30.2 Coming apart, coming together  (Page 5/15)

By mid-1970, a recession was beginning and unemployment was 6.2 percent, twice the level under Johnson. After earlier efforts at controlling inflation with controlled federal spending—economists assumed that reduced federal spending and borrowing would curb the amount of money in circulation and stabilize prices—Nixon proposed a budget with an $11 billion deficit in 1971. The hope was that more federal funds in the economy would stimulate investment and job creation. When the unemployment rate refused to budge the following year, he proposed a budget with a $25 billion deficit. At the same time, he tried to fight continuing inflation by freezing wages and prices for ninety days, which proved to be only a temporary fix. The combination of unemployment and rising prices posed an unfamiliar challenge to economists whose fiscal policies of either expanding or contracting federal spending could only address one side of the problem at the cost of the other. This phenomenon of “ stagflation    ”—a term that combined the economic conditions of stagnation and inflation—outlived the Nixon administration, enduring into the early 1980s.

The origins of the nation’s new economic troubles were not just a matter of policy. Postwar industrial development in Asia and Western Europe—especially in Germany and Japan—had created serious competition to American businesses. By 1971, American appetites for imports left foreign central banks with billions of U.S. currency, which had been fixed to gold in the international monetary and trade agreement of Bretton Woods back in 1944. When foreign dollar holdings exceeded U.S. gold reserves in 1971, President Nixon allowed the dollar to flow freely against the price of gold. This caused an immediate 8 percent devaluation of the dollar, made American goods cheaper abroad, and stimulated exports. Nixon’s move also marked the beginning of the end of the dollar’s dominance in international trade.

The situation was made worse in October 1973, when Syria and Egypt jointly attacked Israel to recover territory that had been lost in 1967, starting the Yom Kippur War . The Soviet Union significantly aided its allies, Egypt and Syria, and the United States supported Israel, earning the enmity of Arab nations. In retaliation, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an embargo on oil shipments to the United States from October 1973 to March 1974. The ensuing shortage of oil pushed its price from three dollars a barrel to twelve dollars a barrel. The average price of gasoline in the United States shot from thirty-eight cents a gallon before the embargo to fifty-five cents a gallon in June 1974, and the prices of other goods whose manufacture and transportation relied on oil or gas also rose and did not come down. The oil embargo had a lasting impact on the economy and underscored the nation’s interdependency with international political and economic developments.

Faced with high fuel prices, American consumers panicked. Gas stations limited the amount customers could purchase and closed on Sundays as supplies ran low ( [link] ). To conserve oil, Congress reduced the speed limit on interstate highways to fifty-five miles per hour. People were asked to turn down their thermostats, and automobile manufacturers in Detroit explored the possibility of building more fuel-efficient cars. Even after the embargo ended, prices continued to rise, and by the end of the Nixon years in 1974, inflation had soared to 12.2 percent.