By Jon Hilsenrath
In the fall of 1966, a wave of protests swept the U.S.,
capturing the attention of Washington politicians, big business
leaders and newsroom headline writers. But these Americans weren't
voicing their anger over the war in Vietnam or racial
discrimination. The protests were against rising grocery prices,
and the foot soldiers in what was described as a "housewife revolt"
were largely middle-class women with children. Fed up with the
increasing cost of living, they marched outside of supermarkets
with placards demanding lower prices, sometimes printed in
The picketing started in Denver and swept to other cities,
prompting Time magazine to report that supermarket boycotts were
spreading "like butter on a sizzling griddle." President Lyndon
Johnson's special assistant on consumer affairs egged them on,
urging protesters to "vote with the dollar."
Marches and boycotts over food costs would crop up time and
again over the next decade, aimed at the prices of coffee, meat and
other products. They became a part of the social landscape, like
suburban gasoline lines that stretched for blocks and union pickets
for cost-of-living pay increases. One local women's group, the FLP
("For Lower Prices") of Long Island, New York, had an estimated
membership of 1,500, according to "Politics of the Pantry," a book
by historian Emily Twarog that documents some of the protests.
Today, after decades of nearly invisible inflation in the U.S.,
many Americans have little idea what it looks like. Nearly half of
the U.S. population was born after 1981, the last year of
double-digit consumer price increases. But America's long inflation
holiday shows signs of ending. Consumer prices are now rising
again: The Labor Department's consumer price index rose 5% in May
from a year earlier, the biggest increase in more than a decade.
History provides some useful lessons.
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 until it became embedded in the
psychology of nearly every American. It would take two deep
recessions and new ways of thinking about economics to tame the
inflation of that period.
Today's pickup in consumer prices may not lead to a similar
long-term inflation problem. But it might take some political
courage from the nation's central bank and other policy makers to
make sure it doesn't. Preventing the spread of inflation could also
involve some economic pain.
"The problem is when policy makers are too slow to respond to
their mistakes," said Stephen Cecchetti, a Brandeis University
economics professor who worked in the White House Council of
Economic Advisers in 1979-80. His job was to redesign inflation
measures that didn't properly capture how housing costs were
Inflation had happened before, mostly in wartime. Government
spending ramped up to support the fighting. With a surfeit of money
flowing into banks, businesses and households, and fewer goods to
purchase due to production shortages, prices went up. When war
efforts and the spending to fund them receded, inflation
In May 1917, just after the U.S. entered World War I, the Labor
Department's consumer-price index rose 20% from a year earlier.
After the war ended, it stabilized during the roaring 1920s.
Similarly, the index rose 13% in 1942, after the U.S. entered World
War II, stabilized with government-imposed price controls, then
surged 20% in 1947. The index fell in 1949 and then mostly
stabilized during the 1950s, with the exception of the Korean
The mid-1960s started out looking like the old pattern. Consumer
prices started rising as President Johnson sought to fund the
Vietnam War and his Great Society social programs. But as the war
ground on, so did creeping inflation. "They didn't do anything
about it," Mr. Cecchetti said.
When Richard Nixon entered the White House in 1969, the annual
inflation rate had already risen to 5%, from less than 2% during
the Kennedy administration. What followed was more than a decade of
mismanagement by Republicans, Democrats and a supporting cast at
the Federal Reserve, a critical institution that was supposed to be
President Nixon tried to manage the problem by fiat. When meat
prices soared in 1973, some likened the ensuing consumer boycott to
the Boston Tea Party. The administration imposed price caps on meat
for a second time, and the Treasury Secretary, George Shultz, urged
housewives to try "shopping wisely." It didn't work. Meat prices
increased by 37% in 1973, 22% in 1975, 24% in 1978 and 27% in
"I thought a voluntary restraint program could work," says Barry
Bosworth, a Brookings Institution senior fellow who served as
director of Jimmy Carter's Council on Wage and Price Stability from
1977 to August 1979. "I have to admit it was just a complete
Beneath the surface, a more powerful economic force was exerting
itself at the Fed, which controls the nation's supply of money.
When the central bank pumps money into the financial system, two
things tend to happen. First, the cost of borrowing -- the interest
rate -- goes down, because banks have a lot of money and are
prepared to lend it out cheap. Second, the purchasing power of that
Imagine an economy where people do nothing but produce and
consume oranges; each person, on average, makes one dollar a day
and purchases one orange a day. On a typical day, the orange will
cost around one dollar. If you hold orange production and
consumption steady but put an extra dollar in everyone's bank
account, the only thing that will change is that people will bid up
the price of oranges. The purchasing power of a single dollar drops
as you increase its supply. That's inflation.
President Johnson and then President Nixon badgered the Fed to
keep pumping money into the economy and pushing interest rates
lower, thinking it would drive unemployment down and help their
economic programs and electoral prospects. The Fed often complied,
but the main effect was to drive prices higher.
In 1971, for example, the annual inflation rate was still over
4%. Though it showed signs of slowing, the supply of money in
household bank accounts and bank lending was still growing rapidly.
The Fed raised interest rates early in the year but then abruptly
reversed course and started cutting them late in the summer.
Reelection was on President Nixon's mind, and he was close with Fed
chair Arthur Burns. "I would never bring this beyond this room: My
view is that I would rather have it move a little bit slower now,
so that it can go up and get a real big verve later," Mr. Nixon
told Mr. Burns about his desire for economic growth in one taped
conversation in March 1971.
After the meeting, Burns wrote that his friendship with Nixon
was one of the three most important in his life and he wanted to
keep it that way. He also wrote that he wanted the president to
know "there was never the slightest conflict between my doing what
was right for the economy and my doing what served the political
interests of RN."
