Challenge of Peace

INTRODUCTION A long period of inflation began in the United States in the mid-1960s as a result of the deficit finance and consequent borrowing adopted to finance the country's involvement in the war in Vietnam. From 1960 to 1965 the consumer price index increased at an average annual rate of 1.3 percent, but that rate more than doubled in the following five years. The Nixon administration was resolute that it had to "do something" about inflation. Congress put the burden squarely on the executive branch when it passed the Economic Stabilization Act of 1970. The new law authorized the president "to issue such orders and regulations as he may deem appropriate to stabilize prices, rents, wages and salaries . . ."

On August 15, 1971 President Richard Nixon announced what he planned to do. He put an end to the Bretton Woods system of fixed exchange rates by unilaterally repudiating U.S. obligations in this area of international finance. By temporarily suspending "the convertibility of the dollar into gold," the administration raised the official U.S. gold price to the market price, which was substantially higher than the former fixed "official" price. At the same time, Nixon instituted the first peacetime wage and price controls in an attempt to show the world that the United States was "doing something" about inflation.

The controls didn't work; indeed, they weren't expected to work—the hope was that they would buy a little time. Many foreign countries held U.S. dollars as international reserves, and the higher levels of inflation in the United States were eroding the real value of those reserves. By "doing something," it was hoped that those countries would stop redeeming dollars for gold. In addition, Nixon hoped for some trade relief. Some countries, Japan in particular, had adopted trade legislation that made it difficult for U.S. exports to enter that country. On the other hand, U.S. consumers had begun to purchase a wide variety of Japanese imports. Thus, in Nixon's words, the United States was competing "with one hand tied behind her back." Although this speech is best remembered for the domestic wage and price controls it announced, its main focus was international. ∎

Prosperity without war requires action on three fronts: We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators. . . .

First, on the subject of jobs. We all know why we have an unemployment problem. Two million workers have been released from the Armed Forces and defense plants because of our success in winding down the war in Vietnam. Putting those people back to work is one of the challenges of peace, and we have begun to make progress. Our unemployment rate today is below the average of the four peacetime years of the 1960s. . . .

The second indispensable element of the new prosperity is to stop the rise in the cost of living.

One of the cruelest legacies of the artificial prosperity produced by war is inflation. Inflation robs every American, every one of you. . . .

The time has come for decisive action—action that will break the vicious circle of spiraling prices and costs.

I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. In addition, I call upon corporations to extend the wage-freeze to all dividends. . . .

The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past seven years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation's currency is based on the strength of that nation's economy—and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States. . . .

I am taking one further step to protect the dollar, to improve our balance of payments, and to increase jobs for Americans.

As a temporary measure, I am today imposing an additional tax of 10 percent on goods imported into the United States. This is a better solution for international trade than direct controls on the amount of imports.

This import tax is a temporary action. It isn't directed against any other country. It is an action to make certain that American products will not be at a disadvantage because of unfair exchange rates. When the unfair treatment is ended, the import tax will end as well.

As a result of these actions, the product of American labor will be more competitive, and the unfair edge that some of our foreign competition has will be removed. This is a major reason why our trade balance has eroded over the past 15 years.

At the end of World War II the economies of the major industrial nations of Europe and Asia were shattered. To help them get on their feet and to protect their freedom, the United States has provided over the past 25 years $143 billion in foreign aid. That was the right thing for us to do.

Today, largely with our help, they have regained their vitality. They have become our strong competitors, and we welcome their success. But now that other nations are economically strong, the time has come for them to bear their fair share of the burden of defending freedom around the world. The time has come for exchange rates to be set straight and for the major nations to compete as equals. There is no longer any need for the United States to compete with one hand tied behind her back.