Early in his Presidency, Carter stated that his administration would seek to stay in touch with the American people to avoid future Watergates. He indicated that he would be a strong supporter of human rights around the world. During 1977 the economy continued to improve, but more slowly than predicted. Legislation passed by Congress included bills to create jobs and to establish a new cabinet-level department, the Department of Energy.

The economic recovery continued into 1978, but inflation was increasingly a problem and undermined the stability of the dollar in foreign money markets. Discontent with rising prices was demonstrated by demands for cuts in taxes and limits on government spending. President Carter's legislative program stalled in Congress during the year, and his popularity in public-opinion polls dropped sharply as voters questioned his leadership. Although there were no major international crises, both Americans and allies of the United States were concerned about the rapid growth of Soviet power and influence, and some questioned whether the Carter administration was responding adequately to this threat.

During 1978 the United States made three historic foreign-policy initiatives. In April the Senate approved a treaty giving Panama control of the Panama Canal (on December 31, 1999) and of the Canal Zone (which was turned over to Panama on October 1, 1979). In September President Carter met with Egyptian president Anwar Sadat and Israeli prime minister Menachem Begin and helped to bring about an agreement on a peaceful solution to the problems between these longtime Middle East antagonists. (A peace treaty was signed six months later.) In December the United States government announced that it would open normal diplomatic relations with the People's Republic of China on January 1, 1979. Two important Supreme Court rulings that would have far-reaching effects on the economic prospects of blacks, other minorities, and women were handed down in 1978 and 1979. In these cases the Court gave approval to the principle of affirmative action—giving preferential treatment to victims of past discrimination—in education (Regents of the University of California v. Bakke) and in employment (Kaiser Aluminum & Chemical Corporation v. Weber).

Economic problems worsened in 1979 as the rate of inflation increased and a period of recession began. High gasoline prices and gasoline shortages produced an energy crisis. Adding to the nation's energy problems was a near disaster at the nuclear power plant at Three Mile Island in Pennsylvania in early 1979, which brought into question the future of nuclear energy. Legislation enacted by Congress in 1979 included a law creating a new executive department, the Department of Education, which began operation in 1980. The Department of Health, Education and Welfare, which lost its educational functions, became the Department of Health and Human Services.

Iranian Hostage Crisis

In November, 1979, Iranian militants seized the American embassy in Tehran, Iran, and took its personnel hostage. They demanded that the deposed shah of Iran, who was in the United States for medical treatment, be forced to return to Iran. The United States was unsuccessful in seeking release of the hostages in negotiations with the Iranian government. In April, 1980, an American commando raid was aborted before an attempt could be made to free the hostages.

1980 Presidential Election

In 1980 the nation faced both continued inflation and a recession with its resultant high unemployment. President Carter's popularity continued to decline and he was challenged—although unsuccessfully—for the Democratic Presidential nomination by Senator Edward M. Kennedy of Massachusetts.Ronald Reagan, former governor of California, was nominated by the Republicans. The election campaign was marked by little voter enthusiasm for either major party candidate or for Representative John B. Anderson of Illinois, who ran as an independent. Nevertheless, Reagan won by a landslide in electoral votes.