America’sOnlyPeacetimeInflationThe1970s.pdfVIP

America’s Only Peacetime Inflation: The 1970s J. Bradford De Long University of California at Berkeley and National Bureau of Economic Research December 19, 1995 In a world organized in accordance with Keynes’ specifications, there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead... —Jacob Viner (1936) I know there’s the myth of the autonomous Fed... [short laugh] and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you. —Richard Nixon to Arthur Burns (see Ehrlichman (1982)) Abstract The 1970s were America’s only peacetime inflation: the only time when uncertainty about prices made every business decision a speculation on monetary policy. In magnitude, the total increase in the price level as a result of the sustained spurt in peacetime inflation to the five-to-ten percent per year range in the 1970s was as large as the jumps in the price level as a result of the major wars of this century. The truest cause of the 1970s inflation was the shadow of the Great Depression. The memory of the Depression created a predisposition on the left and center of political opinion that any unemployment rate was too high, and eliminated whatever mandate the Federal Reserve might have had for controlling inflation by risking high unemployment. The Federal Reserve gained a mandate to control inflation at the risk of unemployment du