Recession of 1970
A mild recession occurred in 1970. The unemployment rate rose from 3.5 percent in December 1969 to 6.1 percent in December 1970. Although the recession had ended the previous month, the unemployment rate hovered very close to 6 percent throughout 1971, and averaged 5.7 percent in the first 10 months of 1972. It was only in November that it fell abruptly to 5.2 percent, responding to the strong 5.7 percent annual growth rate of real GNP.
The stimulative policies followed in 1970 and the first half of 1971 succeeded in halting the recession, but they worsened the economy's price performance. (an implied annual rate of 6.2 percent), and the PPI rose by 0.4 percent in June (an implied annual rate of 4.9 percent). clearly not falling. In May and June, the CPI rose by one-half percent each month Rates of inflation were clearly not falling.
At the same time, the U.S. was incurring a deficit in its balance of trade for the first time in this century. This reinforced a persistent view that the dollar was seriously overvalued in terms of other major currencies. Speculation was rife that the dollar would have to be revalued in terms of gold. Hundreds of millions of dollars were exchanged for German, Dutch, Swiss, Austrian, and Belgian funds. In a single week in early August, 3-7 billion U.S. dollars flowed into foreign central banks.
The failure of inflation to abate and the massive dollar outflow led to a new policy that included domestic wage and price controls. On August 15, 1971, President Nixon appeared on nationwide television to announce "the most comprehensive new economic policy to be undertaken by this country in four decades." His policy included some domestic tax reductions and sweeping changes in the international sphere, but by far the most dramatic announcement was the imposition of domestic wage and price controls.
A 3-month freeze, labeled Phase I, was imposed on prices and wage rates, This was followed by Phase 11, a regime of selective price and wage controls. Rates of inflation did fall in 1971 and 1972. Sharp disagreement continues, however, between economists who believe this reduction was due to the controls, and those who believe that the effect on prices of the earlier tight fiscal and monetary policies made itself felt only with a long lag.
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