1971: The Decision That Broke the American Household Budget

In 1971 the median American household earned about $9,030 a year and the median new house sold for about $25,200. That is two and three-quarter years of a single income. Today the median household earns about $83,700 and the median new house sells for about $420,000, which is five years of income, and most households now earn it with two people working instead of one. Nine times the money. Less of the house.

Between those two ledgers sits one Sunday evening in August 1971, and a decision almost nobody in the country understood while it was happening. This is not the story of why that decision was made. That story has been told many times. This is the story of the bill it left behind, and of exactly which line on an ordinary household budget that bill lands on.

THE 1971 PAGE

Before anything changed, the rest of the household page looked like this. Gasoline averaged 36 cents a gallon. The interest a bank was legally allowed to pay on an ordinary passbook savings account was capped by a Federal Reserve rule called Regulation Q at 4.50 percent at a commercial bank, 5.00 percent at a savings and loan. Consumer prices rose about 4 percent that year. A household that saved carefully roughly kept pace with inflation, and no better. One earner, in most cases. A house at two and three-quarter times the annual income. Savings that at least held their ground.

AUGUST THE FIFTEENTH

On Friday, August 13, 1971, President Richard Nixon went to Camp David with about fifteen advisers, among them Treasury Secretary John Connally and Federal Reserve Chairman Arthur Burns. Foreign governments held far more dollars than the United States held gold to redeem them with, and the redemptions had begun. On Sunday evening, August 15, at nine o'clock, Nixon went on national television from the Oval Office and announced three things at once. Executive Order 11615 froze wages and prices for ninety days. Proclamation 4074 put a 10 percent surcharge on imports. And he had directed Secretary Connally, he said, to suspend temporarily the convertibility of the dollar into gold. The word temporarily is doing a great deal of work in that sentence. The suspension has now lasted more than fifty years.

WHAT BRETTON WOODS ACTUALLY PROMISED

Before that night the dollar had a fixed definition in gold, thirty-five dollars to the ounce, and every other major currency was pegged to the dollar. That arrangement, built at a New Hampshire resort in 1944, was called Bretton Woods. Ordinary Americans could not walk into a bank and trade dollars for gold; private gold ownership had ended under Executive Order 6102 in April 1933 and was not restored until the last day of 1974. What existed was a promise between governments, and that promise acted as a ceiling. It meant there was an outside limit on how many dollars could ultimately exist, because at some point somebody could ask for the metal. After August 15, there was no such limit.

WHY EVERY REBUILD FAILED

The Smithsonian Agreement that December devalued the dollar to thirty-eight dollars an ounce. A second devaluation followed in February 1973, to forty-two dollars and twenty-two cents. By March the major currencies were simply floating against one another, and the Jamaica Accords, negotiated in Kingston in January 1976, wrote the floating world into the rules of the International Monetary Fund. Every attempt failed for the same reason, and each failure showed up in the same place: the price of a week of groceries.

WHAT THE ORDINARY NUMBERS DID

In August 1971 the Federal Reserve's measure of the nation's money stock, the series economists call M2, stood at about $685 billion. Today that same series is over $23 trillion. Measured by the Consumer Price Index kept by the Bureau of Labor Statistics, one 1971 dollar buys today what about 12 cents bought then, and the price level is roughly eight times what it was the year the gold window closed. In the fifty years before 1971, a stretch that included two world wars and the Great Depression, prices had not done anything close to that.

REDRAW: 1981

Ten years on, median household income had risen to about $19,070, more than double the 1971 figure, which sounds like a decade of triumph until you set the other lines beside it. The median new home sold for about $68,900, so the house that had cost two and three-quarter years of income now cost about three and a half. The mortgage on it carried an interest rate of 18.63 percent in the week of October 9, 1981, the highest in the history of the Freddie Mac survey. And the savings account was still capped near 5.25 percent under Regulation Q while consumer prices, measured December to December, ran above 12 percent in 1974 and above 13 percent in 1979. That is a ceiling on the reward for thrift, set by rule, sitting well below the rate at which money was losing value. A household that did everything right, spent less than it earned, and put the difference in the safest place the system offered, was guaranteed by law to lose ground.

THE FIGURE THAT REFRAMES EVERYTHING

Average hourly earnings for production and non-supervisory workers, which is to say most working Americans, adjusted by the Bureau of Labor Statistics Consumer Price Index, peaked in the early 1970s and by that measure did not durably regain that level until around 2020. Close to half a century. Economists genuinely argue about the right price index for that comparison, and it matters: deflate the same wage series by the Commerce Department's measure instead and the recovery arrives decades sooner.

And yet household income in dollars kept climbing. How? Two lines that barely existed in 1971. The first is the second paycheck. Participation in the paid labor force among married women rose from about 41 percent in 1970 to a peak above 60 percent around the end of the century, so a great deal of what looks like rising household income is not a rising wage at all. It is a second person going to work. The second line is debt. Household debt measured against disposable income went from about 60 percent in 1971 to a peak near 135 percent in 2007, and sits near 90 percent today. A household that could no longer close its budget with one wage closed it with two, and when two were not enough, closed it with credit.

THE DISCIPLINE NEVER LEFT

Nothing about the household changed. In 1975 American households saved about 13 percent of what they took home, according to the Bureau of Economic Analysis. Today they save between 3 and 4 percent. Americans did not get lazy in 1972. What changed is that the system stopped having an outside limit on the quantity of the unit those ledgers were written in. In a system like that, holding money becomes a slowly losing position by default, while holding things that inflation lifts becomes a slowly winning one. The household that already owned assets in 1971 rode that current. The household that was saving up to buy them was swimming against it. Nothing was stolen from anybody. The rules of the game changed direction under the feet of people who had been taught the old ones and were still playing them faithfully.

NO ASSET NAMED HERE

There is a reason so much anger attaches to this particular date. This is not a recommendation of what to hold, what to buy, or what will protect you. There is no asset named here and no advice to give. What the ledger supports is narrower and more useful: a description of the current. After 1971 the American household budget acquired a permanent headwind on its cash line, and the thing that used to be automatic about thrift, that saving carefully would carry you forward, stopped being automatic. That is a statement about mechanics, not morals.

The generation that lived through it was not fooled. They noticed first, because they were the ones keeping the books. A price index is compiled in Washington from thousands of quotes and published with a lag. A ledger is compiled at a kitchen table by somebody who remembers exactly what the same bag of groceries cost in the spring. When the two disagree, the ledger is usually the one that noticed first.

Sources: U.S. Census Bureau (median household income; median sales price of new houses sold); Bureau of Labor Statistics (Consumer Price Index; average hourly earnings for production and non-supervisory workers; Current Population Survey); Bureau of Economic Analysis (personal saving rate); Federal Reserve (M2 money stock, Z.1 financial accounts, Regulation Q, Federal Reserve History); Freddie Mac Primary Mortgage Market Survey; National Archives and the American Presidency Project (Executive Order 11615, Proclamation 4074, and the August 15, 1971 address).

When Money Broke — household budgets, decoded line by line. Website: https://whenmoneybroke.com/ Contact: contact@whenmoneybroke.com