When Economic Principles Were Ignored

In televised speech on Sunday evening August 15, 1971, Richard Nixon shocked the world with these words: “I am today ordering a freeze on all wages and prices throughout the United States for a period of 90 days,” (see video) and “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets…” (see video).
There are many lessons learned from this Nixon shock, as Amity Shlaes, Joe Thorndike and I wrote in pieces this week on Bloomberg Echoes here, here, and here, respectively.  Perhaps the most important lesson, a warning actually, is how a presidential administration with economic principles emphasizing free markets and limited government intervention can end up implementing an economic policy of controlled markets and extensive government intervention, with terrible consequences. By reading contemporary reports, such as the Newsweek columns of Milton Friedman mentioned in my piece, you can see how politics drove the decision making and how administration economists either succumbed or were overruled. In marked contrast, a decade later another free-market, limited-government administration came into power in Washington and stuck to its principles—and the economic performance turned out to be far better.
For a useful quick summary of how these momentous decisions were made (with candid commentary by Milton Friedman and George Shultz), watch this short 5-minute video from Commanding Heights.
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