Inflation Nation

By ALLAN H. MELTZER
NYT

Pittsburgh

IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

Back then, as now, the members of the Fed were well aware of the harmful effects of inflation. In private, they vowed not to let it get out of hand and several times even started to do something about it. But when their anti-inflationary moves caused the unemployment rate to rise to 6.5 percent or 7 percent, they forgot their promises and again began expanding the money supply and reducing interest rates.

By 1979, reported rates of inflation, worsened by the oil shock, had reached double digits. Opinion polls showed that the public now considered inflation to be the main economic problem. President Jimmy Carter’s choice for chairman of the Fed, Paul Volcker, said that he would fight inflation more deliberately than his predecessors. The president agreed with him, as did the chairmen of the Congressional banking committees.

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