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By the time Richard Nixon resigned, the postwar economic boom period Americans had experienced was ending. Presidents Gerald R. Ford and Jimmy Carter attempted to lead the United States through both domestic and foreign crises.

The Economic Crisis of the 1970s

 What economic conditions or problems led to a stagnant economy during the 1970s?

After World War II, American prosperity seemed normal. It relied on easy access to global raw materials and a strong manufacturing base at home. In the 1970s, however, prosperity gave way to a decade of hard times.

A Mighty Economic Machine Slows

Economic troubles began in the mid-1960s. President Johnson increased deficit spending, to fund the Vietnam War and the Great Society, without raising taxes. This pumped money into the economy, but by the 1970s, this spending caused rapid inflation.

Rising oil prices dealt another blow. By 1970, the United States had become dependent on imported oil. In 1973 the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) used oil as a political weapon when war erupted between Israel and its Arab neighbors. Arab members announced an embargo, or trade ban, on petroleum to countries that supported Israel. They raised the price of crude oil by 70 percent and then by another 130 percent a few months later. After the embargo ended, oil prices continued to rise, from $3 per barrel in 1973 to $30 per barrel in 1980. This meant that Americans had less money for other goods, which contributed to a recession.

SKILLS PRACTICE
The text on Presidents Ford and Carter can be challenging. Before reading, look through the lesson. Look at the headings, the vocabulary terms, the charts and graphs, and the photos. Write down what they are telling you about the 1970s. As you read, refer to your notes to remind you of the context.

A Stagnant Economy

Declining manufacturing was another economic problem. By 1970, many American factories were old and less efficient than those in competing countries. In 1971 the nation imported more than it exported for the first time since 1889. Many factories closed. Millions of workers lost their jobs. In the early 1970s, Nixon thus faced a new economic problem nicknamed stagflation—a combination of inflation and a stagnant economy with high unemployment.

Because some economists supported the theory that inflation could only occur when demand for goods was high, they were not sure what fiscal policy the government should follow in order to fight inflation and the recession. Nixon wanted to control inflation. The government first tried to cut spending and raise taxes, and then tried to get the Federal Reserve to raise interest rates. When these methods failed, Nixon decided to end the gold standard. 

After World War II, as part of the Bretton Woods system, the U.S. dollar was made convertible to gold at the rate of 35 dollars for one ounce of gold. Other currencies in the world were then pegged to the US dollar at agreed upon exchange rates. The United States maintained gold reserves equal to the amount of currency in circulation. Anytime someone wanted to convert their dollars into gold they could do so.

The problem with the system was that it limited monetary policy. If the United States wanted to put more money into circulation, it had to make sure there was an equivalent amount of gold in reserve. When inflation began in the late 1960s, many people thought part of the problem was that foreign nations were gouging, or charging high unfair prices, to American consumers. OPEC seemed to be an example of this. If the dollar’s value changed, however, the cost of imported goods could be brought down.

No major trading partner of the United States, however, wanted to change its exchange rate. Americans were buying lots of imported goods and foreign countries were earning a lot of U.S. dollars that they could convert to gold. So Nixon decided to "close the gold window" announcing that dollars could no longer be redeemed for gold. The president also imposed a 90-day freeze on wages and prices to try to prevent the end of the gold standard from making inflation even worse.

Nixon's actions became known as the New Economic Policy, or the Nixon Shock. The plan was supposed to be temporary, to force other countries to renegotiate their exchange rates. But by early 1973, the system had collapsed and the gold standard came to an end. The United States moved to a true fiat currency. Fiat currency is money that has value because the government says it has value and requires people to accept it for payment of goods and services.

Because it was no longer tied to gold or any other physical thing that has value, the dollar began to "float" or rise or fall in value compared to other nation’s currencies. The end of the gold standard gave the Federal Reserve the ability to use monetary policy without many limitations. It could now freely pump money into the economy to help overcome recessions, or slow the expansion of the money supply to control inflation. But critics have argued that it makes the international economy less stable, encourages deficit spending, and has led to sudden swings in the world's stock markets.

