Inflation continued to be a problem in 1971, with forecasts showing an acceleration into 1972, which presented a growing political problem for Nixon. Although inflation was unpopular, so were actions such as higher interest rates to moderate it. Those on the left had a simple answer: wage and price controls. On July 20, 1971, Harvard economist John Kenneth Galbraith, who had helped administer wage and price controls during World War II, testified before the Joint Economic Committee that there was really no choice in the matter because there was no combination of monetary or fiscal policies that could curb inflation without sharply raising the unemployment rate. Continuing, Galbraith said:
There is only one way to have an effective economic policy. That is to leave the monetarists and fiscalists to continue their academic quarrel and recognize that adequate employment and reasonably stable prices can only be reconciled by coming to grips with the wage-price spiral. That requires controls.… The first step in getting an effective economic policy must be a general freeze.
Ironically, Galbraith, who was widely known for being a supporter of Keynesian economics, added that “Mr. Nixon has proclaimed himself a Keynesian at the moment in history when Keynes has become obsolete.” Galbraith thought that big corporations could now charge monopoly prices which negated Keynesian policies.
Nixon’s CEA chairman Paul W. McCracken was alarmed by Galbraith’s testimony and penned an attack on it in a Washington Post op-ed article on July 28. Wage and price controls would seriously erode personal freedom, McCracken said, and quickly collapse unless the underlying monetary and fiscal sources of inflation were restricted. He was also dubious about the government’s ability to administer an all-encompassing set of wage and price controls.
What really set in motion the actions of August 15 was a demand by Britain to exchange $3 billion of U.S. dollars it held from running a trade surplus for gold. Although American citizens were prohibited from owning gold, the Bretton Woods system permitted governments to do exactly what Britain wanted to do. The problem was that the U.S. had only about $10 billion of gold at that time and had no intention of giving such a large chunk of it to the British. Every other country holding dollars would have instantly demanded gold as well and there wasn’t enough to go around—a classic run on the bank.