1970s Inflation Runs Amok and Then Is Beaten

Who Stopped It?
By Gregory Bresiger
Gregory Bresiger
Gregory Bresiger
Freelance Reporter
Gregory Bresiger writes about business and personal finance. He is a former New York Post business reporter.
November 22, 2021 Updated: November 28, 2021

News Analysis

In 1970, inflation wasn’t excessive, but it was becoming a problem. It worried many Americans, including those facing reelection in 1972. The annual inflation rate in the United States was only 5.7 percent, according to the U.S. Bureau of Labor Statistics, and the prime interest rate had climbed to 8 percent, the Federal Reserve Board reported.

Worse was about to happen. Fiscal and monetary policies hurt the country, including low interest rates later raised along with big deficits to pay for welfare programs and the Vietnam War, according to several economists.

The nation was about to be upended, as was almost every welfare state society around the globe. Governments such as the Carter and Ford presidencies in the United States and the Callaghan ministry in the United Kingdom were toppled, as were central bankers. They lost power partly because inflation was hurting millions.

How did it happen? How did it end?

In part, it was the story of two Federal Reserve Board chairmen. Arthur Burns was named by President Richard Nixon in late 1969. He told Burns to keep interest rates low to ensure strong employment even though Nixon knew this could cause inflation.

It’s also the story of Chairman Paul Volcker, named by President Jimmy Carter in 1978 amid the nation’s worst outbreak of peacetime inflation.

In the case of Burns, Nixon and his adviser John Ehrlichman insisted on low interest rates.

Nixon told Burns, “We’ll take inflation, if necessary, but we can’t take unemployment,” according to William Greider’s book, “Secrets of the Temple.”

“I know,” Nixon wrote Burns in 1970, “there’s the myth of the autonomous Fed … [short laugh], and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you,” wrote Bradford DeLong in “America’s Peacetime Inflation: the 1970s.”

DeLong and other scholars writing about this period could classify Nixon’s economic thinking as fighting the last war.

Nixon became so obsessed with the massive unemployment of the 1930s that he ignored the main problem of the 1960s and 1970s. Nixon, who hardly mentions these economic issues in his memoirs, lost the inflation war. However, he won the immediate battle, the election of 1972. Nixon was reelected in part because the economy seemed strong.

But after the election, problems began.

“The 1970s was the decade of inflation in the United States,” writes economist Alan S. Blinder in a National Bureau of Economic Research report, “The Anatomy of Double-Digit Inflation in the 1970s.”

Blinder wrote that “the average annual inflation rate for the decade was 6.8%,” which, he noted, was “double the long-run historical average and nearly triple the rate of the previous two decades.”

We “were plagued by extremely variable inflation rates during the 1970s,” he wrote.

The price of money eventually had to reflect that. The prime rate reached a record level at 21.5 percent on Dec. 19, 1980, the Fed reported.

By the end of the 1970s, annual inflation in the United States increased to 13.5 percent.

The inflation problem was partly aggravated by the rising price of imported oil. Arab leaders, holding billions of petrodollars, were angered by the devaluing of the U.S. dollar, which happened when the U.S. could no longer maintain the gold standard.

Suddenly, in the mid-1970s, interest rates shot up.

Inflation and expensive money were shocking. Workers, businesses, and investors were hurt in interest-sensitive industries such as housing and cars.

However, problems went beyond the business world. By the late ’70s, millions of elderly Americans who thought they had a comfortable retirement no longer did.

After much economic hardship, solutions were found and inflation rates eventually became unimportant. But for about a decade, the nation lived with the trauma of quickly rising prices.

“To put it mildly, the public was growing restive,” Volcker wrote in a memoir, “Keeping at It: The Quest for Sound Money and Good Government.”

Some of Volcker’s predecessors would also become restive. In 1978, in the midst of a tremendous inflation problem, Burns wasn’t reappointed by Carter. Later, Burns addressed the woes of inflation in a speech entitled “The Anguish of Central Banking.”

Burns declared “that the persistent inflation that plagues the industrial democracies will not be vanquished—or even substantially curbed—until new currents of political thought create a political environment in which the difficult adjustments required to end inflation can be undertaken.”

