Economic Woes, 1971–1972

Abstract

The second Nixon shock was delivered on Sunday, 15 August 1971, which in a piece of unfortunate timing was the 26th anniversary of Japan’s surrender. Speaking in a live television broadcast, Nixon announced measures to protect the dollar and to shore up the US economy. These included an end to the convertibility of the dollar to gold, a 10% import surcharge and domestic wage and price controls.¹ This so-called New Economic Policy effectively ended the period of American leadership of the world economic and financial system which had been in place since the end of the Second World War. By the late 1960s and early 1970s, the economies of western Europe and Japan had recovered from the devastation of war and were now threatening the US economy with cheaper imports. As a result, America’s trade balance, long in surplus, slipped into deeper and deeper deficit. In removing the peg to gold, Nixon effectively devalued the dollar against other currencies and therefore made American goods cheaper to sell and foreign goods more expensive to import. The surcharge, which further added to these prices, was a temporary measure. It would, Nixon outlined, be removed once a new currency arrangement between the major industrialised nations was agreed upon.