EDITOR NOTE: The narrative goes that inflation began heating up in the 1960s, went into overdrive in the 1970s, and that by the end of the decade, then-Fed chair Paul Volcker stepped in, decided that enough was enough, and pulled out the big guns, raising interest rates to such a degree that it killed the inflationary surge once and for all, at least until now. Today’s Fed, and most of the financial pundits who are virtually “writing off” our present-day inflation, have confidence that all the Fed needs to do is to repeat Volcker’s actions as an answer to 1970's inflation; that it’s a simple solution. But what if the Fed’s role in putting inflation back into the proverbial bottle was misrepresented? What if it’s all a big lie? That’s what the author below is arguing in this first installment of a 2-part piece. If the Fed had little to do with curing the inflationary mess we experienced in the 1970s, then the current Fed’s assumptions that it can do the same may put us all in a precarious situation.
In the field of economics, any narrative overly vague, poorly defined, or which cannot be substantiated is probably untrue. The current narrative garnering ever increasing media attention goes something like this:
“Inflation was extremely high in the 1970’s so the Fed raised rates and controlled inflation.”
Specifically, they credit the Fed with taking action which supposedly reigned in or defeated (price) inflation. Like all urban legends, the story changes depending on who tells it. According to Federal Reserve Chair Jerome Powell, in a letter to a US Senator, he wrote:
We understand well the lessons of the high inflation experience in the 1960s and 1970s, and the burdens that experience created for all Americans. We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise.
Powell, who was 17 years old in 1970, includes the 1960’s in the high inflation experience, noting (price) inflation was both high and burdensome. The lessons learned are not specified, but he’s referring to Fed intervention, which, as the story goes, includes raising interest rates.
Nobel Prize winning economist Paul Krugman of the New York Times also has a take. Just last week he said:
This doesn’t look at all like 1970s stagflation redux; it looks like a temporary blip, reflecting transitory disruptions…
Unfortunately, he too refers to an entire decade, while also managing to include the word “transitory,” or the notion that price surges are acceptable if they occur over a short period of time. Of course, this forgets that without an offsetting transitory “deflation,” all increases to prices remain permanent.
Financial services firm Charles Schwab also recently weighed in:
With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation.
The author goes on to say that it was in the late 60’s and into the 70’s the Fed “let” inflation rise, until 1979 when newly appointed Fed Chair Paul Volcker made the “move to squash inflation.” According to legend, the Fed increased rates until the effective federal funds rate hit an all-time high of over 19% in 1981, and this is what helped to put inflation back into the bottle.
When asked if we should be nervous over the prospects of inflation, Federal Reserve Bank President, Neel Kashkari told CBS:
Right now, I'm not concerned about a repeat of the 1970s.
It’s not only America who remembers how bad things were 50 years ago. The Government of Canada’s wholly owned news channel, the CBC suggests to:
find someone, maybe a grandparent, who witnessed the onset of serious inflation in the 1970s and 1980s…
Should someone be lucky enough to have a 71 year-old grandparent who can remember the price of a View-Master, a typewriter or what they called a “Wall Telephone,” in short order it will be clear prices on goods and services of that era are difficult to discern. Technological changes, wages, and shifts in consumer preferences are just some of the problems encountered when trying to compare life then versus now.
Even if the price of more relatable items like tuition or automobiles can be recalled, it would require some calculation, like the purchasing power of the dollar, to understand the experience of the 70’s; that doesn’t take into consideration inherent problems such as bias and data gathering. Unless grandpa lived an “average” life, which adequately represented the nation’s experience as a whole, conveying the difficulties of the decade will prove to be an onerous, if not impossible task, whether anecdotal or statistical methods are applied.
The exact time frame of the inflation also remains elusive and dependent on one’s perception of the experience. Yet, despite pointing out the difficulties in trying to conceptualize how unbearable the inflation era was, that is not what is in dispute. We can accept the narrative that throughout the 70’s, most prices increased year over year in unimaginable ways, caused by countless factors, including an oil crisis. The topic of dispute is the Fed’s response to said crisis. We’ve been told it was the Fed’s diligent action of raising rates to all-time highs which alleviated the burden of inflation. Herein lies the problem.
Fortunately, we can use the Fed’s own data to see how they fought inflation, right? Surely they should be able to substantiate this claim. Now more than ever this becomes of paramount importance as more experts allude to a possible repeat of 70’s inflation; they will undoubtedly look to repeat the supposed solution. This is problematic because few seem to know how the Fed actually solved the crisis.
Originally posted on Mises Institute