Federal Reserve Chair Paul Volcker (top right) and President Richard Nixon (bottom right) with scenes of inflation from the 1940s and ‘70s. BEN KOTHE FOR THE WALL STREET JOURNAL.

The great late Maya Angelou famously said when speaking about important lessons from the past: “History, despite its wrenching pain, cannot be unlived, but if faced with courage, need not be lived again.” 

Even though, she was not referring to inflation, but to way more important and consequential social issues, the lessons behind her wise words are more relevant than ever before. In times when the word “historical” gets used too often, putting things on perspective and learning from our past has to be the first step we take. There is no denying that the current levels of inflation are high in historical terms, but to react as if our country has not lived through high inflationary cycles would be a mistake. It is normal to feel anxiety as most of us live through these experiences for the first time, but we shall take a step back and learn from how past generations were able to not just live through these cycles, but thrive after them.

The curated article below, published by the Wall Street Journal, does a fantastic job walking the reader through how previous generations handled inflation. The author describes the day-to-day challenges and sacrifices that most Americans experienced.  

We hope you enjoy the read and do not hesitate to reach out to us if we can be of any value. 

Source: How Previous Generations Handled Inflation Crises The Wall Street Journal, July 29th, 2022


How Previous Generations Handled Inflation Crises

Since World War II, the U.S. has experienced three ‘Great Inflations.’ Looking at their causes and effects can help us anticipate what comes next for today’s high-inflation economy.

By David Oshinsky

Inflation is soaring, Wall Street is bearish, the supply chain is clogged. Empty store shelves dominate dinner table conversations. The new president is in hot water, his approval rating at just 30%. A recession seems likely. The year is…1946.

The unease that Americans currently feel about inflation, now at 9.1%, is new to them but would have been familiar to past generations. Inflation in the U.S. has reached the double-digit mark in eight of the 77 years since the end of World War II, forming three distinct clusters: 1946-48, 1974-75 and 1979-81. These clusters provide a window into the past, showing both the threads that connect our era to previous episodes of severe inflation and the factors that set it apart.

The first Great Inflation, in 1946-48, had its roots in the military buildup during World War II.

The first Great Inflation, in 1946-48, had its roots in the military buildup during World War II. The nation’s gross national product doubled between 1940 and 1945, and unemployment, the scourge of the Great Depression, virtually disappeared. In the first half of 1942, the federal government placed close to $100 billion in war orders, requesting more goods than American factories had ever produced in a single year. Seventeen million new jobs were created and wages surged. The problem was no longer finding enough work for people to do but finding enough people for the work to be done.

Americans had never earned such large paychecks, but there was little to buy. Factories refitted their assembly lines to roll out tanks and machine guns instead of automobiles and washing machines. More goods flowing to the war effort meant fewer goods available on the home front, which forced the government to ration everything from food to gasoline while instituting wage and price controls to dampen inflation. The public, profiteers aside, accepted these sacrifices as a patriotic duty. Businesses mostly adhered to the price controls, and labor unions signed a “no-strike” pledge to keep wages in check. The inflation rate dropped from 10.9% in 1942, when price and wage controls began, to 2.3% in 1945.

Then came the deluge—the painful transition from wartime to peacetime. Having put aside an astonishing $140 billion in savings and liquid securities, Americans were ready to spend. Since factories couldn’t switch back instantly to normal production, the demand for consumer goods far outpaced the supply. Under intense pressure from Congress, business groups and organized labor, President Harry Truman allowed the wartime wage and price controls to expire. Prices shot up. The cost of meat doubled in two weeks.

Shoppers protest inflation at a grocery store in St. Louis, 1946. PHOTO: BETTMANN ARCHIVE/GETTY IMAGES
Shoppers protest inflation at a grocery store in St. Louis, 1946.
PHOTO: BETTMANN ARCHIVE/GETTY IMAGES

The 18.1% inflation rate in December 1946 remains one of the highest ever recorded in the U.S. It would take more than a year for it to dip below double digits and for the economy to fully recover.

The Great Inflation of this era might seem like an outlier, given the unique circumstances of war and recovery. It isn’t. The factors most responsible for what transpired—supply chain shocks and the sudden lifting of wage and price controls—would provide a foundation for the inflationary episodes to come.

By 1950, the economy had regained its momentum following bouts of unemployment and recession. Production caught up to demand. A new era of mass consumption emerged, marked by relentless advertising and new forms of credit. Close to 6 million automobiles were manufactured every year in the 1950s, as GM, Ford and Chrysler cleared a once-crowded field of smaller rivals. More cars meant more gasoline sales, more highway construction, more business along the crowded interstates. Housing starts zoomed, due to cheap V.A. mortgages and a Levittown-style approach to building affordable, look-alike, single-family homes.

