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The Great Inflation — 1971 to 1982
One price, eleven answers
Eight steps, about twelve minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Step 1 of 8
This part takes as read that the main currencies had been floating against each other since March 1973, and that crude oil cost the countries buying it more than three times as much in 1974 as in 1973.
The question
This is part seven of twelve, and it is where the series asks its question. One price reached eleven countries and what came out the other end was more than three times apart at the two ends. The eleven are the United States, Japan, West Germany, the United Kingdom, France, Italy, the Netherlands, Sweden, Switzerland, Canada and Australia.
So the difference has to be something the eleven did not share, and the rest of the series is a list of candidates. Three of them are here: each currency against the dollar, pay, and the money stock. Two of the three are measured on more than one window, and of the five results two clear the bar, both of them on windows that overlap the 1974 inflation they are set against.
Every one of them is put through the same test on the same countries, ten for the currency and eleven for the rest, and the results print whichever way they came out. The next five parts repeat the same method. Nothing here says what caused anything, and where two things move together in the same twelve months the step says so.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Consumer price in West Germany ran at 6.99 per cent in 1974. All eleven countries here bought oil that year at a price quoted in dollars.
Prices were rising in many countries at once by the early 1970s, and that was itself what economists set out to explain. A 1983 National Bureau of Economic Research volume sets out to find what connected them, and says inflation apparently moved from country to country like a contagious disease.
Each country's figure is the average of the twelve monthly year-on-year price rises the OECD publishes for it. Australia alone is the average of four quarterly ones. The OECD's total for all its members in 1974 was 14.10 per cent.
West Germany's own published figures for the same year. Its 1974 annual report says the worldwide wave of inflation peaked then. It puts the industrial countries' consumer price rises within a span of 7 to 25 per cent. The span covers more countries than these eleven.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
West Germany's consumer prices rose 6.99 per cent in 1974. By how much did Japan's rise in the same year, on the same measure?
For scaleThe Bundesbank's 1974 report put the industrial countries' consumer price rises within a span of 7 to 25 per cent that year, across a wider set of countries than these eleven.
The Bundesbank set one route out in its 1971 annual report, under a marginal heading reading the transmission mechanism. It says the monetary easing in the United States is passed to the other countries through international payment flows, especially through credit transactions.
Dollars arriving where a central bank has promised an have to be taken at that exchange rate, in the report's account. The bank pays for them in its own currency, newly made, which the report calls a creation of central bank money it did not choose.
The Bureau volume describes the same argument. Its chapter on the United States says America was a source but scarcely a victim of the rise in prices elsewhere, and puts that down to its reserve-currency role. A later chapter weighs it against an explanation resting on oil, and calls that one minor.
The route those two describe runs one way, out of the United States. All eleven still met a price quoted in the same currency, and a common price cannot by itself produce inflations more than three times apart.
In its 1971 annual report, what did the Bundesbank say those dollars did to prices and wages in Europe and Japan?
Ten of the eleven can be ranked by what their currency did against the dollar in 1974, measured from one year-end to the next. The one left out is the United States, whose currency the other ten are measured against.
Three of the ten needed more of their own currency to buy a dollar at the end of 1974 than at the start. Australia needed 12.13 per cent more, Japan 7.48 per cent and Italy 6.83 per cent. Seven needed less, out as far as Switzerland at 21.70 per cent less.
Put the ten in order by what their currency did, then by their inflation, and compare the orders. Matching orders score plus one, reversed minus one, no relation zero. Clearing 0.648 for ten countries, or 0.618 for eleven, happens by chance about one time in twenty.
Rank the ten by what their currency did against the dollar during 1974, and rank them by their inflation that year. Which went with the higher inflation?
American consumer prices rose 6.16 per cent in 1973 and 11.03 per cent in 1974, while averaged 4.9 per cent in 1973 and rose after it.
The 1971 Economic Report expected a trade. Its Council chapter calls the country's position an unemployment-inflation dilemma, in which pushing unemployment down risks pushing inflation up. In 1974 and 1975 both of them moved the same way.
