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One reason successive presidential administrations were unable to end stagflation during the 1970s was the significant change in the international economy that impacted America’s economic climate.
The industrial development of America’s allies in Western Europe and Asia—especially Germany, Japan, and South Korea—challenged the global dominance of the U.S. economy, which had continued since the end of World War II. This was, in part, a result of the support that the United States provided to these nations to help them recover from the war.
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To contain communism, American companies and the federal government invested in the economies of its allies. By the beginning of the 1970s, those investments had started to pay off, to the extent that products manufactured by these countries were successfully competing with American-made goods.The increased American appetite for imports filled foreign central banks with billions of U.S. dollars, the value of which was based on an international gold standard. When the value of U.S. dollars in foreign banks surpassed the value of U.S. gold reserves in 1971, President Richard Nixon decided to allow the U.S. dollar to flow freely against the price of gold.
Nixon’s decision lowered the value of the U.S. dollar in comparison to the currencies of economic competitors. This process is known as “devaluing.” For a brief time, it stimulated the export of American-made goods because they were now cheaper overseas. The move also temporarily curtailed domestic inflation and reduced the dependence on imports.
The devaluation of the dollar added flexibility to the global economy, but Nixon’s decision upset some in the international community and increased volatility in the world economy. This became evident in the fall of 1973.
In October 1973, Syria and Egypt jointly attacked Israel in what is known as the Yom Kippur War to recover territory that was lost in a conflict with the Israelis several years earlier. The United States supported Israel, which earned it the enmity of Arab nations. Many of the oil-producing states in the Middle East also objected to Nixon’s devaluation of the U.S. dollar, which was the currency commonly used to pay for oil shipments.
For these reasons, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo on oil shipments to the United States from October 1973 to March 1974. In addition, all OPEC member nations agreed to raise the price of oil from $3 a barrel to almost $12 a barrel—an increase of over 300%.
Prices at the pump increased accordingly—from 38 cents per gallon before the embargo to 55 cents per gallon by June 1974. The prices of other goods, the manufacture and transportation of which involved oil and gas, also rose.
The embargo, and the resulting energy crisis, contributed to domestic stagflation during the 1970s. The combination of stagflation and the oil embargo made it appear as if the American economy had run out of gas.
Faced with high fuel prices, some consumers panicked. As a result, the demand for gasoline sometimes surpassed the supply. Some gas stations limited the amount of gasoline that customers could purchase. When the gas in their tanks ran low (or out), station owners closed their stations until they received another shipment.
As drivers waited in line for gasoline, they recognized that the oil embargo illustrated America’s dependence on foreign oil and vulnerability to negative political and economic developments overseas.
Cheap oil enabled economic growth, the migration to suburbia, and other manifestations of American prosperity following World War II.
However, by the 1970s, much of the oil that fueled American economic growth came from overseas—mainly, from the Middle East.
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In 1973, the Middle East provided over 40% of America’s oil imports and 30% of America’s overall oil supply.After the oil embargo ended in the spring of 1974, oil prices continued to rise. Inflation soared to 12.2% by the end of the year. Just as the Vietnam War exposed the limits of U.S. military power, the oil embargo and increased international economic competition led some to believe that the nation was no longer a superpower.
Changes in the international arena during the 1970s were reflected in America’s containment policy and Cold War geopolitics.
The Nixon administration gave foreign policy a high priority. When he took office during the Vietnam War, President Nixon recognized that five major economic powers—the United States, Western Europe, the Soviet Union, China, and Japan—dominated world affairs. Nixon looked for opportunities to pit competing powers against each other for the benefit of the United States.
Nixon’s most notable accomplishment in this regard involved China. In August 1971, he reversed decades of U.S. hostility to the communist regime of the People’s Republic of China when he announced that he would meet China’s leader, Chairman Mao Zedong, in Beijing. Nixon and his advisors, most notably Henry Kissinger, hoped that the establishment of relations with China would prompt the Soviet Union to seek a more productive relationship with the United States.
Nixon arrived in China in February 1972. Chinese Premier and President Zhou Enlai agreed that the Soviet Union should be prevented from making advances in Asia. The trip did not result in an alliance between the United States and China, but both nations promised to seek trade agreements and to establish full diplomatic relations.
