Inflation in the 1970’s

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It's the 1970s, and the stock market is a mess. It has lost nearly 50% over a 20-month period, and for close to a decade few people want anything to do with stocks.1? Economic growth is weak, which results in rising unemployment that eventually reaches double-digits.

The easy-money policies of the American central bank—designed to generate full employment by the early 1970s—also resulted in high inflation.4? 5? The central bank (once under different leadership) would later reverse its policies, raising interest rates to some 20%—a number once considered usurious.6? For interest-sensitive industries, such as housing and cars, rising interest rates cause a calamity. With interest rates skyrocketing, many people are priced out of new cars and homes.

KEY TAKEAWAYS
Periods of rapid inflation occur when the prices of goods and services in an economy suddenly rise, eroding the purchasing power of savings.
The 1970s saw some of the highest rates of inflation in the United States in recent history, with interest rates rising in turn to nearly 20%.

Central bank policy, the abandonment of the gold window, Keynesian economic policy, and market psychology all contributed to this decade of high inflation.

The great inflation was blamed on oil prices, currency speculators, greedy businessmen, and avaricious union leaders. However, it is clear that monetary policies, which financed massive budget deficits and were supported by political leaders, were the cause.

Interest Rate Casualties
This is the gruesome story of the great inflation of the 1970s, which began in late 1972 and didn't end until the early 1980s.8? In his book, "Stocks for the Long Run: A Guide for Long-Term Growth" (1994), Wharton professor Jeremy Siegel, called it "the greatest failure of American macroeconomic policy in the postwar period."

This mess was proof of what Milton Friedman said in his book, Money Mischief: Episodes in Monetary History: Inflation is always "a monetary phenomenon."

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The Bottom Line
It would take another Fed chairman and a brutal policy of tight money—including the acceptance of a recession—before inflation would return to low single digits.25? But, in the meantime, the U.S. would endure jobless numbers that exceeded 10%.3? Millions of Americans were angry by the late 1970s and early 1980s.

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