The National Bureau of Economic Research dates the from November 1973 to March 1975, sixteen months. Real over those quarters went from $6,150.1bn to $5,957.0bn in chained 2017 dollars. The fall of 3.14 per cent is our own arithmetic on those two published levels.
By 1978 the Council of Economic Advisers was writing that the persistence of inflation posed major problems for both economic theory and policy. It asked why inflation kept its momentum in the face of idle plant and unemployed workers.
American unemployment averaged 4.9 per cent in 1973. What did it average in 1975, the year the recession ended?
For scaleOn the same measure unemployment averaged 3.5 per cent in 1969 and 5.6 per cent in 1974.
The Council of Economic Advisers wrote in 1978 that similar developments had appeared in other industrial nations since 1970. Throughout the industrial world, it said, policy now faced substantial unemployment and strong momentum in prices together.
Individual countries had met conditions like it before, the Council wrote, but prolonged inflation alongside unemployment in many countries and large current account imbalances was a new experience. Of the two decades before, the same chapter says such problems tended to be isolated in individual countries and were tractable.
Real output across the eleven sits on one table, in millions of 2021 dollars at constant national prices. It gives a level for every one of them in both 1974 and 1975, so the falls can be counted rather than described.
So a sentence saying the world went into recession in 1974 and 1975 rounds eleven countries into one outcome and loses four of them. The Bundesbank calls the recession a third problem, beginning in many countries during 1974. Which countries fell, and by how much, is what is left to explain.
Annual real output fell in 1974, or in 1975, or in both. In how many of the eleven countries did that happen?
Pay growth over 1971 to 1973 ran from 6.88 per cent a year in the United States to 16.32 per cent in Japan, which makes pay a candidate. In all eleven it then grew faster in 1974 than over those three years.
Three lists are set against the eleven countries' 1974 inflation: pay growth over 1971 to 1973, pay growth during 1974, and broad money growth during 1974. Broad money is notes, coins and bank deposits, and the ranking works as it did for the currency.
The European Central Bank's later model of the 1970s and 1980s has an oil shock raising the price of what an economy produces, first through nominal wages and then through unit profits. It finds that on euro area figures and not these eleven, and says that pattern has been largely absent since 1999.
The pay column is of mixed kinds across the eleven rows. Five countries are on wage-rate indices, two on manufacturing wage rates, one on compensation per employee, and three on earnings measures. With eleven countries the bar to clear is 0.618.
Of those three lists, which one ranked most closely with the eleven countries' inflation in 1974?
On 6 November 1972 the British Prime Minister told the Commons that statutory limits on pay and prices were the only remaining course. A Bill would be introduced the next day.
In July 1975 a different British government set a limit of six pounds a week on pay settlements. It said its policy rested on consent and willing co-operation, with legal powers held in reserve: legislation was already prepared to make exceeding the limit unlawful for an employer.
The 1981 Economic Report reaches past its own country in one phrase, experience with incomes policies here and abroad. Its chapter is confined to voluntary policies and excludes the legal prohibitions described above.
The Bill the Prime Minister announced on 6 November 1972 stopped increases in three of these. Which is the odd one out?
The Congressional Research Service sums up the American programme in one line. While the controls were in place inflation did fall, and it rose to double digits after they were dismantled. They came off over the same months the oil price rose, and nothing separates those two.
Robert Gordon measured the first two years of them for Brookings. Controls worked, he wrote, by squeezing profit margins enough to hold prices below their free market levels, rather than by moderating wages relative to prices.
William Poole set the test in the same year's Brookings papers: controls cannot be viewed as effective if their impact on the price level is temporary. Gordon gives at least four reasons for calling them a failure, on the stated assumption that squeezed margins are rebuilt. Both are about one American programme.
So five results are on the board: two clear the bar and three do not, and both of the two sit on windows overlapping the inflation they are set against. Pay and prices move together in 1974, nothing says which moved first, and every later candidate meets the same test.
Prices did rise more slowly while the controls were on. What did Gordon conclude about their effect on inflation in the long run?
Module 7 of 12 in The Great Inflation — 1971 to 1982
Your score will appear here.