Double Digits, in Triplicate

Three periods of ‘Great Inflation’ in the U.S. shared a similar rise and fall

graph showing three periods of 'Great Inflation'
*from the month after inflation fell prior to the period of ‘Great Inflation’
Source: Labor Department via St. Louis Fed

While the era saw a dramatic shift from blue-collar to white-collar work and a couple of mild recessions, the inflation rate remained rock-solid, rarely topping 2% until the late 1960s.

The only exception was a brief bump during the early months of the Korean War in 1951, when the fear of rationing set off a national buying frenzy. It would be another 15 years before inflation raised serious concerns, triggered by a second Asian war, this one in Vietnam.

Determined to expand the U.S. war effort without reducing his ambitious Great Society agenda, President Lyndon Johnson refused to raise the tax revenue he needed, fearing that Congress and the voters might turn against him. As government spending increased, the economy heated up and the budget deficit ballooned. Inflation rose slowly but steadily, from 1.3% in 1965 to 5.5% in 1969, by which time the unpopular, demoralized president had returned to private life.

Some historians see the Vietnam War as a trigger for the Great Inflation of the 1970s. Others believe inflation was inevitable, given so many disruptive forces: Watergate, the OPEC oil embargo, global crop failures, Three Mile Island, the revolution in Iran. It was, in the words of a character in the comic strip “Doonesbury,” “a kidney stone of a decade.”

The 1970s began with Richard Nixon, a self-described fiscal conservative, at the helm. Bored by economic issues, he left them to his advisers, including Arthur Burns, John Connolly, George Shultz, Herbert Stein and Paul Volcker. What did concern Nixon were the political consequences of bad economic news.

It was an article of faith at the time that an inverse relationship existed between inflation and unemployment—the so-called Phillips curve. High inflation was associated with low unemployment, and vice versa. Democrats since Franklin Roosevelt had viewed unemployment as the more serious problem, while Republicans saw inflation as public enemy number one. But the latest figures showed something odd: Unemployment and inflation were rising in tandem, the former reaching 6.1% in August 1970 while the latter stood at 5.8%. Economists called it “stagflation.”

Nixon’s advisers charted a new course. The president was already on record opposing mandatory wage and price controls as un-American. Yet in 1971, he went on television to tell the country that he was imposing a 90-day freeze on wages and prices for the first time since World War II. Nixon’s speech that evening also included a policy change of far greater importance: The U.S. was abandoning the Bretton Woods financial system that had pegged the world’s major currencies to the U.S. dollar, convertible to gold at $35 an ounce. But news of the freeze, being easier to understand, dominated the headlines.

Inflation did drop just in time for the 1972 presidential election, which Nixon won in a landslide. The White House quickly phased out the mandatory controls, then reimposed them, before ending them for good in 1974. Amid the confusion, ranchers and farmers hesitated to send their beef and produce to market, leading wary shoppers to pick grocery stores clean. With Watergate now consuming the president and world events undermining an already shaky economy, the nation entered an inflationary phase unlike any it had seen since 1946-48.

The first Great Inflation had been triggered by supply chain shocks and compounded by the lifting of wage and price controls. So was the second Great Inflation. The distinguished economist Alan Blinder summarized the reasons in three words: food, energy and decontrol. “These three shocks alone,” he wrote, “can account for all of the acceleration and deceleration of inflation in that period.”

National prosperity had long rested on a supply of cheap and plentiful oil, increasingly from the Middle East. In 1973, Arab members of OPEC slapped a full oil embargo on the U.S. to punish it for supporting Israel during the Yom Kippur War. The price per barrel quadrupled, leaving few short-term options for the Nixon White House beyond diplomacy and conservation. It reduced the highway speed limit to 55 miles per hour, lowered thermostats in government offices, approved daylight-saving time in winter and eased environmental restrictions on coal mining. Across the nation businesses closed early, families dimmed their Christmas lights, and northern colleges canceled their winter sessions. Not even those who had lived through the first Great Inflation could recall having to wait in line for hours at the filling station, hoping some gas would still be left when they reached the pump.

At the same time, food prices were rising to crazy heights. A combination of drought and mismanagement in the Soviet Union led to a grain shortfall of 36 million tons in the early 1970s, and Washington had signed a trade deal that allowed the Russians to buy millions of tons of American wheat on credit, at below-market prices, which contributed to severe shortages in the U.S.

