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A Cautionary Tale

Inflation and its painful aftermath

May-June 2010

Robert J. Samuelson ’67 had the bad luck to send The Great Inflation and Its Aftermath: The Past and Future of American Affluence to the printer the spring before the recent financial crisis became acute. The book reached stores just in time for the November 2008 election, and, even though it received respectful reviews, it was swept aside by events. Now Samuelson is back with a paperback edition, somewhat revised and updated, with a new introduction addressing the significance of the financial cataclysm of the last couple of years. 

Lucky Sam. It turns out that there’s a double-barreled moral to his story. A little like Edward Gibbon, Samuelson started out to write a history and finished with a cautionary tale. 

Anyone born after, say, 1965, might have been puzzled at the sudden prominence assigned to Paul Volcker this past January. The Democrats had just lost their super-majority. A little-known Massachusetts Republican state senator named Scott Brown surprised everyone by winning the Senate seat that Edward M. Kennedy ’54, LL.D. ’08, had held for nearly 50 years. 

Suddenly there was the 82-year-old Volcker, summoned to the White House to stand at President Barack Obama’s side as he announced that “the Volcker rule” would guide the administration’s efforts to reform the banking industry--federally insured banks should be barred from speculative activity unrelated to their business. Yet it had been more than 20 years since Volcker had retired as chairman of the Federal Reserve Board. The banking lobby, and the Senate, quickly dismissed his rule. What could the old man add? In fact, under the circumstances, Volcker was probably the next best thing to George Washington.

Anyone of college age or older in the summer of 1979, when President Jimmy Carter named Volcker to the Fed, probably recognized that the appointment turned out to be one of the two most memorable things that happened to the United States between 1979 and 1987--that is, besides the personal computer, the AIDS pandemic, MTV, and Spy magazine. The other one was the election of Ronald Reagan in 1980. 

Samuelson originallywrote to explain what he calls the “lost history” of the last 50 years--how the rise of inflation in the 1960s and 1970s produced one sort of crisis in 1980, and how the disinflation of the 1980s and 1990s laid the groundwork for a crisis of a different sort in 2008. He is well qualified for the task, having begun writing about political economy (as a cub for the Crimson) when John F. Kennedy was in the White House, and having written about it ever since--after 1984 as a columnist for The Washington Post and Newsweek. 






A slow writer, he laboriously produced one book in the 1990s--The Good Life and Its Discontents: The American Dream in the Age of Entitlement--which argued that the American Dream had escalated into an unrealistic American Fantasy. In the next decade he spent most of his spare time writing The Great Inflation and Its Aftermath, “lest the entire episode slip from our collective consciousness.” The mistake that America made in Vietnam looms large in historic memory, he writes; the mistake of inflation does not.

True, it is hard now to remember, much less imagine, how differently money signified in 1962. A candy bar or a copy of the New York Times cost a nickel, a beer 15 cents, a gallon of gas 35 cents, a bag of groceries $5, and a full-sized Chevrolet $2,529. Credit cards, to the extent they existed, were irregular company “charge-plates.” Inflation was just getting under way.

The United States was involved in a great contest with the Soviet Union in those days--racing to the moon, staving off a missile crisis in Cuba, beginning a revolution in civil rights, going to war in Vietnam. Congress declared a second war, on poverty, and in 1965, authorized Medicare and Medicaid. The rising price of silver forced the U.S. Treasury Department to quietly stop circulating silver coins in July 1967. Clandestine smelters, run by enterprising gangsters and amateur crooks, went to work and, all but unnoticed in the next two years, silver dimes, quarters, and half dollars vanished from the nation’s coinage, replaced by shiny silver-colored clad versions. 

By the late 1970s, the consumer price index was rising at an annual rate of more than 10 percent. Inflation had become an infuriating, dizzy-making complication in all kinds of everyday decisions. A pair of explosions in the price of oil had convinced many Americans that the world was running out of the stuff. The economy was stagnant. Unemployment was high. The stock market had gone sideways for a decade. Pessimism was deeply ingrained. In The Zero Sum Society, Lester Thurow pronounced the political economy “paralyzed.” 

And then in late 1979, Volcker slammed on the monetary brakes. A year later, Reagan was elected. The two men made a “compact of conviction,” Samuelson says. Volcker assaulted inflationary expectations, raising interest rates to unprecedented levels--banks’ “prime rate” reached a record 21.5 percent--and throwing millions out of work. Reagan provided political support. The president also cut taxes, fired striking air-traffic controllers, broke up the phone company, and taunted the Soviet Union with his Strategic Defense Initiative.

By the time the bitter recession ended in 1982, the inflation rate had dropped from 11 percent to barely 4 percent--and then stayed there, despite big budget deficits. The United States began a 25-year boom, the longest in its history. Samuelson calls this “the restoration of capitalism”--more stable and productive, but more crass and cruel. In 1984, Jane Bryant Quinn and Samuelson replaced Milton Friedman and Thurow (who earlier had taken over from Paul Samuelson, to whom Robert J. is no relation) as the economics columnists at Newsweek. The change was emblematic: goodbye, great themes and expertise; hello, home economy and common sense.


According to Samuelson, the traumatic inflation of the Sixties and Seventies didn’t have to happen. It was “a self-inflicted wound that resulted from collective hopefulness and intellectual overconfidence.” President Kennedy was led astray by his Keynesian advisers, with their counsel that he seek to maintain “full employment” and reduce “output gaps”--subtle technical concepts quite impossible to translate into salable political propositions. Traditions of good housekeeping, such as balanced budgets and the necessity of occasional recessions to check inflation, were forgotten. The brilliance of Volcker and Reagan stemmed from the essential simplicity of their principles, he says. Not surprisingly, Samuelson’s influence in Washington reached its zenith in the mid ’90s, when his espousal of Eisenhower-era balanced budgets framed the contest of wills between Newt Gingrich and Bill Clinton, which in turn finally led to a budget surplus after a period of rapid growth at the end of the decade.

Alas, success brought complacency. The expansions of the 1980s and (especially) the 1990s were intoxicating precisely because they contrasted so starkly with what had gone before. Eventually the virtuous circle turned vicious circle of overconfidence and avaricious abandon. Samuelson has very little to say about the politics of the ’90s and the ’00s--Bill Clinton appears just once in the index of the book, and George W. Bush not at all. Searching for villains is beside the point, he says. The problem was that 25 years of slowly declining inflation rates subconsciously conditioned nearly everyone to believe that growth would bail them out of any and all mistakes. 

Well, so much for that. What next? Are the trillions being spent to save the banks and stimulate the economy foretelling an inflationary doom? Samuelson writes cautiously, “In theory, at least, the huge quantities of cheap money and credit might threaten a subsequent inflation if the economy recovers and they are not withdrawn in timely fashion. The outcome will help define the next economic era.” He stops short of predicting another long hubris-fueled cycle of grandiose expansion that must be finally reined in by another “compact of conviction” somewhere in the years ahead, but that is the implication of his cautionary tale, and clearly he is worried about it. Barack Obama’s “sweeping agenda,” he says, would enlarge the role of government and shrink the role of private enterprise. 

Mainly, though, Samuelson sticks to the message of his columns of the last 25 years. The overly generous entitlements of the welfare state need to be reined in. Households must take more responsibility for individual savings. New government services necessitate new taxes. Governments can’t force economic growth, though there are things they can do to influence it. Government budgets should show a surplus in good times so that they can spend freely in the inevitable bad times. And a low inflation rate is a precondition for a healthy economy. Those Eisenhower-era verities that John F. Kennedy declaimed against weren’t so stupid after all!