Abstract
In late July, 1971, Nixon reiterated his adamant opposition to wage and price controls calling them a scheme to socialize America. Yet, less than a month later, in a stunning reversal, he imposed the first and only peacetime wage and price controls in U.S. history. The Nixon tapes, personal tape recordings made during the presidency of Richard Nixon, provide a unique body of evidence to investigate the motivations for Nixon’s stunning reversal. We uncover and report in this paper evidence that Nixon manipulated his New Economic Policy to help secure his reelection victory in 1972. He became convinced that wage and price controls were necessary to grab the headlines away from the defeatist abandonment of the Bretton Woods Agreement and the closing of the U.S. gold window. Nixon understood the impact of his wage and price controls, but chose to trade off longer-term economic costs to the economy for his own short-term political gain.
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Notes
From taped conversation 546–2, July 26, 1971, White House Tapes, Nixon Presidential Materials Staff, National Archives at College Park, MD. In addition to the recordings available at the National Archives and Records Administration, the Nixon tapes are also available online at the Miller Center: http://millercenter.org/presidentialrecordings.
Ironically, review of the 1970 and 1971 Federal Open Market Committee minutes reveals that Burns consistently pressed for a more expansionary policy in spite of the stiff resistance he met from several inflation hawks on the FOMC.
The Quadriad consisted of Nixon’s four chief economic advisers: Arthur F. Burns, Chairman of the Federal Reserve Board, Paul McCracken, Chair of the Council of Economic Advisers, John B. Connally, Treasury Secretary, and George P. Shultz, director of the Office of Management and Budget.
In an earlier conversation (542–4) Nixon did not want to include Volcker because the President was uncertain about Volcker’s position as Volcker was a Democrat.
In conversation 553–6, Nixon tells Haldeman that “George [Shultz] is a free trader and he just hates to give up on the idea.” Haldeman responds “the one that bothers George the most is the closing the gold window and his line on it is probably …[it] will put you in the position of having to campaign as the President who devalued the dollar.” Shultz, in discussing the freezing of wages and prices, notes their political popularity but calls it an “administrative nightmare” destined to produce “serious distortions” (Shultz and Dam 1977, p. 69).
Although Burns favored wage and price controls or an incomes policy, he opposed an outright freeze. Wells (1994, p. 63) quotes Burns: ‘There are times when in the dead hours of night, I find myself even thinking about a price and wage freeze. But when I rise and have a cup of coffee, I still don’t want one.”
Haldeman (1994, p. 340) records that “…the British had asked for $3 billion to be converted into gold. If we gave it to them, other countries might follow suit. If we didn’t, they might wonder if we had enough gold to support the dollar. In either case, it was a major crisis.”
Connally anticipates that Monday (August 16) was going to be a very bad day.
Regardless of his economic knowledge, Connally’s political skills are impressive.
Unfortunately, the tape quality is particularly poor at this point and the conversation becomes unintelligible.
January 8, 2008 phone conversation between Volcker and one of the authors.
Television News Archive, Vanderbilt University, CBS Evening News for Monday, November 15, 1971.
Stein, “Wage and Price Controls: 25 Years Later,” http://www.wsj.com/articles/SB840060795168291000.
Incredibly, Stein (Ibid.) goes on to write: “It was a rather flaky theory, and we were not prepared for the possibility that it was wrong.”
In a phone interview Volcker recalled that he was unaware of the pressure Nixon exerted on Burns for an easy monetary policy. He was unhappy with the Fed’s policy, which he felt should be fighting inflation.
Conversation 578–4, September 24, 1971.
Conversation 469–9, March 18, 1971.
Administration economists including Arthur Burns, Herb Stein and Paul Volcker wanted a freeze or controls to break inflationary expectations, but Nixon’s acceptance was politically motivated.
Conversation 577–3, September 20, 1971.
Conversation 584–3, October 5, 1971.
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Acknowledgments
The authors acknowledge helpful comments and suggestions from Saul Hoffman and Paul Volcker.
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Abrams, B.A., Butkiewicz, J.L. The political economy of wage and price controls: evidence from the Nixon tapes. Public Choice 170, 63–78 (2017). https://doi.org/10.1007/s11127-016-0381-0
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DOI: https://doi.org/10.1007/s11127-016-0381-0