# Great Inflation The **Great Inflation** is the name economists give to the seventeen years, **1965 to 1982**, in which American inflation climbed from about 1 percent to more than 14 percent and was only broken by two back-to-back recessions. It is the defining monetary episode of the postwar United States: it discredited the [[Keynesian Economics]] consensus, made [[Monetarism]] and later [[Supply-Side Economics]] politically viable, carried [[Ronald Reagan]] into office, and turned [[Central Bank Independence]] from a preference into an article of faith. ## The arc | Phase | What happened | |---|---| | **1965–1969 — guns and butter** | Vietnam and Great Society spending run the economy hot. [[William McChesney Martin]]'s December 1965 hike provokes [[Lyndon B. Johnson]]'s ranch confrontation; the Fed accommodates thereafter and inflation climbs from about 1 percent in 1964 toward 6 by 1969 | | **1970–1973 — the Burns Fed and the broken anchor** | [[Arthur Burns]] takes the chair; [[Richard Nixon]] presses him for easy money before the 1972 election (the tapes are explicit). The [[Nixon Shock]] of August 1971 closes the gold window and begins wage-price controls, which run in three phases to 1974; Bretton Woods collapses between 1971 and 1973 | | **1973–1975 — the first oil shock** | The [[OPEC]] embargo multiplies crude prices; by 1974 unemployment tops 7 percent while inflation runs near 12. [[Gerald Ford]]'s voluntary "Whip Inflation Now" campaign fails | | **1976–1979 — the second wave** | Inflation re-accelerates under [[Jimmy Carter]] and Fed chair [[G. William Miller]], who favored growth over price stability. The [[Iranian Revolution]] brings a second oil shock in 1979 | | **1979–1982 — the break** | [[Paul Volcker]]'s [[Volcker Shock]]: inflation peaks near 15 percent in March 1980; two recessions follow, the second (July 1981–November 1982) pushing unemployment to 10.8 percent; inflation ends the episode under 5 percent | ## Why it happened The Federal Reserve's own history identifies several causes that compounded one another: - **A false trade-off.** Policymakers believed the [[Phillips Curve]] offered a stable menu: permanently lower unemployment in exchange for modestly higher inflation. The trade-off turned out to be temporary; the inflation was not. - **Full employment first.** Burns later claimed that full employment was the first priority "in the minds of the public and the government, if not also at the Federal Reserve." - **No external anchor.** With the gold window closed and fixed exchange rates gone by 1973, nothing outside the Fed restrained money growth. - **Supply shocks.** The 1973–74 and 1979 oil shocks pushed prices up while pushing output down — stagflation, which the prevailing models said could not persist. - **Bad real-time data.** Athanasios Orphanides showed that policymakers substantially overstated the economy's potential output, so they consistently believed policy was tighter than it was. ## Why it matters to this vault **It is the case study every independence argument cites.** The Nixon-Burns tapes are the documentary proof that a president will press for a pre-election boom and that a chair may deliver one; whether Burns acted under pressure or from conviction is, per Burton Abrams, something that "may never be definitively determined." Either way, the inflation arrived after the election. **It made the modern right's economic program possible.** Stagflation broke public confidence in Keynesian demand management and opened the door to the monetarist and supply-side counter-revolution, the [[1980 Presidential Election]], and the [[Reagan Tax Cuts]]. The debate over whether the 1983 recovery came from the tax cuts or from the Fed releasing its brake is still live — see [[Paul Volcker]]. **It is the template for 2021–2026.** Every post-pandemic inflation argument — "transitory" versus entrenched, supply shock versus demand, whether a Fed under presidential pressure can hold the line — is argued in the Great Inflation's vocabulary. See [[Inflation Expectations]] and [[Fiscal Dominance]]. ## See also - [[Interest Rate Policy Timeline]] — Epochs 3–5 cover this period meeting by meeting - [[Volcker Shock]] — how it ended - [[Inflation]] · [[Phillips Curve]] · [[Monetarism]] · [[Central Bank Independence]]