Robert J. Samuelson, an economics columnist for Newsweek and the Washington Post, says historians have not understood the significance of the “Great Inflation” that raged through the economy in the late 1970s and early 1980s. It was, he argues in The Great Inflation and Its Aftermath, one of those watershed moments in American history, not at the level of the Civil War or the Great Depression, to be sure, but perhaps the major turning point of the postwar era.
In 1976, the Consumer Price Index rose by 4.9 percent; over the next few years it climbed steadily until it reached double digits, 13.3 percent in 1979 and 12.5 percent in 1980. And with these rising prices, productivity declined, standards of living fell, investors fled the stock market, debt crises followed one upon another. Almost everyone was affected, and not just in their wallets and bank accounts.
As he writes, “The economy’ is also a social, political and psychological process,” and the Great Inflation, he explains, did real damage to the American psyche, engendering a feeling of hopelessness, causing citizens to lose confidence in their political and economic institutions. An inflationary psychology took hold, creating a self-fulfilling prophecy as wages chased prices in an ever more destructive cycle. “In all of American history,” Samuelson writes, “this inflation had no comparable precedent.”
And who was to blame for this unparalleled disruption, this system-threatening state of affairs? According to Samuelson, we all were. Pogo Possum said, “We have met the enemy and he is us.” Samuelson says so too.
His tale of culpability begins at the end of World War II. With the Depression a recent memory, Americans entered peacetime worried above all about the return of widespread joblessness. In 1947, US President Harry S. Truman declared, “The job today is to see to it that America is not ravaged by recurring depressions and long periods of unemployment.” Dwight D. Eisenhower agreed. But it was under John F. Kennedy that the nation ambitiously shifted from fighting unemployment to promoting “full employment.”
Armed with the tools of Keynesianism, Kennedy’s team of economic advisers believed they could fine-tune the economy, controlling business cycles and eliminating the possibility of recession. Lyndon B. Johnson, Richard M. Nixon and Jimmy Carter all went along with the new thinking, as did the economists at the Federal Reserve, whose easy-money policies abetted the politicians’ full-employment aspirations. A bipartisan consensus had been achieved. But, Samuelson says, the consensus was wrong. “Wishful thinking” had triumphed over reality.
Reality came in the form of inflationary pressures. Beginning in the mid-1960s policies intended to promote full employment — tax cuts, budget deficits, low interest rates, easy credit — were pushing prices up. US Presidents, both Democratic and Republican, chose to ignore the warning signs, or to administer weak palliatives until it was too late. Once the inflationary mentality set in, only the harshest medicine would work. Inflation had to be wrung out of the economy. The costs would be high.
At this point, Samuelson’s story enters its heroic phase: Ronald Reagan and Paul Volcker stepped onto the stage and seized control of history. As chairman of the Federal Reserve, Volcker proceeded to fight inflation with stern determination, tightening money and credit and dragging the economy into what Samuelson calls “the most punishing slump since the 1930s.” Unemployment climbed to 10.8 percent (still a postwar high), and everyone screamed. US Senator Howard Baker, the Republican majority leader, called for the Fed to “get its boot off the neck of the economy”; others demanded Volcker’s head, or at least his resignation. But his medicine broke the inflationary fever by the mid-1980s, and prices stabilized.
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