Rising Inflation Problem: Oil Crisis in USA 1970s

During the long 1970s, there was a lack of confidence in the general public in the government in the United States. Many events led to this situation, including the government lying about the Vietnam war, racial problems like busing and watergate, etc changed the perception of how US people viewed their government. Even though it was a mixture of failed policies by the government that happened at the same time which caused the problem, in this essay we will focus on discussing why the energy and stagflation caused the people to lose their confidence in the government.

Firstly stagflation marked a decline in traditional American prosperity and values. Understand stagflation the definition of stagflation is a slow economic growth with high unemployment and inflation rate, this situation was unseen before by the people in the 1970s because the US government used to adopt the Keynesianism as their key economic belief and Keynesian economists were not expecting stagflation because it was completely against their beliefs. According to Robertson, the lack of confidence of the public was generated by their witness of changes and they would start to question their governments and policies. After WW2 most Americans enjoyed decades of growing prosperity provided by post-war economic and manufacturing growth and the US turned into the most dominant economic power in the world. And before the economic downturn in the 70s, lower social classes such as farmers, blue-collar workers, and African Americans were enjoying prosperity too as they were moving upwards in society to enjoy economic success. Because they were living in a society in which the boundaries between different classes were disappearing by increasing individual economic power. Even though to some it may sound not applicable, the government promised to secure equality for everyone in the society. And at last, it created expectations for the consumers in the society which things would only get better with the economy and the government’s promises, so when stagflation happened it shattered the dreams of many people and they believed the government failed to meet their expectations and secured their rights.

The stagflation did not happen just by accident, and when people blamed the government they had their reasons. Understanding the cause of stagflation it could lead to one man and he was Richard Nixon. Nixon was a significant figure for the 1970s because when he was president, he ended the Vietnam war by reducing the number of US troops in 1973 and he built diplomatic relationships with China and Russia which were achievements in the cold war period. But his economic policies received many criticisms. In a speech he made in 1971, we could study his approaches to the economy and understand why his policies would cause stagflation. In the speech he stated that he had “three fronts” for his policies, the first one increased the employment rate, stabilize the cost of living so it did not rise, and protect the US dollars from foreign factors to maintain a “prosperity without war”. It seems that what Nixon did was completely normal because he was just trying to respond to the social problems happening in American society at that time.

Another policy he imposed was he end of the Bretton Woods System in 1971 and it took away the US dollar’s position as a leading currency and devastate the economy. The US dollars had been the world's most reliable currency after WW2 because the US dollars were supported by the country’s gold reserve because most US dollars were tied to the price of gold. Nixon abolished the gold window when many European countries tried to exchange their US dollars to gold because since the 1960s foreign countries held 50 billion US dollars which was 5 times more than the value of the US gold reserve. The close of the gold window caused the value of the US dollar to drop dramatically and therefore increased the import price of foreign goods.

Even though he successfully identified the problems in the US at that time, he responded to these problems did not solve the problem but rather worsen the economy. Nixon to stop inflation, he said in the speech, “I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. Also, I call upon corporations to extend the wage-price freeze to all dividends.” He imposed a price and wage control 90 times to stop inflation without the need to harm the employment rate and the economy's growth, and it achieved a short success in the 90 days because the employment rate did increase and industrial production raise too. But it did not last very long because the fixed wages of workers made them consume less because and the fixed price caused producers to produce less, and when the price of foreign raw materials keep increasing the manufacturers could only reduce the number of workers after the period. Nixon not only intervene in the free market as a president as it harmed the economic freedom of the US, and part of the reason he did this was because he tried to enter the election in 1972 as most people in 1971 backed him with 50% in the poll supported the freeze.

Nixon’s economic policies did not solve the inflation problem in the US but made the situation worse. His policies even though made the employment rate and industrial production grow for a short period but he failed to identify the core problem which was inflation and prices kept going higher. The Americans lost confidence because they could not enjoy their prosperity like before and they witnessed their country the US losing the position as a leading economic power in the world and their currency devalued. Moreover, Nixon gave the people high hopes with these policies as he won the next election but the inflation kept getting worse, when people saw the government policies could not solve the economic problem that had persisted for many years and the president gave them false promises, people would start to lose their confidence in their government.