Ford and Carter Battle the Economic Crisis

 

How did Ford and Carter try to resolve the nation’s domestic issues?

When Nixon resigned in 1974, inflation was still high. Meanwhile, the unemployment rate was over 5 percent. It would now be up to the new president, Gerald Ford, to confront stagflation.

Ford Tries to “Whip” Inflation

By 1975, unemployment had risen to nearly 9 percent. Ford launched a plan called WIN—“Whip Inflation Now”—but it had little impact on the economic situation. He tried other measures to reduce inflation, including keeping taxes low, but these plans also failed to revive the economy.

Ford’s Foreign Policy

Ford continued Nixon’s general foreign policy strategy. He kept Kissinger on as secretary of state and continued to pursue détente. In August 1975, Ford met with leaders of NATO and the Warsaw Pact to sign the Helsinki Accords. Under the accords, the parties recognized the post–World War II borders of Eastern Europe. The Soviets promised to uphold certain human rights, although this did not always happen.

In May 1975, soon after Communists seized power in Cambodia, Cambodian forces captured the Mayaguez, an American cargo ship. Ford sent U.S. Marines to retrieve the ship, but Cambodia had already secretly released the crew. Unaware of the crew’s safety, the marines recaptured the ship, and 41 servicemen died in the battle.

The Election of 1976

The presidential race pitted Ford against former Georgia governor Jimmy Carter, who had no experience in Washington. Carter ran as an outsider promising to restore honesty to the federal government. He also promised to create or reform several domestic programs. Carter’s image as a moral and upstanding individual attracted many voters, and he narrowly defeated Ford.

Carter’s Economic Policies

Carter tried to use domestic policies to fix the economy. At first he tried to end the recession and reduce unemployment by increasing government spending and cutting taxes. Then he tried to ease inflation by reducing the money supply and raising interest rates. These measures did not work.

Carter believed that the nation’s most serious economic problem was its dependence on foreign oil. He asked Americans to fight against rising energy consumption. He also proposed a national energy program to conserve oil and to promote the use of coal and renewable energy sources. Carter even convinced Congress to create a Department of Energy, and asked Americans to reduce energy consumption. Some argued that Carter should deregulate the domestic oil industry to decrease dependence on imported oil. Carter agreed to support deregulation but called for a special tax to keep oil companies from overcharging.

In the summer of 1979, instability in the Middle East produced a second major fuel shortage. Under pressure, Carter spoke in a televised address. He warned about a “crisis of confidence” that had struck “at the very heart and soul and spirit of our national will.” The address became known as the “malaise” speech, although Carter had not used that word. Many Americans felt that Carter was blaming them for his failures.

President Carter’s difficulties in solving the nation’s economic problems lay partly in his inexperience and inability to work with Congress. He made little effort to reach out to Washington’s legislative leaders, and many of his energy proposals failed. By 1979, public opinion polls showed that Carter’s popularity had dropped.

Carter’s Foreign Policy

 

What were President Carter’s greatest foreign policy success and his greatest failure?

A man of strong religious beliefs, President Carter argued that the United States must try to be “right and honest and truthful and decent” in dealing with other nations. Yet it was on the international front that Carter suffered a devastating defeat.

Morality in Foreign Policy

In his Inaugural Address, Carter gave his foreign policy a focus by saying:

"Our commitment to human rights must be absolute . . . the powerful must not persecute the weak, and human dignity must be enhanced. . . . We pledge perseverance and wisdom in our efforts to limit the world’s armaments to those necessary for each nation’s own domestic safety."

—from his Inaugural Address, January 20, 1977

Carter and his foreign policy team—including Andrew Young, the first African American ambassador to the United Nations—strove to achieve these goals.

