Like most presidents, Nixon had little grasp of complex economic issues but a clear understanding of his political stakes in them. At all costs a recession and high unemployment were to be avoided going into the reelection year of 1972.
The president inherited a mess. Johnson had not followed the advice of his economists, and the result was soaring inflation (up to 5 percent in the last quarter of 1968, double the average rate since 1956). Unemployment was low, at 3.3 percent. Given a tradeoff between unemployment and inflation, Nixon would accept higher unemployment rates in order to cool down the inflation, provided it would lead to prosperity by 1972.
Early economic policies, set by Treasury Secretary David Kennedy, Under Secretary Paul Volcker, and Labor Secretary George Shultz, called for a relatively tight budget and a moderately restrictive monetary policy by the Federal Reserve Board. A tax bill passed in 1969 incorporated several Nixon initiatives, including a repeal of the investment tax credit and removal of 2 million of the nation's poor from the tax rolls. But by 1970 it was clear that the program was not working. In June of that year the Council of Economic Advisers began issuing "inflation alerts." By July a shortfall in revenues led Nixon to embrace the concept of the "full employment balanced budget," which provided for large deficits if the amount of expenditures did not exceed the revenues that would have been obtained under conditions of full employment. When Nixon submitted his budget to Congress in January 1971, he used this concept to justify a proposed $11.6 billion deficit and even publicly embraced Keynesian economic principles to argue that government expenditures would pull the nation out of recession. For a Republican president, all this was quite unorthodox, as Democrats gleefully pointed out.
With inflation and unemployment both on the rise, Nixon's appointee to chair the Federal Reserve, Arthur Burns, shifted from a tight-money policy. Early in 1971 the president began to criticize unions and management for agreeing to excessive wage increases in the steel industry. Nixon established the Tripartite Committee to monitor union settlements in the construction industry. By late spring, recently appointed Treasury Secretary John Connally was convinced that bold new measures were needed. By early summer the balance of trade had deteriorated so much that a full-scale flight from the dollar ensued. Unemployment was over 6 percent and climbing.
Meetings held at Camp David in mid-August produced agreement on a new economic program. As outlined by Nixon to the nation on 15 August in a nationwide television address, it included the closing of the gold window and the ending of the convertibility of the dollar into gold; actions that amounted to an 8 percent devaluation of the dollar against other major currencies, thus stimulating American exports; a 10 percent surcharge on foreign imports to discourage their consumption; and measures to stimulate the domestic economy, including an end to the excise tax on automobiles, a 10 percent tax credit for business investment, and a speedup in the personal income tax exemption, to be reflected in reduced withholding taxes in workers' paychecks. To counter the inflationary psychology, Nixon announced a ninety-day freeze on wages and prices (under authority granted to him the year before by the Democratic Congress) and the establishment of the Cost-of-Living Council. These measures, dubbed the "Nixon shocks," were taken without any prior consultation with America's allies, which caused severe strains in relations with them. Inflation was halted temporarily and then slowed as a second phase was implemented on 14 November 1971, with creation of the Pay Board and the Price Commission, which could monitor compliance with guidelines for increases in wages and prices.
By the beginning of 1972, with 2 million more people out of work than in 1969, the administration began to stimulate the economy. The budget sent to Congress in January provided for a $25.2 billion deficit. Government agencies accelerated their purchases from businesses. The Federal Reserve Board expanded the money supply by 9 percent in the election year, leading to charges (which Burns vehemently denied) that Nixon and Burns had made a deal to ensure Nixon's reelection and Burns's reap-pointment. By the autumn the economy seemed to be turning around. Inflation remained under control, unemployment was dropping, and the recession had ended. Later the American public would pay the price for these election-year arrangements. Inflationary forces could not long be suppressed by wage and price controls, and when they were lifted, the effects of increased deficits, an expanded money supply, and the rise in oil prices made themselves felt: inflation increased to 8.8 percent in 1973 and 12.2 percent in 1974, beginning a decade of exceptional price instability marked by increasing inflation rates through the end of the Carter presidency.