EC The 1970's Never Ended

Big economic storms are rare and usually end quickly, but they tend to have long-lasting effects. Today I want to talk about a storm 50 years ago that still affects us now. Important things happened in the 1970's.

I personally remember that decade well. I was in my 20's and they were formative years. I met people and learned things that led me where I am now. The funny part is its larger events, important as they were in hindsight, didn’t get nearly as much attention at the time. Those events did not even register to me as important.

We didn’t have social media and 24-hour news networks. The “well-informed” people read local newspapers and watched Uncle Walter (Cronkite) in the evening. Business people and bankers read The Wall Street Journal. Political junkies read The New Republic or National Review. But none of us really knew everything as it happened, with the one exception of the Vietnam War.

Selected portions of that were played out on our TVs in the evening and in papers. For that matter, most business and national news was also only consumed in light detail. Even back then, there was too much to portray in 30 minutes or a short column.

In any case, we are still dealing with the legacy of that time. But as I’ll show, we may be starting to at least recognize some of the mistakes. That’s the first step to actually fixing them.

1971 Memories

A half-century later we are still enduring the effects of 1971, when Nixon “closed the gold window.” But to understand why, we have to consider the window’s origin.

Currency devaluations, leading to inflation, depression, and worse, were common before World War II. The 1944 Bretton Woods conference designed a new system which took effect in the 1950's. The US would hold most of the world’s gold, guaranteeing other nations could convert their gold reserves at a fixed $35 per ounce rate. Essentially, this tied other countries to the US dollar.

Bretton Woods “worked” for almost 20 years but with side effects, not unlike today’s euro problems. You can’t tie independent countries with their own fiscal policies to the same currency. It guarantees balance of payment problems.

Starting in the mid-1960's, various European countries began demanding payment for their dollars in gold. They wanted the US to balance its budget, which had gone wildly into deficit because of the Vietnam War. The US was literally using Air Force planes to ship gold from Fort Knox to New York and outbound. You can read many interesting stories like this one. We tend to think of crises as happening over very short periods. This one was building for years.

West Germany, faced with having to devalue the Deutsche Mark, instead abandoned the Bretton Woods system in May 1971. The dollar weakened considerably, concurrent with rising unemployment and inflation. Nixon appointed former Democratic Texas Governor John Connally as Treasury Secretary in early 1971. In an international meeting, Connally uttered the famous saying: “The dollar is our currency but your problem.”

As the situation worsened, Nixon called an emergency meeting at Camp David which included the Federal Reserve Chairman Arthur Burns and a young Paul Volcker. After much debate, Nixon listened to the ever-confident Connally. On Aug. 15, 1971, President Nixon ended the Bretton Woods system and also imposed wage and price controls in the US. (CPI inflation was almost 6% at the time.)

He added import tariffs, too. Basically, the opposite of what most economists would suggest. The dollar crashed even more and we had to invent the word “stagflation” to define the widespread misery. This was all later dubbed the “Nixon Shock.”

We can’t blame Nixon for everything, though. Other things were happening at the same time: social unrest amid the Vietnam War, the civil rights movement, more women entering the workforce, technological changes, and more. Much of it was good and necessary but still disruptive.

But whatever the causes, that period seems to have been a kind of economic fulcrum. I’m not the only one to notice it, either. A host of writers and websites have chronicled the seemingly sudden changes. For instance, try WTF Happened in 1971? You’ll see page after page of charts, each with a little red arrow pointing to 1971 as a turning point.

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Disclaimer:The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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