3. 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
4. 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
5. 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
6. 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
7. 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
9. 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
10. 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.
11. 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?
12. Stagflation
Richard Nixon's 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.
13. 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
14. 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.
15. 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.
