Economics Essays - Inflation

Specifically, it was generally believed that permanently lower rates of unemployment could be “bought” with modestly higher rates of inflation.The idea that the “Phillips curve” represented a longer-term trade-off between unemployment, which was very damaging to economic well-being, and inflation, which was sometimes thought of as more of an inconvenience, was an attractive assumption for policymakers who hoped to forcefully pursue the dictates of the Employment Act.

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The orthodoxy guiding policy in the post-WWII era was Keynesian stabilization policy, motivated in large part by the painful memory of the unprecedented high unemployment in the United States and around the world during the 1930s.

The focal point of these policies was the management of aggregate spending (demand) by way of the spending and taxation policies of the fiscal authority and the monetary policies of the central bank.

Except during periods of global crisis, this was the first time in history that most of the monies of the industrialized world were on an irredeemable paper money standard.

The late 1960s and the early 1970s were a turbulent time for the US economy.

During World War II, the world’s industrial nations agreed to a global monetary system that they hoped would bring greater economic stability and peace by promoting global trade.

That system, hashed out by forty-four nations in Bretton Woods, New Hampshire, during July 1944, provided for a fixed rate of exchange between the currencies of the world and the US dollar, and the US dollar was linked to gold.This is a forensic investigation of sorts, examining the motive, means, and opportunity for the Great Inflation to occur.The first part of the story, the motive underlying the Great Inflation, dates back to the immediate aftermath of the Great Depression, an earlier and equally transformative period for macroeconomic theory and policy.If the Great Inflation was a consequence of a great failure of American macroeconomic policy, its conquest should be counted as a triumph.In 1964, inflation measured a little more than 1 percent per year.As the world’s reserve currency, the US dollar had an additional problem. As inflation drifted higher during the latter half of the 1960s, US dollars were increasingly converted to gold, and in the summer of 1971, President Nixon halted the exchange of dollars for gold by foreign central banks.Over the next two years, there was an attempt to salvage the global monetary system through the short-lived Smithsonian Agreement, but the new arrangement fared no better than Bretton Woods and it quickly broke down. With the last link to gold severed, most of the world’s currencies, including the US dollar, were now completely unanchored.It eventually declined to average only 3.5 percent in the latter half of the 1980s.While economists debate the relative importance of the factors that motivated and perpetuated inflation for more than a decade, there is little debate about its source.It had been in this vicinity over the preceding six years.Inflation began ratcheting upward in the mid-1960s and reached more than 14 percent in 1980.