To remove a major symbol of American interventionism, Carter agreed to give Panama control of the Panama Canal, which the United States had built and operated for over 60 years. In 1978 the Senate ratified two Panama Canal treaties, which transferred control of the canal from the United States to Panama on December 31, 1999. Carter also singled out the Soviet Union as a human rights violator. Relations between the two superpowers suffered a further setback when Soviet troops invaded Afghanistan in December 1979. Carter responded by imposing an embargo on the sale of grain to the Soviet Union and boycotting the 1980 Summer Olympic Games in Moscow. Détente was crumbling.

Triumph and Failure in the Middle East

In 1978 Carter helped broker a peace between Israel and Egypt through the Camp David Accords. The treaty signed in 1979 established peace between Israel and Egypt--two nations that had been bitter enemies for decades. This was important because this was the first time an Arab state recognized Israel's right to exist, made peace with Israel, and normalized diplomatic relations after refusing to recognize or negotiate with Israel following the 1967 war. This was the first time Israel traded land and removed settlements for peace. Although many Arab nations did not support the treaty, it helped begin the slow peace process in the Middle East.

Just months after the treaty was signed in 1979, Carter faced a crisis in Iran. The United States had long supported Iran’s monarch, the shah, because Iran was a major oil supplier and a buffer against Soviet expansion. The shah had grown increasingly unpopular in Iran due to his repressive rule and Westernizing reforms. The Islamic clergy opposed the shah’s reforms. In January 1979, protesters forced him to flee. An Islamic republic was then declared.

Led by religious leader Ayatollah Khomeini, this new regime distrusted the United States because of its support of the shah. In November 1979, revolutionaries stormed the American embassy in Tehran and took 52 Americans hostage. The Carter administration unsuccessfully tried to negotiate the hostages’ release. In April 1980, Carter approved a daring rescue attempt that failed when several helicopters malfunctioned and one crashed in the desert. Eight servicemen died in the accident.

The crisis continued. Every night, news programs reminded viewers how many days the hostages had been held. Carter’s inability to free them cost him support in the 1980 election. On January 20, 1981, the day Carter left office, Iran released the Americans, ending their 444 days in captivity.

 

Thinking Like A HISTORIAN
Comparing and Contrasting
Historians can examine economic data when they are trying to analyze history and to better understand the actions and choices made during a particular period of history. They can draw conclusions from comparing and contrasting the price of oil from two different time periods. They can evaluate how global or local historic events or changes in supply and demand may have contributed to a decline or rise in oil prices. For example, in 1981 crude oil prices for refiners hit a high of about $39 per barrel. They declined slowly and then sharply until the early 2000s. Then, in 2008, oil prices rose dramatically, to about $131 per barrel. In order to analyze the similar data for oil prices in 1981 and 2008, historians might look at related local and world events that could have affected this soar in prices in both years. 
Transferring Information Use the information above, as well as research from the library or online, to create a visual presentation of oil prices from 1970 to today. Use spreadsheet software that lets you create graphs. Add captions identifying major political or economic events that occurred when prices were high.
Analyzing PRIMARY SOURCES
Carter After the Iran Hostage Rescue Failure
"He looked exhausted and careworn, sitting behind the big wooden desk in the Oval Office as he spoke. ‘It was my decision to attempt the rescue operation. It was my decision to cancel it when problems developed. . . . The responsibility is fully my own.’
The mood at the senior staff meeting was somber and awkward. I sensed that we were all uncomfortable, like when a loved one dies and friends don’t know quite what to say."

—Chief of Staff Hamilton Jordan, Crisis, 1982

Reviewing Vocabulary

TEKS: 10C, 10D, 17E

Using Your Notes

TEKS: 10C, 15E, 17E

Answering the Guiding Questions

TEKS: 10C, 15E, 17C, 17E

TEKS: 10F 

TEKS: 10C, 10D

Writing Activity

TEKS: 10D