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Gerald Ford

Stagflation: Interesting facts and information on Stagflation.

Definition and Summary of the Stagflation
Summary and Definition: Stagflation was an economic phenomenon of the 1970's resulting from a combination of economic stagnation, rising prices and inflation.

The post WW2 boom years of the 1950's and 1960's in which the United States dominated International trade ended as European competition increased, oil prices rose, imports exceeded exports, spending decreased and unemployment increased.

The Gross domestic product (GDP) of the United States fell as the economic performance of the nation declined resulting in a lower standard of living across the whole country.

Stagflation - Nixon, Ford, Carter and Reagan
The economic policies of President Richard Nixon failed to curb stagflation and when President Gerald Ford took office the American economy was in the worst recession since the Great Depression. The economic policies of President Jimmy Carter also failed to curb stagflation. Eventually President Ronald Reagan combined supply-side economics with monetarism, referred to as Reaganomics, and by 1983 the U.S. economy finally began to recover.

Facts about Stagflation
The following fact sheet contains interesting facts and information on Stagflation.

Definition of Stagflation: Stagflation is a combination of inflation and stagnation. The term was coined in 1965, by U.K. politician Iain Macleod (1913-1970),

Definition of Inflation: Inflation is a rise in prices relative to money available. It is an increase in the price you pay for goods and a decline in the purchasing power of your money. In other words, during a period of inflation you can get less for your money than you used to be able to get.

Definition of Stagnation: Economic stagnation is a prolonged period of slow economic growth, usually accompanied by high unemployment.

The programs introduced by President Lyndon B. Johnson to meet his vision of the Great Society pumped large amounts of money into the economy without raising taxes. The numerous legislation passed between 1963-1968 resulted in a rise in the cost of goods, which spurred inflation.

Rising prices and economic stagnation gave rise to the use of the term "Stagflation" during the presidency of Richard Nixon and continued during the presidencies of Gerald Ford and Jimmy Carter. It was eventually halted when President Ronald Reagan introduced "Reaganomics", combining monetarism with supply-side economics with monetarism.

Causes: Inflation. Inflationary pressures led to major shifts in the economic policies of the presidents and their administrations during this period. A lack of understanding of economic problems resulted in a focus on immediate issues effecting the country and short-term solutions to resolve the problem of inflation.

Causes: Complacency and Stagnation. The United States had experienced a long period of prosperity following WW2, which many Americans believed would last forever. The economy had seen a boom period in which the United States dominated trade. Production levels were staggering and had astounded the rest of the world. US industries stopped developing, growing and progressing. In other words, they were stagnating.

Causes: Foreign Competition. War torn Europe and Japan, began to recover from the ravages of war, building new and highly efficient manufacturing plants. U.S. industries faced fierce competition from abroad and were unable to effectively compete due to their older plants, out of date machinery and less efficient methods.

Causes: Exports v Imports. By 1970, for the first time in nearly 100 years, the US was importing more goods than it exported.

Causes: Raw Materials. The rising costs of raw materials exacerbated the economic situation.

Causes: High interest rates. The 1970's was also characterized by high interest rates.

Causes: Rise in Unemployment. Many factories were forced to close, millions of workers lost their jobs and unemployment rose to 6.1%

Causes: International Forces. There were many causes of Stagflation, many of which related to international forces, that were contributing to the economic crisis in the United States. The problems were met by introducing erratic monetary policies that created the extreme economic occurrence, referred to as stagflation.

Causes: Economic policies: The Nixon administration and his economists concentrated more on controlling inflation than on combating recession and formulated four economic policies which, without realizing it, sowed the seeds for stagflation.

  • The government tried to introduce tax rises prompting people to spend less, which in turn would ease the demand on goods and drive down prices. Tax rises were soon abandoned due to fierce protests against this measure

  • The Federal Reserve Board raised interest rates. Loans were more expensive and harder to get. Businesses were reluctant to borrow to grow and improve their businesses and the economy slowed even further.

  • Wage and price controls were introduced. These had the effect of forcing manufacturers to find other ways to reduce costs which they did by reducing their workforce. Laying off workers led to a rise in unemployment, a reduction in demand for goods and slowed economic growth.

  • The government removed the United States from the gold standard. The value of the dollar plummeted and as a result the prices of imports rose

Causes: The 1973 oil crisis: The 1973 oil crisis made the economic problems in the United States even worse. The Arab and Egyptian and Syrian members of the Organization of Petroleum Exporting Countries (OPEC) proclaimed an oil embargo in response to American involvement in the 1973 Yom Kippur War.

The United States was faced with its first fuel shortage since WW2. Oil rationing, price controls, speed limits and daylight saving time were all put into effect to conserve energy. Consumers were faced with queues at fuelling stations and industries were faced with increased production costs. The oil embargo was lifted in March 1974 but prices would continue to rise. The increase in oil prices accelerated inflation.

The fuel shortage had a direct and lasting impact on the U.S. automobile industry and led to a dramatic increase of smaller European and Japanese cars in the 1970's. Americans could no longer afford to buy, or run their large, heavy, and powerful cars. Imports of foreign cars increased dramatically.

Steel consumption began to decline during the period of competition from foreign producers and soaring prices of materials. Steel consumption did not return to its peak level for the next 20 years.

Despite the economic policies of Nixon the recession continued as unemployment continued to rise. Nixon made the decision to completely reverse course by adopting an expansionary fiscal and monetary policy in which the wage and price controls were lifted. Far from resolving the economic crisis, stagflation resumed its upward spiral.

The nation was then rocked by the Watergate Scandal and the resignation of Richard Nixon. On August 9, 1974 President Gerald Ford took over the reins of the deflated nation with high inflation, stagnation and high unemployment - Stagflation.

President Ford had lost support by pardoning Richard Nixon and was reluctant to introduce mandatory wage and price controls to reduce inflation - which by this time was running at 10%. His approach was to request voluntary controls to address the economic crisis and introduced a plan called Whip Inflation Now (WIN).

The WIN plan was based on requests to hold back the increases in wages, reduce spending, increase savings and cut back on their oil and gas consumption. Not surprisingly, the WIN plan lost.

President Ford and his administration began cutting government spending and introducing higher interest rates to curb inflation. The economic polices of President Ford failed and President Jimmy Carter was elected.

President Jimmy Carter was faced with ending Stagflation and reducing unemployment. To achieve these goals he cut taxes and increased government spending. These policies failed to have the desired effect and inflation surged hitting a 32-year high of 13%.

President Carter reversed the changes and attempted to address the economic crisis by reducing the money supply and raising interest rates.

The nation was then hit by the 1979 Oil crisis resulting in higher fuel prices, oil shortages and Americans returned to the queues at gas stations.

As the nationís economic problems of Stagflation deepened the popularity of Jimmy Carter decreased and Ronald Reagan assumed the presidency in 1981.

The economic policies of Ronald Reagan, referred to as Reaganomics, applied a variety of different tactics to combat stagflation including the reduction of taxes, decreasing the growth in government spending, decreasing economic regulation and promoting unrestricted free-market activity.

Some of the major legislations passed during the presidency of Ronald Reagan to combat Stagflation included the Economic Recovery Tax Act of 1981, the Tax Equity and Fiscal Responsibility Act of 1982, and the Tax Reform Act of 1986.

By 1983 the U.S. economy finally began to recover and the economic crisis known as Stagflation at last came to an end.

US American History
1945-1993: Cold War Era

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