In 1945 the United States emerged from a world war with the only intact industrial economy in the world. The British, European, Soviet, and Japanese economies were in ruins. China and the rest of Asia, Africa, and South America had undeveloped economies, later renamed third world economies. Additionally, the US held most of the worldâ€™s gold reserves. President Franklin D. Roosevelt had used WW II to destroy Britainâ€™s control of international trade and the British pound as the world reserve currency. The US forced breakup of the British system of trade preferences and the coerced Bretton Woods Agreement gave those roles to the United States.
Four years of war production gave the US a large, disciplined, and skilled work force, and war time consumer shortages provided enormous pent-up consumer demand to drive the postwar economyâ€™s growth. Jobs were plentiful, and US real income rose strongly in the 1950s and into the 1960s.
But then things started to go wrong. President Johnsonâ€™s program of â€œguns and butterâ€ ( the Vietnam War and â€œGreat Societyâ€ welfare spending) resulted in a proliferation of US dollars that eventually forced President Nixon to close the gold window and terminate the right of foreign central banks to redeem their holdings of US dollars for gold. Additionally, the Keynesian demand management macroeconomic policy began breaking down. High marginal income tax rates resulted in weaker supply increases to increases in aggregate demand. Expansionary monetary policy pushed up consumer demand, but high tax rates curtailed supply response,