Summary
Comprehensive essay from the Federal Reserve History project tracing the Great Inflation of 1965–1982 — “the greatest failure of American macroeconomic policy in the postwar period.” The essay covers the economic theories that enabled the inflation (Phillips curve exploitation), the institutional failures (Burns-era Fed, Bretton Woods collapse), and the energy shocks that compounded the problem. It ends with Volcker’s conquest and the shift to inflation targeting.
Key Points
- Inflation measured ~1% in 1964; reached 14%+ by 1980; the entire episode lasted nearly two decades
- Root cause: excessive growth in money supply — Federal Reserve policies
- Three structural causes: (1) flawed Phillips curve economics encouraging low-unemployment pursuit; (2) Bretton Woods collapse removing dollar’s gold anchor (Nixon Shock, 1971); (3) fiscal imbalances, energy shocks (1973 Arab embargo, 1979 Iranian revolution), and bad data
- Burns argued full employment was the “first priority in the minds of the public and government” — and the Fed accommodated fiscal deficits rather than fighting inflation
- Nixon’s wage and price controls (1971–1974) temporarily suppressed prices while exacerbating shortages; Ford’s “Whip Inflation Now” (WIN) was a failure
- Volcker took over August 1979 with inflation above 11%; implemented reserve-targeting rather than rate-targeting; rates spiked to near 20%
- Two recessions (1980; 1981–1982); unemployment peaked at nearly 11%
- By end of 1982 recession: inflation back under 5%; credibility restored; economic recovery followed
Newsletter Angles
- The Great Inflation is the master template for understanding why the Fed is resisting Trump in 2025: once the fire starts, it’s very hard to put out — and the cure (Volcker) caused years of economic pain
- The Burns episode shows that “independent” central banks can fail not through formal capture but through the chair’s personal accommodation — directly applicable to the current Fed chair succession question
- The role of supply shocks (oil embargoes) prefigures today’s tariff-driven supply-side inflation — the Fed can’t fix what it didn’t cause
Entities Mentioned
- Federal Reserve — the institution at the center of the Great Inflation
- Arthur Burns — chair during the inflation’s acceleration; portrayed sympathetically as facing genuine constraints
- Paul Volcker — conquered the inflation; the triumph of independence
- Nixon Shock — the institutional disruption that removed the monetary anchor in 1971
Concepts Mentioned
- Stagflation — the era’s defining economic condition
- Fed Independence — what Burns failed to maintain; what Volcker exemplified
- Nixon Shock — Bretton Woods collapse is treated as a key enabling condition
Quotes
“The Great Inflation was the defining macroeconomic event of the second half of the twentieth century.”
“The origins of the Great Inflation were policies that allowed for an excessive growth in the supply of money — Federal Reserve policies.”
“[Fighting high inflation] was seen as necessary to achieve both objectives of the dual mandate, even if it temporarily caused a disruption to economic activity.” — on Volcker’s approach
Notes
Primary source: Federal Reserve History project (federalreservehistory.org). Authoritative institutional history. Somewhat self-serving in how it frames the Fed’s culpability — framed as “mistakes were made” rather than “political capture.” Worth comparing with the more pointed academic critique in How Richard Nixon Pressured Arthur Burns Evidence from the Nixon Tapes.