During the 1970s, the long period of postwar economic expansion and consumer prosperity came to an end, succeeded by slow growth and high inflation. There were many reasons for the end of capitalism’s “golden age.” With American prosperity seemingly unassailable and the military-industrial complex thriving, successive administrations had devoted little attention to the less positive economic consequences of the Cold War. To strengthen its anticommunist allies, the United States promoted the industrial reconstruction of Japan and Germany and the emergence of new centers of manufacturing in places like South Korea and Taiwan. It encouraged American companies to invest in overseas plants and did not complain when allies protected their own industries while seeking unrestricted access to the American market. Imports of foreign steel, for example, led to growing problems for this key industry at home. The strong dollar, linked to gold by the Bretton Woods agreement of 1944, made it harder to sell American goods overseas (discussed in Chapter 22).
In 1971, for the first time in the twentieth century, the United States experienced a merchandise trade deficit—that is, it imported more goods than it exported. By 1980, nearly three-quarters of goods produced in the United States were competing with foreign-made products and the number of manufacturing workers, 38 percent of the American workforce in 1960, had fallen to 28 percent. Moreover, the war in Vietnam produced ever-higher federal deficits and rising inflation.
In 1971, Nixon announced the most radical change in economic policy since the Great Depression. He took the United States off the gold standard, ending the Bretton Woods agreement that fixed the value of the dollar and other currencies in terms of gold. Henceforth, the world’s currencies would “float” in relation to one another, their worth determined not by treaty but by international currency markets. Nixon hoped that lowering the dollar’s value in terms of the German mark and Japanese yen would promote exports by making American goods cheaper overseas and reduce imports since foreign products would be more expensive in the United States. But the end of fixed currency rates injected a new element of instability into the world economy. Nixon also ordered wages and prices frozen for ninety days.