Overcoming the Great Inflation: 1970–1983

Abstract

The Great Inflation, which lasted from 1970 to 1982, is examined in this chapter. In the United States a price explosion posed a serious challenge for the central bank. A combination of reluctance to act forcefully and intense political pressure on the Fed coincided with a breakdown of the international system and a severe oil crisis. High inflation co-existed with a deep recession (stagflation). Central banks reacted in different ways to this unique situation, most practicing gradual adjustment, while Germany and Japan reacted swiftly to quell inflation. Attempts at using wage and price controls failed, as did initial attempts to repair the international monetary system. After a series of contentious exchange rate realignments, financial markets calmed down. It took very high interest rates to tame inflation in the United States and elsewhere. The price was a recession, but economic recovery set in, in the early 1980s. Most central banks started abandoning targeting the money supply.