In May 1972, 3 months after visiting China, Nixon became the first American president to visit the Soviet Union. He met with Soviet leader Leonid Brezhnev in Moscow, where they discussed trade. They also signed the Strategic Arms Limitation Treaty (SALT), which froze the number of intercontinental nuclear missiles in each country’s arsenal and banned further development of antiballistic missile systems.
The negotiations reflected a new approach to containment that both leaders referred to as détente, or peaceful coexistence.
Gerald Ford, Nixon’s vice president who succeeded him as president in 1974 (following Nixon’s resignation), further advanced détente in August 1975 when he, Soviet Premier Brezhnev, and representatives of 31 other countries signed the Helsinki Accords. This agreement, which was signed in Helsinki, Finland, recognized the territorial boundaries that had been established at the end of World War II, including the division of Germany. The accords also included a pledge by all signatories to protect human rights within their borders.
Despite proclamations of détente, tensions between the two superpowers persisted. During the early years of the Cold War, they contended in Europe; in the 70s, the superpowers confronted each other in the Middle East.
Jimmy Carter, who won the 1976 presidential election against Gerald Ford, took office in January 1977. He believed that U.S. foreign policy should be based on moral principles and national values. For example, he argued that the United States had failed in Vietnam because of the My Lai massacre and other atrocities, which were contrary to moral values.
Instead of containment or détente, Carter sought to implement a foreign policy based on the observance of human rights.
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In 1978, Carter ended American aid to the military dictatorship that governed Argentina, which had waged a “dirty war” against its citizens that killed approximately 30,000 people.EXAMPLE
When leftist insurgents known as the Sandinistas overthrew Nicaraguan dictator Anastasio Somoza—a U.S. ally—in 1979, Carter refused to intervene.Carter achieved a notable diplomatic success in the Middle East by bringing Israeli Prime Minister Menachem Begin and Egyptian President Anwar Sadat to the United States to negotiate peace. Their meetings at Camp David, the presidential retreat in Maryland, led to the signing of the Camp David Accords in September 1978. The accords made Egypt the first Arab nation to recognize Israel, which had been created in the Middle East in 1948. The accords led to the signing of a historic peace treaty between the two nations 1 year later.
Despite these successes, Carter’s foreign policy approach—and the détente policy in general—unraveled as a result of two conflicts in the Middle East in 1979:
The Soviet Union invaded Afghanistan in late 1979 to rescue a communist government threatened by the Islamic revolution. In response to the invasion, President Carter backed away from his prior emphasis on human rights and issued the Carter Doctrine.
In addition, Carter placed an embargo on grain exports to the Soviet Union and announced that the United States would boycott the 1980 Summer Olympic Games, scheduled to take place in Moscow. He seemed to disregard his previous emphasis on moral values and human rights when he authorized aid to fundamentalist Muslims, known as the mujahideen, who fought the Soviets. One faction of this resistance became known as the Taliban.
The Iran Hostage Crisis presented an even more serious foreign policy challenge. Located on the southern border of the Soviet Union, Iran became a key U.S. ally following the CIA-engineered overthrow of Prime Minister Mohammad Mossadegh in 1953. The United States subsequently supported Mohammad Reza Pahlavi, the Shah of Iran, with billions of dollars in aid.
The Shah became increasingly unpopular among his people due to his brutal policies, which included the use of a secret police force to suppress dissent. The Shah’s efforts to modernize Iran along Western lines also alienated Muslim clerics.
In February 1979, as the Shah’s health deteriorated, a revolution inspired by exiled cleric Ayatollah Khomeini overthrew the government and established an Islamic republic. When President Carter permitted the ailing Shah to enter the United States for medical treatment in November 1979, a group of Iranian students and activists, including Islamic fundamentalists who opposed the Westernization and secularization of Iran, invaded the U.S. embassy in Tehran, taking 66 embassy employees hostage. The women and African Americans among them were soon released; 53 men remained in captivity.
Carter appeared weak and inept to many Americans during negotiations for the release of the hostages.
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In April 1980, an attempt to save the hostages failed when a helicopter transporting a rescue team crashed in Iran.As Carter approached the 1980 election against Republican challenger Ronald Reagan, the fate of the hostages remained in doubt.
Source: This tutorial curated and/or authored by Matthew Pearce, Ph.D with content adapted from Openstax “U.S. History.” Access for free at openstax.org/details/books/us-history LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL
