sudden and all but total three-month freeze, the economy has moved into a new climate of controlled thaw. Phase II's outlines did not lack for critics or doubters. On prices, businessmen expressed some displeasure over the big surprise over the big surprise in the rules; a guideline on profits, which were not subject to anything resembling control even during the freeze. Unions, to be sure, are reluctant members of the team. Their five representatives on the Pay Board were outvoted on the wage package by the ten business and public members. Still, the board's final decision was a much more equitable compromise than A.F.L.-C.I.O. President George Meany would admit. It set the overall wage guidelines at 5.5% annually, halfway between the original proposals of labor and management. Further, the board decided to permit nearly all wage increases already written into contracts, including some that exceed the 5.5% guideline. The only dispute that the labor members lost outright was their demand that all freeze-delayed increases be paid retroactively. (December 27, 1971) The last time the dollar was devalued-by a stroke of Franklin D. Roosevelt's pen in 1934-Budget Director Lewis Douglas declared: "This is the end of Western civilization." It was a sign of the economic times last week that, when Richard Nixon announced another dollar devaluation, the predominant reaction throughout Western civilization was one of relief. That assessment represents a rare victory of reality over mythology. For decades, American statesmen and financiers have viewed devaluation as an unthinkable national humiliation and a devastating blow to the non-Communist world's financial system, which uses the dollar as the central trading currency. In fact, the dollar has long been overvalued, partly for reasons that reflect credit rather than blame on the U.S. American aid helped to revive Europe's war-shattered industrial power in Japan. Those actions reduced the U.S.'s dominance of world business, which the dollar's price had reflected in the early postwar years. At home, the U.S. paid a high price in loss of markets to its overseas competitors, because American goods became expensive in relation to foreign products. In one sense, his action made outright devaluation only a change in a bookkeeping abstraction. It will take the form of an increase in the official price of gold-meaning that instead of refusing to sell gold for $35 an ounce, the Treasury will simply refuse to sell the metal for $38 an ounce. [Phase II was quite successful: inflation was held to just 3.4% between November 1971 and January 1973. Then Phase II gave way to Phase III, a period when loosened guidelines were supposed to be accompanied by voluntary restraint in wage and price rises. Instead, the pent-up pressures of the previous 17 months sent prices upward at an annual rate of 9.2%. Food prices went through the roof.] (April 9, 1973) It was a triumph for what might be called Housewives' Lib--the most successful boycott by women since Lysistrata. Fed up with rising food prices, outraged by advice from various Washington officials to eat fish, eat cheese, or just eat less, thousands of women took to the streets in protest. In scores of cities and towns, they demonstrated, paraded, picketed, pamphleteered and badgered politicians. They cut down their purchases of meat, pledged meatless Tuesdays and Thursdays and, in an all-out boycott planned for this week, threatened to buy no steaks, chops, roasts or hamburger at all. In riposte, some farm leaders said that they would hold their animals off the market, thus creating an artificial shortage to keep prices propped up. In an audacious assault on the family pocketbook, U.S. food prices have been rising steeply. Consumer prices for food rose 2.3% in January and 2.4% in February--the fastest rate of gain since the Korean War. For consumers, the problem of high and rising food prices is literally a gut issue, and they have been demanding with ever greater insistence that President Nixon clamp on controls. Nixon finally took action last week. Only two months after he had loosened wage and price controls in Phase III, only two weeks after he had publicly expressed his distaste for controls on food, the President made still another of his celebrated turnabouts. On nationwide television, he announced that ceilings were being imposed on prices of beef, pork and lamb. [After five months, there seemed no choice but to tighten up again.] (June 25, 1973) The freeze was better by far than Phase III, but many critics in Congress and in U.S. and foreign business would have preferred a more permanent program--which is now up to two months away. The interim program was hurriedly slapped together and seemed like a desperation move. The President and his aides were drafting changes almost up to the moment that he announced it. Even if, as seems likely, it accomplishes a temporary slowdown in price increases, the danger remains that too much inflationary momentum has been built up for anything less than an extremely tough Phase IV to curb it. Reasons: the President waited unconsciously long to take a new stand against high prices. Since January, U.S. consumer prices have spiraled upward at an annual rate of 9.2%, their worst rise in more than two decades. The increases were even greater in the supermarket, where prices have been inflating at an annual rate of 25% or more--and worse was ahead. </body> </article> </text>