Wall Street Journal Remembers the Great Inflation

By: Robert Aro

The Wall Street Journal (WSJ) joined the chorus of headlines about rising prices by recounting price inflation with the article: When Americans Took to the Street Over Inflation, warning readers:

Today, after decades of nearly invisible inflation in the U.S., many Americans have little idea what it looks like… But America’s long inflation holiday shows signs of ending…

Ringing the alarm after the Labor Department’s Consumer Price Index (CPI) reading showed 5% in May, the author tells us:

History provides some useful lessons.

This is precisely the problem. How can any supposed solution of the 1970’s be applied to today?

The author begins the narrative:

The nagging inflation of the late 1960s and 1970s didn’t happen overnight. It took root over years, building through a cascade of policy missteps and misfortunes… It would take two deep recessions and new ways of thinking about economics to tame the inflation of that period.

Going back to as early as 1966, protests began to sweep the nation:

Fed up with the increasing cost of living, they marched outside of supermarkets with placards demanding lower prices…

Ironically, the CPI data illustrates the limitation of trying to understand price increases through the use of CPI data. Per the chart below, the mid-1960’s rise in the index doesn’t look anymore remarkable than the periods before:

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The stated resolution of this inflation problem is the concerning point. It took two recessions and new economic ideas to somehow “tame” inflation.

This alleged taming remains stated but not proven. Suspension of belief is required to accept (price) inflation was defeated without prices ever decreasing. Two recessions being the cure is a grandiose claim! However, it’s difficult to disprove, as this commonly accepted thesis cannot be proven to begin with. Like a nod to Keynes himself, victory is declared through the declaration of victory itself.

Tidbits of history are provided, explaining various government failures in fighting price increases. There was LBJ’s Vietnam War effort and “Great Society” social programs which did nothing to lower prices. Nixon severed the international exchange of dollars for gold and the USD exchange rate went tumbling, while he also imposed price caps on meat. His administration famously urged housewives to try “shopping wisely.” Jimmy Carter had the Council on Wage and Price Stability, described by one director of the program as a “complete failure.”

The Fed gave into government, acquiescing to LBJ and Nixon’s urges to keep pumping money into the system to maintain low rates obliterating the strength of the dollar. As for mainstream economists, their models of the Phillips-Curve proved disastrous:

Some economists had thought that when unemployment rose, inflation would fall. Instead, both went up, giving rise to yet another new term, “stagflation.”

And to no surprise, women took some blame for the various missteps:

A flood of women into the labor force also made it harder to decipher a stable rate of unemployment. 

Perhaps when “too many” women go to work it ruins the Fed’s predictive models?

Last but not least, Fed Chair (1979-1987) Paul Volcker continues to play the role of hero, the Chair who raised interest rates and, per the author, restricted growth of the money supply. How higher rates fixed the problem is peculiar. The restrictive money supply idea is curious as well. The M2 Money supply from 1960 to 2000 table below shows that under Volker, the money supply saw a steeper increase than the decades before, never decreasing.

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We should learn from the past. But this becomes difficult when the method in which these problems were resolved was never made clear. Between government, the Fed and economists, it seems no one had an adequate solution, save for the legend of Paul Volker who apparently fought inflation. At least that is the prevailing story.

Few people want to say the obvious, that the Fed did nothing to stop price increases; society simply managed to live through hardship caused by government and central planners. Unfortunately, the most honest and consistent pattern over the decades is perpetual decline of the dollar, unaffordability of life for the masses, and ever-increasing debt levels showing no signs of letting up anytime soon. Society continues to not be capable of “taming” inflation as much as simply finding ways to “live through” inflation, made easier when we ascribe great feats to leaders said to have carried us through such trying times. 

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