Can you remember each figure? Tap to check.
Consumer price in 1974, the lowest and the highest of the eleven
What the Bundesbank said the dollars did to prices and wages in Europe and Japan
How the ten measured currencies and 1974's ranked together
and in the United States, across the same
How many of the eleven had a fall in annual real in 1974 or 1975
Pay and money put through the same rank test as the currency
The day a second government moved to stop pay, prices, rents and dividends rising
What the people who assessed the controls concluded
You met six terms in this module
, , , , ,
One price, eleven answers, and five results on the board. Part eight asks what happened when the price rose again.
[1] Consumer price inflation in each of the eleven countries and for the OECD as a whole, year by year: Organisation for Economic Co-operation and Development, consumer price indices, carried by the Federal Reserve Bank of St. Louis on FRED. Series CPALTT01<CC>M659N, "Consumer Price Index: All Items: Total for <country>", growth rate same period previous year, not seasonally adjusted, monthly. The annual figure used here is the average of the twelve monthly year-on-year rates in the year. West Germany's 1974 mean is 6.9943 and Japan's is 23.1750. The OECD total is series OECDCPALTT01GYM, "Consumer Price Index: Total for OECD", whose 1974 mean is 14.0983. Australia is CPALTT01AUQ659N and is quarterly: it returns four observations for 1974 where the other ten return twelve, and the monthly Australian code returns HTTP 404. Ten of the eleven series rest on this one publisher and only the United Kingdom is two-sourced. The German series carries an unverified identity on whether its 1970 to 1990 values are the Federal Republic in its pre-1990 borders.
[2] Each country's exchange rate against the dollar, its pay and its broad money stock, on one panel across all eleven: Jorda-Schularick-Taylor Macrohistory Database, release 6. Columns `xrusd`, `wage` and `money`. The documentation gives `xrusd` as "USD exchange rate (local currency/USD)" and, for the modern segment of nine of the eleven, the International Monetary Fund's "Exchange Rates, National Currency Per U.S. Dollar, End of Period, Rate". West Germany's entry names the same publication without the end-of-period wording, and the United States is 1 at all times. It is a year-end rate and not an annual average, so every change quoted here is year-end to year-end, and a positive change is a currency that bought fewer dollars at the end of the year than at the start. The `wage` column is of mixed kinds across the eleven rows -- wage-rate indices for five countries, manufacturing wage rates for two, compensation per employee for another, average weekly earnings, average nominal earnings and hourly earnings for three more -- and the module says so. Every coefficient below is computed by us from these columns against the OECD price series above, and each was reproduced this session on the sum of squared rank differences the research file records.
[3] How much each of the eleven economies produced year by year, after taking prices out of it: Penn World Table 11.0, Groningen Growth and Development Centre and the University of California, Davis, carried by the Federal Reserve Bank of St. Louis on FRED. Series RGDPNA<CC>A666NRUG, "Real GDP at Constant National Prices". FRED's own units line reads "Millions of 2021 U.S. Dollars, Not Seasonally Adjusted", the frequency is annual and the release is Penn World Table 11.0. The table publishes a level and no rate, so every percentage taken from it here is ours, computed as the level divided by the previous level, minus one. The OECD's own code NAEXKP01<CC>A657S does not reach this window for Japan, Italy, the Netherlands or Switzerland, which is why this table carries the count. Required citation: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), "The Next Generation of the Penn World Table", American Economic Review, 105(10), 3150-3182.
[4] How many Americans were out of work, year by year: U.S. Bureau of Labor Statistics, Current Population Survey unemployment rate, carried by the Federal Reserve Bank of St. Louis on FRED. Series UNRATE, civilian unemployment rate, sixteen years and over, seasonally adjusted, monthly. The annual figure is the mean of the twelve months: 4.8583 in 1973 and 8.4750 in 1975.