Before the rate cuts that year, Nixon's lieutenants threatened
Burns by planting stories in newspapers that the president was
considering stacking the central bank with White House supporters
and also falsely accusing Mr. Burns of seeking a pay raise. In
addition to the threats, they tried to win him over with gifts,
like sunglasses and a jacket from Camp David.
"He really played Burns like a yo-yo," said Jeffrey Garten, a
trade official in the Clinton administration whose forthcoming
book, "Three Days at Camp David," deals with Mr. Nixon's decision
that year to let the value of the dollar float in global markets,
another move that helped to propel inflation.
The value of a dollar relative to other global currencies had
been fixed to the price of gold after World War II. This meant
other central banks could come to the Federal Reserve and exchange
their growing dollar reserves -- built up through their gains in
trade -- for gold at a fixed price. But U.S. gold reserves were
dwindling as trade surpluses disappeared and dollars went overseas.
Fearing the U.S. would run out of gold, Mr. Nixon severed the link
that August, sending the dollar's exchange rate tumbling.
As a result, the price of imported goods doubled over the next
four years. Moreover, because global trade in many goods was priced
in dollars, exporters of commodities like oil also were under
pressure. In October 1973, members of the Organization of the
Petroleum Exporting Countries, or OPEC, squeezed supplies in an oil
embargo targeting the West. It was intended to punish countries
that supported Israel but also had the economic aim of pushing up
the price of oil as its value in dollars fell.
Unrelenting inflation sent the U.S. economy into a game of
leapfrog. Workers demanded pay increases to keep up with the rising
cost of living. Many of them got raises through cost of living
adjustments in union contracts. To keep up with rising costs, in
turn, businesses raised prices even more. Thus grew a relatively
new concept in the economic lexicon, the "wage-price spiral."
Economic relationships fell out of their old patterns. Some
economists had thought that when unemployment rose, inflation would
fall. Instead, both went up, giving rise to yet another new term,
Complicating matters, worker productivity slowed inexplicably,
making it harder for the Fed to read where the economy would go
next. A flood of women into the labor force also made it harder to
decipher a stable rate of unemployment. "Technical errors were
levered into a disaster," said Athanasios Orphanides, a professor
at the MIT Sloan School of Management, who started his career as an
economist at the Fed studying what it did wrong in the 1970s.
By 1979 Arthur Burns was out at the Fed. He would shock an
audience of leading bankers in Belgrade that year with a speech
called "The Anguish of Central Banking," in which he effectively
declared defeat. "It is illusory to expect central banks to put an
end to the inflation that now afflicts the industrial economies,"
he said. The problem wasn't that they were incapable of doing it,
but that politics made it impossible to achieve the goal.
Households had also become almost inured to it. "People have
learned to cope with inflation," one supermarket executive told The
Wall Street Journal in 1978. "They have come to accept price
increases with less antagonism." For millions of people, prices
rose faster than wages, leaving them worse off even though their
pay was going up.
A new leader at the Fed, Paul Volcker, was in the audience for
Mr. Burns's 1979 speech. Tall as a basketball player, with giant
hands and a gravelly voice, Volcker left the Belgrade meeting with
other ideas in mind. The following week, he engineered a dramatic
increase in interest rates that would become known as the Saturday
Night Massacre. Volcker's fight against inflation included
restricting the growth of the money supply, leading to sharply
higher interest rates that helped to end the presidency of the man
who appointed him, Jimmy Carter.
Much of the way that today's economists think about inflation
was shaped by these events. Central bank independence and an
official low inflation target became lodestars for central bankers
around the world, including the Fed. Economists also came to
understand the important role that psychology plays in the monetary
affairs of a nation. If consumers, workers and businesses come to
believe that inflation will worsen, they will bid up prices and
wages in anticipation, fueling the very inflation they loathe.
Central bankers now monitor inflation expectations in surveys and
financial markets for evidence their credibility is intact.
Inflation episodes after World War I and World War II showed
shocks sometimes hit an economy, spurring a temporary spurt in
prices, but then businesses and households get back to a normal way
of operating. Long-term inflation sets in when policy makers,
especially central bankers, lose the will to stop it with
restrictive credit policies that come with a short-term cost in job
losses or recession.
The economy is much different now from what it was in the 1970s.
The dollar floats freely and isn't fixed to the cost of gold. That
diminishes the risk of an abrupt collapse in its value with
international repercussions. Adjustments happen tick by tick on
traders' computer screens almost every minute of every day.
Rising global competition has left today's workers with less
bargaining power, making it harder for them to demand wage
increases in response to inflation. In 1976, six million unionized
workers had automatic cost of living adjustments in their
contracts. By 1995, the number had dropped to 1.2 million, and such
agreements are now rare. Workers thus bear the brunt of inflation,
but wage-price spirals seem less threatening.
In recent years, the memory of inflation in the 1970s has
worried American policy makers less than the specter of Japan's
slow growth and low inflation in the 2000s. Inflation has run below
the Fed's 2% target consistently since 2008-09, prompting Fed
officials to conclude that what the economy really needed was
stimulus. Stagnation has been their focus, not stagflation, which
is why they have worked so assiduously to keep interest rates
Fed officials say recent consumer price increases are
transitory, tied to the Covid-19 crisis. Measures of inflation
expectations are steady. Mr. Bosworth said he suspects policy
makers will ultimately conclude they pumped too much money into the
economy in response to the pandemic. Will we see Americans in the
streets again protesting out-of-control prices? Not if policy
makers heed the lessons of the past.
Write to Jon Hilsenrath at firstname.lastname@example.org
(END) Dow Jones Newswires
June 11, 2021 08:14 ET (12:14 GMT)
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