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The Economy · Inflation, Outlawed

President Declares Inflation Illegal; Inflation Keeps Operating Without a License

A 90-day freeze on every price and paycheck in America was going to whip rising prices. It whipped the chickens instead.

By the Fuxed Desk • 5 min read • Severity ★★★★★ Severe
What wasn’t broken
Prices in 1971 were creeping up around four percent a year — annoying, hardly the apocalypse. The market, left to its own devices, has a way of sorting out what costs what.
The "fix"
On August 15, 1971, in a Sunday-night address that bumped Bonanza, President Nixon froze all wages, prices, and rents for 90 days, slapped a surcharge on imports, and slammed the gold window shut — a grab bag of fixes delivered with the confidence of a man who had not run it past an economist.
The result
Inflation did dip while the freeze held, because that is what happens when you make raising a price a crime. Then reality mailed its invoice: when controls returned in 1973, ranchers held cattle off the market, farmers drowned baby chicks rather than sell at a loss, and shoppers cleared the shelves. The apparatus was scrapped by April 1974; by the time Nixon resigned that August, inflation had topped 12 percent, and stagflation moved in for the decade. Fuxed

Inflation in the summer of 1971 was running about four percent — the sort of number that gets a man re-elected, not run out of town. But an election was coming, four percent felt like five, and the President wanted it gone yesterday. The orthodox cure — spend less, tighten money, wait — had the fatal defect of taking time and hurting first.1

So on a Sunday night in August, Nixon went on every channel at once and did what no peacetime president had dared: he made it illegal to raise a price or a wage for ninety days. He also closed the gold window, ending the dollar's convertibility and quietly burying the postwar money system, and threw on a ten-percent import surcharge for good measure. Wall Street threw a party. The phones at the new price-control office did not stop ringing for a year.2

For a while it even seemed to work, in the way a thermometer held under the cold tap reads cooler. Measured inflation fell to around four percent during the freeze, because the government had simply forbidden the numbers to go up.3 The trouble is that a price is a piece of information, and when you outlaw the information you do not repeal the conditions behind it. Anything that had to be sold below cost stopped being made. Shortages of everything but dollars began to appear.3

When the controls were clamped back on in 1973, the farce curdled. Ranchers, unable to get what beef cost to raise, kept their cattle at home. Poultrymen drowned chicks rather than feed birds they would have to dump at a loss. Housewives found bare cases where the meat used to be.3 The whole rickety contraption was dismantled in April 1974. Nixon resigned that August with inflation past twelve percent and the economy sinking into stagflation — high prices and high joblessness at once — a thing the experts had ruled impossible right up until they were standing in it.4

I am today ordering a freeze on all prices and wages throughout the United States.— President Richard Nixon, address to the nation, August 15, 1971

References & Citations

  1. Federal Reserve History — "Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls," federalreservehistory.org.
  2. The American Presidency Project, UCSB — "Address to the Nation Outlining a New Economic Policy, August 15, 1971," presidency.ucsb.edu.
  3. Cato Institute — "Remembering Nixon's Wage and Price Controls," cato.org.
  4. Econlib (Library of Economics and Liberty) — "Nixon's Wage and Price Controls," econlib.org, 2016.

As Covered Elsewhere

Federal Reserve History Nixon Ends Convertibility and Announces Wage/Price Controls Read → Cato Institute Remembering Nixon's Wage and Price Controls Read → Econlib Nixon's Wage and Price Controls Read →