[5] How big the economy was quarter by quarter, after taking prices out of it: U.S. Bureau of Economic Analysis, real gross domestic product, carried by the Federal Reserve Bank of St. Louis on FRED. Series GDPC1, real gross domestic product, billions of chained 2017 dollars, seasonally adjusted annual rate, quarterly. The fourth quarter of 1973 reads 6150.131 and the first quarter of 1975 reads 5957.035. The fall between them is our own arithmetic on those two published levels, and both of them print in the step so a reader can check it.
[6] The dates the recession of the mid-1970s is officially held to have started and ended, and how long it ran: National Bureau of Economic Research, US Business Cycle Expansions and Contractions. The table's row for this cycle gives the peak as "November 1973 (1973Q4)", the trough as "March 1975 (1975Q1)" and the duration of the contraction, peak to trough, as 16 months.
[7] A study whose subject is how inflation moved from one country to another in the 1970s, and what it concluded about the dollar's part in it: Michael R. Darby, James R. Lothian, Arthur E. Gandolfi, Anna J. Schwartz and Alan C. Stockman, The International Transmission of Inflation, University of Chicago Press for the National Bureau of Economic Research, 1983. Chapter 1, "Introduction and Summary", page 3: "Inflation became the dominant economic, social, and political problem of the industrialized West during the 1970s." And: "To answer these questions, we must first discover the nature of the economic linkages which apparently transmitted inflation from country to country like a contagious disease." Page 5: "The problem with the Bretton Woods system was that over time increases in monetary growth in the United States tended to spill over to other countries." Chapter 16, "The United States as an Exogenous Source of World Inflation under the Bretton Woods System", page 478: "America was a source but scarcely a victim of inflationary trends in the rest of the world. This indictment follows from the special role of the United States as provider of a fiat reserve currency." Chapter 17, page 494: "According to most proponents of this view, the United States played a key role in the process, its excessive monetary growth being exported abroad via the fixed exchange-rate system formally in existence until 1973." The same chapter, page 494: "In broad outline, both explanations are consistent enough with the facts that neither can be ruled out." Page 495: "Our own evidence lends very little support to the most recent reincarnation of the special-factor explanation of inflation... at best it can account for only a minor fraction of the inflation in the first half of the 1970s. Monetary factors, we find, explain the bulk." Page 496: "while it is possible that the oil-price increase had a significant role in increasing inflation, it certainly was not a dominant one." The chapter PDFs are served by the NBER at nber.org/system/files/chapters/, c6121, c6139 and c6140.
[8] A central bank's own account, written at the time, of how easier money in America reached everybody else: Deutsche Bundesbank, Geschaeftsbericht fuer das Jahr 1971, completed 12 April 1972. Page 22, under the report's own side-heading "Der Uebertragungsmechanismus": "Die geldpolitische Auflockerung in den Vereinigten Staaten wird durch die internationalen Zahlungsstroeme und darunter im besonderen durch Kredittransaktionen auf die uebrigen Laender uebertragen." Also page 22: "Die wirklichen Probleme entstehen erst dadurch, dass im internationalen Waehrungssystem eines praktisch reinen Dollarstandards die amerikanische Geldpolitik weitgehend auch die monetaere Entwicklung in den anderen Industrielaendern mitbestimmen kann." Page 23: "Das Resultat ist vielmehr, dass infolge dieser unfreiwilligen Zentralbankgeldexpansion durch Dollarankauf das nationale Geldvolumen der nichtamerikanischen Staaten in inflatorischer Weise aufgeblaeht wird." And: "Waehrend diese Ausweitung des Geldvolumens fuer die europaeischen Laender (und Japan) einen viel zu weiten Spielraum fuer die Erhoehung von Preisen und Loehnen schuf, hatten die sie verursachenden hohen Zahlungsbilanzdefizite der USA auf deren Wirtschaft keine unmittelbaren Rueckwirkungen." The English in the module is a rendering of the German and is not a quotation; the umlauts and the eszett are transliterated here.
