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When Americans Took to the Streets Over Inflation -2-

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 low.

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


(END) Dow Jones Newswires

June 11, 2021 08:14 ET (12:14 GMT)

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