This wouldn’t be the last time a Fed chairman would concede that some of his money policies had failed. In Alan Greenspan’s memoir, “The Age of Turbulence,” he conceded that easy money for housing, a federal policy of trying to get everyone a house in America by making loan requirements soft, was dangerous.

“I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk, and that subsidized homeownership initiatives could distort market outcomes,” Greenspan wrote.

The economy went into recession in 2008. Volcker, in his memoir, also said Janet Yellen, now Treasury Secretary and then-president of the San Francisco Fed, missed the brewing sub-prime loan dangers.

When, after the Nixon/Burns market-distorting money policies, governments and central bankers supported strong anti-inflationary monetary policies, historians say high inflation rates were brought under control for decades.

But before that, Volcker, who was appointed in 1978, was the object of criticism and even death threats. That’s because he administered a bitter pill: He allowed a recession to continue by doing the opposite of his Burns/Nixon predecessors: Tight money. Volcker drastically raised interest rates to over 20 percent, an unheard-of number.

Volcker, appointed by President Carter, wrote that “the Fed would have to deal head-on with inflation; and I would advocate tighter policies.”

Volcker, across two administrations, Carter and Reagan, insisted on sticking to it. Volcker said President Ronald Reagan was urged by staff to criticize these tight money policies, but resisted.

Reagan, Volcker wrote, “once explained that a professor at his small college in Illinois had impressed upon him the dangers of inflation.”

Mark Thornton, an economist with the Mises Institute in Auburn, Alabama, told The Epoch Times that initially there was a lot of confusion about the source of high inflation rates.

“I grew up with inflation in the 1970s and we heard a lot of myths that it was a lot of middlemen overcharging for oil and Arabs that caused the problems,” Thornton said. “The fact is it was the massive deficits to pay for social and war programs and the pressures put on the Fed to pay for these programs. The Fed kept interest rates artificially low, and we ended up with high inflation and high interest rates as well.”

Thornton didn’t agree with all Volcker’s policies but says his anti-inflation policies were correct. “He brought interest rates more in line with the market,” Thornton said.

By 1991, U.S interest rates dropped to the 5 to 6 percent level, and two years later, they were almost half of that, at 3.03 percent. Volcker, by the 1990s, was applauded. He made a speech, “The Triumph of Central Banking.”

By 1990, the inflation rate was down to 5.4 percent, which was still high for some, but much better than the 13.5 percent of 1980. In 2000, inflation dropped to 3.4 percent. And by 2010, inflation, at 1.6 percent, was no longer an issue. Last year, it dropped to 1.2 percent.

Still, today some fret that the value of their dollars, their standard of living, could decline. The U.S. Bureau of Labor Statistics, at the end of October, reported an annual inflation rate of 6.2 percent. That number, the highest in decades, is close to the 1970 rate of 5.8 percent.

Some in Congress ask: Will central bankers and political leaders fail again as they did in the 1970s?

Federal Reserve Chairman Jerome Powell insists the Fed understands the 1970s. He implicitly recognizes how destructive cheap money was.

“We understand well the lessons of the high inflation experience in the 1960s and 1970s, and the burdens that experience created for all Americans,” Powell wrote in a recent letter to U.S. Sen. Rick Scott (R-Fla.), who is concerned about a repeat of the 1970s. “We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise.”

The ideal monetary policy, according to Fed policy, is to promote growth with two percent or less annual inflation.

Still, monetary historian Milton Friedman, who, along with economist Anna Schwarz, wrote in “A Monetary History of the United States, 1867-1960,” that the Fed prolonged the Great Depression by its blundering. They warned in the book that inflation is as dangerous as a drug. And, like a drug, it can destroy.

“A little inflation will provide a boost at first—like a small dose of a drug for a new addict,” according to “Milton Friedman, a Guide to His Economic Thought” by Eamon Butler. “But it takes more and more inflation to provide the boost, just as it takes a bigger and bigger dose of a drug to give a hardened addict a high.”

Gregory Bresiger
Freelance Reporter
Gregory Bresiger writes about business and personal finance. He is a former New York Post business reporter.