Nixon’s economic policies affected the economy and the problem of inflation got worse. But his policies were only for internal reasons and externally there was the oil crisis that happened in 1973. The oil crisis happened because Arab countries in OPEC decided to reduce oil production and imposed an oil embargo on the US because the US supported Israel in the Arab-Israeli wars. According to Grover and Ratner, petroleum had been the main source of energy of America since the 1950s which took up 40% of total energy consumed and it was not until the 2010s it dropped from 4% to 36% and the major consumption of petroleum was transportation in the US because most cars mainly used oil. But the heaviest consumer of oil in the US was the industrial manufacturers because they needed electricity to operate and took up more than 25% of the whole nation of electricity. It showed that through the decades the US is still dependent on petroleum as their main source of energy and oil as part of most American’s life because of the rising private car ownership as a means of transportation and the embargo on oil would affect the American industry.

Nixon made a speech on January 1974 on the energy crisis and in the speech he thanked the Americans who were willing to sacrifice them by saying, “the actions you take to save energy on a personal, voluntary, day‐in, day‐out basis—that is now the single most important reason for our success so far.” He thanked the Americans who voluntarily organized the “Gasless Sunday” program throughout the country which gas stations would close from 9 p.m. on Saturday and reopen on Monday morning. And later he mentioned that the oil crisis was a “foreign-made crisis” and the US would not need any countries’ help to produce the oil they needed to “produce our jobs, to heat our homes, to furnish our transportation for where. ever we want to go.” What he implied here was the US was aiming for energy independence because Americans’ lifestyles should not be bound by the policies of foreign countries. Later he announced the “Project Independence” which the final aim of the project was by 1980 America would reach independence in energy by finding new sources of energy and conserving petroleum.

In 1973 the US Congress passed the “Emergency Petroleum Allocation Act” which was a law passed so the President was required to issue laws and rules on controlling the price and allocating petroleum. In the act, it first stated that there were 7 aims and, to sum up, the act was created to protect the rights of American citizens, sustain the agriculture and industrial production and maintain public services with an equal distribution of oil and least effect on the economic efficiency. And it mentioned, “ no petroleum refinery in the United States is involuntarily required to operate at less than its normal fuel capacity because of the unavailability to the said refinery of suitable types of crude oil.” the government tried to ensure that every consumer in the country would share an equal amount of oil even under a ration-like law.

Even though the government was trying to solve the energy crisis they still failed to retain the confidence of their people. During Nixon’s term of office in terms of economic policies, he made many poor decisions that instead of a solution became a burden for the country's economy. One could say the US was in a passive role in the oil crisis because there was not much they could do about foreign decisions. But we could know from Nixon’s speech and the act that one way the US government was trying to alleviate the oil crisis was by asking the help from the people. They asked their people to change their lifestyle to save energy until the government finds a solution and Nixon’s “Project Independence” aimed to find a solution by 1980 which was almost 10 years long. It could be said that the people were demanded by the government to sacrifice their prosperous way of living to make up for the government’s mistakes because before the oil crisis many officials were supporting the increasing consumption of petroleum and raising the import of foreign petroleum. The price of petroleum skyrocketed more than 3 times in 1973 and it caused the prices of goods to go up so the business could only fire workers to cut costs. When people lost their jobs and could not afford to consume manufactured goods and were asked to sacrifice their lifestyle, they would lose faith in the government.

At the end of the 70s President Carter made his famous “Crisis of Confidence” speech related Americans’ confidence in the government to the energy crisis but he was not apologizing to the people but rather criticizing the people who doubt the government and their country. It was not until when Ronald Reagan abolished the “Emergency Petroleum Allocation Act” and restored American confidence.

To sum up, the US government failed to solve the rising inflation problem at the start of the 1970s and Nixon took a wrong approach in his economic policies. The oil crisis caused the price to go up and hinder economic growth, therefore, accelerating stagflation. Therefore the Americans eventually lost their confidence to the government because their prosperous post-war “American dream” lifestyle was gone and the government was asking for their help while failing to help them back and it lasted for a decade. It shows that the incompetence of the US government’s ability to deal with an economic recession was the reason why people lose faith in the government, throughout the decade there was no real solution that can help to improve the situation and the demanding attitude from the government was another factor that people did not trust the government in the 70s.

Bibliography

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