Nixon shock: Difference between revisions

The '''Nixon shock''' refers to the effect of a series of economic measures, including [[wage freeze|wage]] and [[price freeze]]s, surcharges on imports, and the unilateral cancellation of the direct international [[convertibility]] of the [[Gold standard|United States dollar to gold]], taken by United States [[President of the United States|President]] [[Richard Nixon]] in 1971 in response to increasing inflation.<ref>{{Cite book |last=Garten |first=Jeffrey E. |url=https://books.google.com/books?id=-xYBEAAAQBAJ |title=Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy |date=2021 |publisher=HarperCollins |isbn=978-0-06-288770-2 |language=en}}</ref><ref>{{cite news |last1=Lewis |first1=Paul |title= Nixon's Economic Policies Return to Haunt the G. O. P. |url= https://www.nytimes.com/1976/08/15/archives/nixons-economic-policies-return-to-haunt-the-gop-nixons-economic.html |access-date= 25 March 2019 |work=The New York Times |date=15 August 1976}}</ref>

{{quoteblockquote|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 7 years, there has been an average of one international monetary crisis every year… 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. Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the [[wikt:bug-a-boo|bugaboo]] of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar.<ref>{{cite web|last=Nixon|first= Richard|title=Address to the Nation Outlining a New Economic Policy: "The Challenge of Peace" |url= https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace|work=The American Presidency Project|access-date=2 Dec 2021}}</ref>}}

{{refimprovemore citations needed|section|rationale=At the risk of being [[WP:NOR|original research]], this section needs more citations to support its claims, especially its tie-in to the Great Recession at the end of the section.|date=December 2021}}

The Nixon shock has been widely considered to be a political success, but an economic failure for bringing on the [[1973–1975 recession]], the [[stagflation]] of the 1970s, and the instability of floating currencies.{{cncitation needed|date=June 2022}}

Politically, Nixon's actions were a great success. The American public believed the government was rescuing them from [[price gouging|price gougers]] and from a foreign-caused exchange crisis.<ref>Hetzel, Robert L. (2008), p. 84</ref><ref name= yergin&stanislaw>{{cite book|last1= Yergin|first1=Daniel|title=The Commanding Heights: The Battle between Government and the Marketplace that Is Remaking the Modern World|year=2002|publisher= Simon & Schuster|location=New York|isbn=0-68482975-4|author-link1= Daniel Yergin|last2=Stanislaw|first2=Joseph|author-link2=Joseph Stanislaw|url=https://archive.org/details/commandingheight00yerg_0}} cited in {{cite web|last1=Yergin|first1=Daniel|last2=Stanislaw |first2= Joseph | title =Nixon, Price Controls, and the Gold Standard | work = Commanding Heights|publisher= PBS| year = 2003| url = https://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html| access-date = November 23, 2012}}</ref> The [[Dow Jones Industrial Average]] rose 33 points the next day, its biggest daily gain ever at that point, and the ''New York Times'' editorial read, "We unhesitatingly applaud the boldness with which the President has moved."<ref name=Lowenstein/><ref>Nicky Marsh, ''Credit Culture: The Politics of Money in the American Novel of the 1970s'' (2000) pp. 52–53. </ref>

By December 1971, the import surcharge was dropped as part of a general [[revaluation]] of the [[Group of Ten (economic)|Group of Ten]] (G-10) currencies, which under the [[Smithsonian Agreement]] were thereafter allowed 2.25% devaluations from the agreed exchange rate. According to the Douglas Irwin in ''World Trade Review''{{'}}s report "The Nixon Shock After Forty Years: The Import Surcharge Revisited", for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies.{{citation needed|date=December 2021}}

In March 1973, the fixed exchange rate system became a [[floating exchange rate]] system.<ref name=garber>{{cite conference |url= https://www.nber.org/chapters/c6876.pdf |title=The Collapse of the Bretton Woods Fixed Exchange Rate System |last1=Garber |first1=Peter M.}} in {{harvnb|Bordo|Eichengreen|1993|pp=461–94}}</ref> The currency exchange rates no longer were governments' principal means of administering [[monetary policy]].

Under the floating rate system, during the 1970s, the dollar plunged by a third. Further, the Nixon shock unleashed enormous speculation against the dollar. The [[German Mark]] appreciated significantly after it was allowed to float in May 1971. It forced Japan's central bank to intervene significantly in the [[foreign exchange market]] to prevent the [[Japanese yen|yen]] from increasing in value. Within two days August 16–17, 1971, Japan's central bank had to buy $1.3 billion to support the dollar and keep the yen at the old rate of ¥360 to the dollar. Japan's foreign exchange reserves rapidly increased: $2.7 billion (30%) a week later and $4 billion the following week. Still, this large-scale intervention by Japan's central bank could not prevent the depreciation of US dollar against the yen. France also was willing to allow the dollar to depreciate against the [[French franc |franc]], but not allow the franc to appreciate against gold.<ref>{{Cite report |url=http://www.nber.org/papers/w17749.pdf |title=The Nixon Shock after Forty Years: The Import Surcharge Revisited |last=Irwin |first=Douglas |date=January 2012-01 |publisher=National Bureau of Economic Research |issue=w17749 |doi=10.3386/w17749 |location=Cambridge, MA |language=en}}</ref>