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1 A “New Economic Policy” If you turned on your television set at 9:00 p.m. on Sunday evening, August 15, 1971, as millions of Americans did every week to follow the travails of the Cartwright family in the enormously popular Western Bonanza, you might have been surprised to see the somber visage of Richard M. Nixon, the thirty-seventh president of the United States. Nixon had come down from the mountaintop—down from Camp David, the presidential retreat nestled in the Catoctin Mountains of Maryland—to unveil a dramatic and far-reaching set of economic policy changes. His address, entitled “The Challenge of Peace,” was rather short, given its dramatic content. By 9:20, Bonanza had resumed without a hitch, but our nation still lives with the aftermath of what Richard Nixon said and did that night. The policies Nixon announced had been outlined to him a few weeks earlier by his charismatic Treasury secretary John Connally, and the president had already agreed to the essential elements. The details, however, were developed over the previous weekend by his economic advisers, who had been sequestered at Camp David since Friday afternoon. They had been cut off from any communication with the outside world to avoid leaks. The New York Times had published the heretofore secret Pentagon Papers only a month earlier, and Nixon was determined to keep a tight lid on his plans for the economy. Moreover, as Treasury Undersecretary Paul Volcker told the group, billions might be made with advance knowledge of what the president was about to do. The weekend at Camp David was more than a charade, but considerably less than a decision-making conclave. Nixon began his speech by suggesting, as he so often had, that a Vietnam peace was at hand. He described his plan as essential “to create a new prosperity without war.” He insisted the nation’s economy was moving from war to peace—anticipating an end to Vietnam, which would not 10 Chapter 1 come for another four years. The “New Economic Policy” Nixon announced that evening was intended to address three pressing problems: rising unemployment , ongoing inflation, and the weakness of the dollar. The measures to stimulate employment were relatively noncontroversial standard fare: a tax credit for business investments, elimination of an excise tax on automobiles, and a middle-class income tax cut. The wrinkle, if there was one, was Nixon’s call to offset the fiscal costs of these tax cuts by reduced spending in order not to increase the federal government’s deficit. But in classic Nixonian fashion, “reduced spending” was merely a feint. The president called for a postponement in spending that he knew Congress was never going to buy. He also expected Congress to add more tax cuts into his package. The combination of tax cuts and spending restraint he proposed, however, allowed him to describe these proposals as “reordering our budget priorities so as to concentrate more on achieving our goal of full employment.” The second prong of the New Economic Policy was far more dramatic, catching everyone who heard it by surprise. Even in retrospect, it seems positively unthinkable. A Democratic Congress, anxious to deflect the blame for inflation away from itself and onto the White House, had a year earlier handed Nixon an extraordinary grant of presidential power: to regulate wages and prices throughout the economy. The Democratic congressional leadership was convinced that this Republican president would never use this power. But John Connally had urged Nixon not to reject it, but instead to keep this authority in a closet in case he wanted to use it some day. On this summer Sunday, Nixon opened that closet. He told the country he was ordering a 90-day freeze on all wages and prices in the United States, “backed by government sanctions.” He also announced that he was creating a new federal agency to regulate prices and allocate products, the Cost of Living Council, to maintain price stability after the freeze expired. This freeze came at a time when inflation was at 4 percent. Nixon had pulled out a sledgehammer, not a stick. Perhaps hoping that his audience had not fully comprehended what he had just said, Nixon had the gall to add: “Working together, we will break the back of inflation, and we will do it without the mandatory wage and price controls that crush economic and personal freedom.” But his freeze on wages and prices was...

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