Inflation continued to be a problem in 1971, with forecasts showing an acceleration in 1972, which presented a growing political problem for Nixon. While inflation was unpopular, so were actions such as raising 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 the Second World War, testified before the Joint Economic Committee that there really was no choice in the matter because there was no combination of monetary or fiscal policies that could curb inflation without sharply increasing the unemployment rate. Continuing, Galbraith said:
There is only one way to have an effective economic policy. It is letting the monetarists and the fiscalists continue their academic feud and recognize that adequate employment and reasonably stable prices can only be reconciled by tackling the wage-price spiral. It requires controls… The first step in achieving an effective economic policy must be a general freeze.
Ironically, Galbraith, who was widely known to be a supporter of Keynesian economics, added that “Mr. Nixon proclaimed himself a Keynesian at the time in history when Keynes became obsolete. Galbraith believed that big business could now practice monopoly prices who denied Keynesian policies.
Nixon’s ECA President Paul W. McCracken was alarmed by Galbraith’s testimony and wrote an attack on him in a Washington post July 28 opinion piece. Wage and price controls would seriously erode personal freedom, McCracken said, and quickly collapse unless the underlying monetary and fiscal sources of inflation were curtailed. He also doubted the government’s ability to administer a comprehensive set of wage and price controls.
What really sparked the August 15 actions was Britain’s demand to swap US $ 3 billion that it held in a trade surplus for gold. Although American citizens are prohibited from owning gold, the Bretton Woods system allowed governments to do exactly what Britain wanted to do. The problem was that the United States only had about $ 10 billion in gold at the time and had no intention of giving so much of it to the British. All other dollar-holding countries would also instantly demand gold and there wasn’t enough for everyone – a classic run on the bank.