Nixons Wage and Price Controls

1971-1974

Excerpts from the article below. Another National Emergency Declaration gone wrong.  

https://nixonswageandpricefreeze.files.wordpress.com/2011/07/forty-years-after-the-freeze.pdf

Late in the day on Sunday, August 15, 1971, The White House announced that President Nixon would address the nation at 9:00 P.M., on the state of the American economy.

With the Congress away on recess and the rest of the Government trying to escape the August heat, Nixon declared he was imposing a 90-day freeze on all wages and prices -- the first peacetime controls program in U.S. history.

Second, he closed the gold window, ordering a suspension in the convertibility of the dollar into gold or other reserve assets.

Third, he declared a state of national emergency and imposed a 10% surcharge on all goods imported into the United States.

Nixon’s speech launched the U.S. economy into a decade of unprecedented turbulence, punctuated by episodes of hyperinflation, shortages, high interest rates and stagnation. Most adult Americans today were either too young to experience these traumas or are now so old as to have forgotten them. But Nixon’s dramatic statement was a watershed event.

On Monday morning August 16, 1971, following the President’s address, bedlam reigned in Washington. Companies and workers wondered what to do under the freeze. Lawyers and lobbyists tried to find out, but nobody had any answers.

.The President established a Cost of Living Council composed of Cabinet members and other senior Government officials to run the new program.

Connally was charged  to explain what a wage and price freeze meant: a freeze meant that neither prices nor wages could rise, “except for cucumbers”. [Agriculture products exempt]

As Connally explained to Virginia Knauer, the President’s Consumer Adviser, “Remember, Virginia, when it’s a cucumber you can raise the price, but when it becomes a pickle, it’s frozen”.

Early in the Council’s deliberations it was decided that the freeze could not simply be lifted after 90 days without some follow-up program and the Council approved a plan to usher in a period of more flexible wage and price controls called Phase II.

The Council didn’t want the administrative burden or political responsibility for actually runnng Phase II, so it established a Price Commission to impose price controls and a Pay Board to limit wage increases. But the Council remained in overall charge.

Phase II, like the freeze, was a political ten-strike for Richard Nixon and for the U.S. economy. Inflation slowed, economic activity recovered and organized labor grudgingly agreed to moderate wage demands. The principal union chieftains had been named to the Pay Board and their cooperation was effectively marshaled by George Shultz, who was at that time Director of OMB

Phase II rules essentially allowed companies to pass through increased labor and component costs but, by establishing pre-notification requirements and profit margin limitations, they limited company eligibility for price increases. The real action was on the wage side.

The wage freeze and the follow-on Phase II wage standard, limiting wage increases to no more than 5.5%, reduced the inflationary pressure on prices. The labor leaders on the Pay Board were willing to support wage restraint in order to lower the rate of inflation so long as there was discipline on the price side.

A key objective of Phase III (as the next step in the controls program was inevitably called) was to eliminate the bureaucratic red tape imposed on companies by the price control regulations.

Both the Price Commission and the Pay Board were to be scrapped and the new program was to be self-administered -- a concept that proved to be exceedingly elusive in practice.

A new general price standard was aimed at holding inflation to no more than 2.5% in 1973.

Companies would be told that they must moderate their pricing behavior so as to be consistent with this goal. This meant they could “self-administer” the regulations as guidelines to measure company pricing against the inflation goal, but they could also apply exceptions to themselves, “as necessary for efficient allocation of resources or to maintain adequate levels of supply”.

George Shultz had succeeded John Connally as Treasury Secretary and assumed the role of Chairman of the Cost of Living Council.

Shultz scheduled a press conference at 11:00 A.M. on January 11, 1973 in The White House briefing room to introduce Phase III. It was a disaster. Instead of announcing the “self- administered” controls program envisioned by the Phase III planners, he characterized Phase III as “voluntary”.

While he said that the Administration retained the authority to re-impose mandatory controls in sectors where inflation threatened to get out of hand, his clear message, which the journalists duly communicated to the American people, was that controls were lifted and prices were free to rise. “

Within a matter of months, prices of virtually all commodities -- food- stuffs, minerals and petroleum -- would explode, reaching historic highs. The rate of inflation shot up to 11% by the summer of 1973, leaving Phase III in shambles.

1973 ushered in a period of very tight supplies in wheat and feed grains worldwide. In 1972, the U.S. had sold over 20 million metric tons of grain to the Soviet Union and dollar devaluations in December 1971 and again in February 1973 sharply stimulated export sales of other agricultural commodities. The Administration had anticipated some pressure on food prices during the first half of 1973 and had retained mandatory, though looser, controls over the food industry during Phase III.

The results, however, were worse than even the most pessimistic predictions. During the first quarter of 1973, consumer food prices shot up at an annual rate of 29.8% while the wholesale price index for farm products rose at an annual rate of 51.9%. Red meat prices alone surged at an annual rate of 90% during the quarter.

On March 29, 1973, in an abortive attempt to slow the onslaught, the Council slapped a freeze on red meat prices, but this step backfired as ranchers retaliated by withholding supplies and creating meat shortages. Meanwhile, other food prices continued their seemingly inexorable rise.

By early June 1973, Phase III was thoroughly discredited. Public criticism was mounting and there were pressures in Congress and from business leaders for the Adminisration to take stronger direct action.

On June 13, 1973, he decreed a second price freeze and directed the Cost of Living Council to develop a new controls program to be called (what else?) Phase IV.

There were other strong pressures at work on Nixon during the spring of 1973, inflation aside. The Senate Watergate Committee had begun its hearings and the Nation watched the riveting testimony of former Presidential Counsel, John Dean, accusing the President of covering up the Watergate burglary. Every morning that spring, it seemed, The Washington Post revealed some new evidence of White House misconduct and Nixon’s popularity was slumping badly. Nixon had been forced to rid himself of his top White House assistants H.R. Haldeman and John Ehrlichman, so he brought back as one of his senior advisers, Melvin R. Laird, whom Nixon had known since they entered the Congress together as freshman legislators in 1947 and who had been Secretary of Defense during Nixon’s first term.

Nixon went before the Nation and for the second time in less than two years imposed a freeze on prices. Wages were not to be frozen since wage settlements had not caused the inflationary price hikes of Phase III. Twice during his speech, Nixon cautioned against the seductiveness of controls, warning that “rigid, permanent controls always look better on paper than they do in practice”.

He stressed the importance to returning to a free economy stating, “We must not let controls become a narcotic -- we must not become addicted”.

The Cost of Living Council was not addicted, but still found itself with a new Presidential order to administer a 60-day price freeze and design a Phase IV controls system which would restore public confidence in the Nation’s economy. The planners confronted economic conditions which were far more difficult than they had faced in August 1971.

In the first six months of 1973, industrial prices had risen at an annual rate of 12.5%. Food prices and world market prices for metals and petroleum had climbed even faster.

Phase IV was to be a move “from the freeze to the squeeze”; companies were to be forced to absorb cost increases at the expense of profits before passing them along in the form of increased prices.

The Administration explained its policy as “spreading the bulge”. The inflationary bubble of 1973 was expected to be a temporary aberration which would dissipate as demand slackened in the face of higher prices and additional supplies became available.

Ranchers retaliated by withholding livestock from slaughter. Consumers began to hoard meat supplies and, by August 1973, there were serious meat shortages across virtually the entire country.

In July 1973, it appeared likely that the U.S. would exhaust its supplies of soybeans before the next harvest with potentially disastrous consequences for thousands of U.S. industries which depended upon soybean-based products for their livelihood. Spot prices for soybean futures on the Chicago Board of Trade leapt from $3.44 per bushel in January to $6.95 in mid-summer. At the Council’s urging, the Commerce Department imposed an embargo on overseas sales of soybeans in order to protect domestic supplies and prices began to moderate.

The shortages which had been feared did not occur and no actual disruption of export sales took place. But the Government’s soybean embargo severely discredited the U.S. agriculture community’s reputation as a reliable supplier. Vital U.S. customers in Asia and Europe began to diversify their purchases of agricultural products to the long term detriment of American farmers who had spent many years cultivating export markets and increasing U.S. export earnings.

Petroleum price increases were a particular source of concern to the Phase IV planners. Supplies were suddenly tight and prices were rising. If Phase IV was to retain any shred of credibility, strict controls had to be applied because of the pervasive effect of petroleum prices on the economy.

Crude oil price postings had been virtually flat for many years as a result of chronic over- supply in world markets. In the twenty years 1949-1969, crude oil prices in the U.S. ranged between $2.54 and $2.94 per barrel and American consumers had come to assume that low prices for gasoline and other oil products were an inalienable birthright. But price stability ended as U.S. production declined and world demand surged.

Phase IV regulations placed a ceiling on the price of domestic crude oil at $4.25 per barrel. It was the Council’s intent to increase this ceiling by about 25 cents every quarter so that by April 30, 1974, when the controls program was scheduled to expire, crude oil prices would be in the $5.00-$5.25 range, comparable to expected world price levels. Events were to prove these assumptions fatally wrong.

October 20, 1973 became known as the Saturday Night Massacre when Nixon fired Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus for refusing to dismiss Archibald Cox as Watergate Special Prosecutor. It was a night of high drama and political intrigue in Washington.

Only a handful of people paid attention to an item moving over the news ticker that same evening reporting that OPEC nations had doubled the price of their crude oil exports.

This action raised world crude oil prices to almost $7.00 per barrel, creating a huge spread above the U.S. ceiling price, fixed at $4.25, and causing major problems for the Phase IV rules. In early December, the Council raised the U.S. ceiling price $1.00 to $5.25 per barrel.

The public was furious, Ralph Nader filed suit to set aside the increase, Congressional hearings were immediately called and the Council’s decision was attacked on all sides. The conventional wisdom at the time was that OPEC was weak and ineffectual. The public was therefore indignant that U.S. oil prices were being raised ‘just to pay off some desert sheiks’.

The public soon discovered just how badly they had miscalculated OPEC’s resolve and its leverage. In the wake of the Yom Kippur Arab-Israeli conflict, OPEC declared an embargo upon shipments of oil to the U.S. and other Western nations and, by the first quarter of 1974, in the greatest supply disruption the nation had ever experienced , American motorists were forced to endure long lines at the gas pump.

To make matters worse, on the last day of December 1973, OPEC again doubled oil prices, to levels above $12.00 per barrel. The spread between the U.S. crude oil price ceiling and rising world prices increased. This created the need for a new “entitlements program” to ration low-cost, price- controlled U.S. crude oil among American refiners by forcing the domestic producers to transfer hundreds of millions of dollars to the refiners purchasing much higher priced foreign oil. This program lasted for several years until the crude oil price ceilings were finally scrapped and prices were allowed to find their equilibrium.

This bitter legacy -- shortages of gasoline, heating oil, red meat, soybeans and numerous other products -- together with ruinous price increases, finally discredited price controls in the eyes of the American people.

In the end, the Congress simply allowed the Economic Stabilization Act to expire on April 30, 1974. Thus, the only peacetime experiment with direct economic controls in U.S. history came to an inglorious end.