Ninety-day freeze on wages and prices
The "Ninety-day freeze on wages and prices" was a significant economic measure announced by President Richard Nixon on August 15, 1971, aimed at combating inflation in the United States. Faced with a troubling combination of rising unemployment and inflation—a situation termed "stagflation"—Nixon's decision came at a time when conventional economic strategies appeared ineffective. The freeze was intended to halt escalating prices and wages for a temporary period, with a goal of reducing inflation to a manageable rate of 2 to 3 percent.
The announcement was met with mixed reactions, not only due to its implementation just before financial markets opened but also because it contradicted Nixon's earlier promises against wage and price controls. Initially, the freeze had a moderate success, lowering inflation to an annual rate of 4 percent during its duration. However, once the freeze was lifted, inflation surged again, leading to further government attempts at regulation and additional freezes. Ultimately, these measures failed to effectively control inflation, which peaked at over 12 percent by 1974, coinciding with Nixon's resignation. This episode in U.S. economic history illustrates the complexities and challenges of managing inflation and unemployment in a volatile economic environment.
Ninety-day freeze on wages and prices
The Event President Richard M. Nixon freezes wages and prices in order to address rapid inflation in the economy
Date Announced on August 15, 1971
failure to solve the problem of stagflation detracted from his successes in the area of foreign policy, so he made the decision to break a campaign promise not to impose price and wage controls on Americans.
One of President Nixon’s most pressing domestic problems in 1971 was the rate of price inflation in the economy. Expanded government spending on the war in Vietnam and increased social programs in the United States during the 1960’s and early 1970’s had resulted in the classic recipe for inflation. While presidents and other elected officials ardently desire both low inflation and low unemployment, in the short run, the cost of lowering one is raising the other. Actions that fight inflation, including a reduction in the growth of the money supply, increase unemployment in the economy; actions that fight unemployment, such as higher government spending, tend to increase the rate of inflation.
During Nixon’s first term as president, both unemployment and inflation had risen dramatically. This combination—called stagflation—was previously not considered possible by postwar economists who believed in a fixed trade-off between unemployment and inflation. Nixon’s economic advisers were as confused about what to do about stagflation as anyone else. Surely, given the rate of deficit spending required by the war in Vietnam and increased social programs at home, unemployment should not be so high. As part of the Republican Party’s platform in the 1968 presidential election, and in June, 1971, Nixon had promised that he would not impose wage or price controls on Americans.
Few other remedies for stagflation presented themselves, however, and on Sunday evening, August 15, 1971, President Nixon addressed Americans on television and announced the imposition of a ninety-day price and wage freeze designed to bring inflation down to a rate of 2 to 3 percent growth in the price level per year. Critics charged that the timing of the announcement, specifically the need to make the announcement before the financial markets opened the next morning and the reluctance to interrupt the popular show Bonanza for the announcement, was better thought out than the freeze itself.
Impact
The wage and price freeze was moderately successful and brought inflation down to an annual rate of 4 percent throughout its duration. The move by Nixon was seen by many as decisive and on the following day, the Dow Jones Industrial Average rose by 32.9 points—its largest one-day rise until that time. When the freeze was lifted in mid-November, 1971, however, inflation continued unabated. A series of mandatory wage and price guidelines over the next eighteen months did not bring inflation below 5 percent, and a second wage and price freeze was instituted in June, 1973, to an American public already dealing with shortages caused by the wage and price guidelines. The entire Nixon wage and price control apparatus was abolished in April, 1974, and Nixon resigned the presidency on August 8, 1974, as the rate of inflation topped 12 percent.
Bibliography
Nixon, Richard. RN: The Memoirs of Richard Nixon. New York: Simon & Schuster, 1990.
Rockoff, Hugh. Drastic Measure: A History of Wage and Price Controls in the United States. Cambridge, England: Cambridge University Press, 2004.