After Watergate and the end of the Vietnam War, many Americans lost trust in government. At the same time the long postwar boom ended. The 1970s brought problems that the tools of earlier decades did not seem to fix.
Key idea
An oil embargo (1973) and "stagflation" (high inflation with high unemployment) strained the economy. Gerald Ford pardoned Nixon. Jimmy Carter brokered the Camp David Accords (1978) and faced the Iran hostage crisis (1979 to 1981).
Why it works
In October 1973, during a war between Israel and its neighbors, Arab oil-producing nations cut off oil to the United States, and the price of crude oil roughly quadrupled, from about 3 dollars to about 12 dollars a barrel. Gasoline lines formed, and prices rose across the economy. Economists had expected inflation and unemployment to move in opposite directions; now both were high at once. Ford's pardon of Nixon in September 1974, meant to put Watergate behind the country, cost him trust, and Carter, a former Georgia governor who ran as an outsider, won in 1976. A second oil shock in 1979 pushed inflation above 13 percent by 1980; the Federal Reserve under Paul Volcker then raised interest rates sharply to bring it down.
| Carter's foreign policy | What happened |
|---|---|
| Panama Canal treaties (1977) | Agreed to hand over the canal to Panama at the end of 1999 |
| Camp David Accords (September 17, 1978) | Egypt's Anwar Sadat and Israel's Menachem Begin agreed to a framework for peace; a peace treaty followed in 1979 |
| Iran hostage crisis (November 4, 1979 to January 20, 1981) | After Iran's revolution, militants seized the U.S. embassy and held 52 Americans for 444 days; a rescue mission failed in 1980 |
| Soviet invasion of Afghanistan (December 1979) | Carter halted grain sales and led a boycott of the 1980 Moscow Olympics |
Work it through
Worked example: Reading two numbers at once
In 1974 inflation was about 11 percent and in 1975 unemployment reached about 9 percent. Why did this puzzle policymakers?
- The usual tool against unemployment, more spending or cheaper money, tends to raise inflation.
- The usual tool against inflation, less spending or higher interest rates, tends to raise unemployment.
- With both high at once, each cure seemed to worsen the other problem.
Answer: Stagflation: the standard remedies pulled in opposite directions.
Common mistake
Many students think inflation and unemployment always move in opposite directions. In the 1970s both were high at once, which puzzled policymakers. Economists still debate the causes: the oil shocks, earlier spending and loose money, and rising expectations of inflation all figure.