The consequences of a government action may not be immediately apparent. It can take a long time for the economic system to adjust to a new situation. During the 1960's defense spending to support the war in Viet Nam and domestic spending to support the war on Poverty put money in some people's pockets. It was primarily people not fighting in either war who felt the negative economic consequences of U.S. policy.
Enough people recognized that Johnson had taken a wrong turn to vote for a change in 1968. However, knowing that something is going wrong and knowing how to fix the problem are two different things. President Nixon brought some changes, but in terms of our monetary and social systems, the changes appeared to be mostly extensions of the policies started by Johnson. One thing Nixon did was to impose a wage and price freeze in a hopeless attempt to stabilize the economy. That had two consequences: people outside the U.S. interpreted it as a sign of pending trouble and began to redeem their paper for gold, and supply and demand in the U.S. got out of balance.
To deal with the people outside the U.S., Nixon devalued the Dollar. That seemed to help a little, so he did it again. It was still not enough, so he decided to pull the Dollar out of the Bretton Woods agreement and to let it float, meaning its value in terms of other currencies was what ever you could get.
Slowly but surely, the Dollar shrank in terms of other currencies and in terms of precious metals. For example, in 1965 a Dollar would buy 360 Yen, today it fluctuates around a Dollar for 110 Yen. What that means in practical terms is that something that had cost 1000 Yen in 1965 cost less than $3, but that same 1000 Yen item today costs over $9.
The face of our paper changed also, but in subtle ways so as not to alarm anyone. You can pull a bill out of your wallet and see what I mean. The paper still says that it is Legal Tender, which means U.S. citizens are required by law to accept it in payment for goods or services, but it no longer makes any pretext of being redeemable for anything but more paper.
The mismatch between supply and demand that started during Johnson's presidency as an attempt to appease voters was now building to a crisis. Federal deficits began to run out of control. Nixon's wage and price freeze only added to the problem. Though Nixon did manage to bring the war in Viet Nam to an end, his troubles with the Watergate break in forced him out of office. His successor, Gerald Ford, was unable to get elected in his own right.
President Carter presented a complete change at the White House. He was virtually unknown at the beginning of the campaign, but won his party's nomination and the election easily. He tried to reign in the government's huge deficits with higher interests rates, deregulation, etc., but found himself unpopular for doing so. As interest rates on auto loans approached 20%, the economy slowed down tremendously.
Ronald Reagan talked a good game, but reversal of a process begun in 1932 could not be accomplished in only 8 years. Deficits got larger rather than smaller during his presidency. The massive domestic spending programs Reagan inherited, while well intended, were ineffectual in achieving an end to poverty. He also inherited a massive military-industrial complex and a cold war to go with it. Those who understood the nature of the USSR's economic system knew that it was only a matter of time until it collapsed of its own inefficiencies, but what with our foreign aid, they might have gone on for a long time.
Government ownership of property and central planning were proven to be very inefficient as a means of satisfying human needs by the USSR's 70+ year experiment. Central planning caused gross inefficiencies. There would be shortages of one commodity and surpluses of another. Workers were not interested in doing a good job, because all of their needs were met by the government, no matter how well or how poorly they did their work. As people grew accustomed to the system, they accepted it. Long lines waiting for food or other goods were tolerated as long as everyone had to wait in the same lines.
All of the once great currencies of the world began to suffer as each, while nominally fighting socialism, began to copy the socialist model in ever-greater detail. From the time of the Nixon presidency, the Dollar was no longer Good as Gold to anyone.
It is not fair to hang the problem of the lost value of the Dollar solely on Nixon. From roughly 1914 until 1933, $20 dollars bought an ounce of gold. From 1933 until 1969, $35 bought an ounce of gold. The reason Nixon had to devalue the Dollar was to continue support for the great social programs started by FDR and then expanded by LBJ. To maintain the Dollar at $35 per ounce would have required massive cuts in government spending, cuts no politician was willing to make.
Copyright 2006 by T. D. Blackburn Permission hereby granted to reproduce with this copyright notice included.