onsumers rush to purchase new cars today instead of tomorrow in anticipation of higher prices. Similarly, auto manufacturers may increase prices today, anticipating metal prices will rise tomorrow.
The following graph shows the once dependable Phillips Curve of the 1960s, failed policymakers in the 1970s. Higher levels of inflation accompanied higher unemployment. With each peak higher in inflation, unemployment also reached new highs.
Nixon Removes The Fiscal and Monetary Shackles
Not only was the Fed relying on a faulty economic theory, but its ability to administer monetary policy was greatly amplified on August 15, 1971.
The following comes from our article entitled The Fifteenth of August.
August 15, 1971, was the date that President Richard Nixon shocked the world when he closed the gold window, thus eliminating the free convertibility of the U.S. dollar to gold. This infamous ‘new economic policy’, or “Nixon Shock”, thereby removed the requirement that the U.S. dollar be backed by gold reserves. From that fateful day forward, constraints that previously hindered the Federal Reserve’s (Fed) ability to manage the U.S. money supply were removed.
With Nixon’s signature, the Fed could use monetary policy more aggressively to meet its employment goals. Equally inflationary, the government no longer had to worry that rising fiscal deficits would spur gold redemptions. Fiscal imbalances ran high due to Vietnam and increased spending to promote stagnant economic growth. The government no longer had to choose between guns OR butter. It could pay for guns AND butter.
President Nixon removed essential checks and balances on fiscal and monetary policy. The collective actions added to inflationary pressures.
Summary Part One
Part One begins to set the table, allowing us to appreciate some of the causes of the inflation that ravaged America from the late 1960s to the early 1980s. Part Two will continue the conversation by discussing the oil price shocks, price-wage spiral, and details on how the money supply augmented inflation. We also share essential lessons the Fed and politicians learned and how a new approach allowed Paul Volcker to bring inflation down for good.
Part Three leans on recent inflationary experiences, allowing us to compare similarities and differences between then and today. This contrast will help you better assess the odds that inflation rides the same roller coaster as it did fifty years ago.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.