President Gerald Ford assumed office in 1974 without a popular mandate, after Nixon resigned over Watergate. He faced a level of stagflation so high that the combined inflation and unemployment rates, christened the “misery index,” hit an alarming 18%. Addressing his first joint session of Congress in 1975, he minced no words. “I want to speak very bluntly,” he said. “Millions of Americans are out of work. Recession and inflation are eroding the money of millions more. Prices are too high, and sales are too low…The state of the Union is not good.”

While holding OPEC largely responsible, Ford spoke of American complacency as well. “We, the United States, are not blameless,” he declared. “Our growing dependence upon foreign sources [of oil] has been adding to our vulnerability for years and years, and we did nothing to prepare ourselves for such an event as the embargo of 1973.”

A foe of government overreach, Ford believed that unbalanced budgets and expensive entitlement programs had fueled the second Great Inflation by causing excess demand. Vetoing more than 60 spending bills during his brief tenure, he led a widely mocked citizens’ campaign to lower prices called “Whip Inflation Now.”

A viewer watches President Jimmy Carter’s televised ‘malaise’ speech, July 1979. PHOTO: ASSOCIATED PRESS
A viewer watches President Jimmy Carter’s televised ‘malaise’ speech, July 1979.
PHOTO: ASSOCIATED PRESS

His successor Jimmy Carter fared no better. Like Nixon and Ford, he fell victim to a massive oil shock when the 1979 revolution in Iran triggered the third Great Inflation. With the misery index approaching 22%, Carter spent two weeks at Camp David trying to make sense of it all. The time away convinced him that Americans faced “a moral and spiritual” crisis more serious than any misery index could measure.

Being Jimmy Carter, he felt duty-bound to share this view with the nation. “There is a growing disrespect for government and for churches and for schools, the media and other institutions,” he declared upon returning to the White House. “Too many of us tend to worship self-indulgence and consumption…. This is not a message of happiness or reassurance, but it is the truth and it is a warning.”

Known as the “malaise” speech (though the word doesn’t appear), it is seen today, perhaps unfairly, as an attempt by a wounded president to shift the blame from himself to others. Chaos followed, as Carter quickly fired half his cabinet and several top officials. Among the replacements was a new Federal Reserve Chair, Paul Volcker.

Previous presidents, including Kennedy and especially Johnson, had pressured the Fed, often successfully, to push faster economic growth through low interest rates and a loose money supply. Nixon, working with Fed Chair Arthur Burns, had used temporary wage and price controls to kick the can down the road. Volcker’s selection was controversial. Carter’s confidants thought him too conservative, and they feared, correctly, that Carter would be mortgaging his future to the Fed.

Short-term interest rates in the early 1980s hit 20%, a figure normally seen as usury.

Serving briefly under Carter and then for eight years under President Ronald Reagan, Volcker led a single-minded campaign to subdue inflation, using interest rates as his cudgel. The higher they went, the greater the pain. Short-term rates in the early 1980s hit 20%, a figure normally seen as usury. Unemployment rose, followed by two deep recessions, but inflation dropped from 13.5% in 1980 to 3.2% in 1983.

Today, with consumer prices rising at their fastest pace in four decades, led by food and gasoline, it’s tempting to see another Great Inflation on the way. But 2022 is not 1946 or 1973 or 1980.

The Federal Reserve is a much different institution today, thanks in large part to Volcker. It has a mandate to raise interest rates to slow down the economy, and this week’s second consecutive, unusually large rate hike signals its determination to keep inflation in check. More are likely to follow. As for the specter of stagflation, the jobless rate has remained low and steady at 3.6%, though rising interest rates could change that.

The U.S. still isn’t energy independent, but it has become the world’s largest producer of petroleum and natural gas and a net energy exporter—a dramatic turnabout from its days as a baffled hostage to OPEC. With about 40% of America’s electricity now generated by nuclear power and renewable sources, the game has changed.

The current economic picture is certainly gloomy. This week it was announced that GDP had dropped for a second consecutive quarter, the common definition of a recession. But we are far from the worst economic woes of the past. If our policy makers are both lucky and wise, we may yet avoid adding another chapter to the unsettling story of America’s Great Inflations.

Prof. Oshinsky is a member of the history department at New York University and director of the Division of Medical Humanities at NYU Langone Health. His book, “Polio: An American Story,” won the 2006 Pulitzer Prize for history.

Source photographs for illustration: Associated Press (3); Gerald R. Ford Presidential Library and Museum; Getty Images (6); Library of Congress; Shutterstock (3)

Appeared in the July 30, 2022, print edition as ‘How Previous Generations Handled Inflation Crises America’s History of Great Inflations’.

Source: How Previous Generations Handled Inflation Crises The Wall Street Journal, July 29th, 2022

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