[9] The same central bank's account of 1974, and the range it put on the industrial countries' inflation that year: Deutsche Bundesbank, Geschaeftsbericht fuer das Jahr 1974. Page 47: "Die weltweite Inflationswelle erreichte im Jahre 1974 ihren Hoehepunkt; wie nicht anders zu erwarten, war der Preisanstieg in den einzelnen Laendern sehr unterschiedlich - in den Industrielaendern bewegte er sich, gemessen an den Verbraucherpreisen, innerhalb einer Spannweite von 7 bis 25%." The set of countries in that range is the industrial countries generally and is wider than the eleven followed here. Also page 47: "Als drittes Problem trat in vielen Laendern im Laufe des Jahres 1974 eine beginnende Rezession hinzu." The English in the module is a rendering and not a quotation.
[10] What the American government said, at the start of the decade, about whether inflation and unemployment could be brought down together: Economic Report of the President, transmitted to the Congress February 1971, together with the Annual Report of the Council of Economic Advisers, digitised by FRASER at the Federal Reserve Bank of St. Louis. The President's message, page 7: "In a fundamental sense, as I have always emphasized, the control of inflation and the achievement of full employment are mutually supporting, not conflicting, goals." Page 3: "It is a test of our ability to root out inflation without consigning our free economy to the stagnation of unemployment." The two halves of the volume do not say the same thing and both are carried here. The Annual Report of the Council, page 78: "The long and accelerating inflationary boom that was set off beginning in late 1965 left the country with this unemployment-inflation dilemma, whose severity was only subsequently appreciated."
[11] The same body, seven years later, on inflation and unemployment together and on how far it had spread: Economic Report of the President, transmitted to the Congress January 1978, together with the Annual Report of the Council of Economic Advisers, digitised by FRASER at the Federal Reserve Bank of St. Louis. Chapter 4, "Inflation and Unemployment", page 138: "Since 1970 similar developments have characterized the economies of other industrial nations. Throughout the industrial world, economic policy is now confronted with the simultaneous existence of substantial unemployment and strong inflationary momentum." And: "What does pose major problems for both economic theory and policy is the persistence of inflation: why it keeps its momentum long after the initial shocks have disappeared and in the face of idle plant and unemployed workers." Chapter 3, "The World Economy - a Hesitant Recovery", page 96: "Although individual countries have from time to time faced conditions similar to today's, the combination of prolonged inflation along with unemployment in many countries and large current account imbalances is a new experience." Page 97, on the two decades before: "Problems with inflation and with international payments tended to be isolated in individual countries and were tractable."
[12] A later study of how an energy price rise reached wages in the 1970s, and what it found about the years since: European Central Bank, Economic Bulletin, Issue 5/2022, Box 2: "Wage share dynamics and second-round effects on inflation after energy price surges in the 1970s and today". Page 44: "Second-round effects occur when agents pass on the inflationary impact of the direct and indirect effects to wage and price setting, potentially leading to a wage-price spiral." And: "Second-round effects played a major role in the transmission of oil supply shocks to inflation in the 1970s and 1980s, but these have been largely absent on average in the period since the euro was launched." And: "In the 1970s and 1980s, the GDP deflator started to rise about half a year after the shock; this increase was driven first by nominal wages (measured by compensation per employee) and then, after a year, also by unit profits and resulted in a wage-price spiral." The body is a retrospective, founded in 1998, and its estimates for the 1970s run on euro area aggregates rather than on the eleven countries followed here.
[13] The day a second government moved to make pay and price increases unlawful: House of Commons, "Inflation (Government Proposals)", statement by the Prime Minister, 6 November 1972, HC Deb vol 845. Column 626: "In order that the fulfilment of the objectives should not be prejudiced in the meantime, the Government propose to introduce tomorrow an interim Bill to provide for a standstill on increases in pay, prices, rents and dividends, subject to a limited number of defined exceptions." And, at the same column: "We have come to the conclusion that we have no alternative but to bring in statutory measures to secure the agreed objectives of economic management in the light of the proposals discussed in the tripartite talks."
[14] The same country, three years later, putting a figure on what pay could rise by: House of Commons, "Attack on Inflation", statement by the Prime Minister, 11 July 1975, HC Deb vol 895. Column 901: "The Government have decided to accept an overriding limit of GBP 6 per week for pay settlements during the next pay round, a figure consistent with the aim of reducing the rate of inflation to 10 per cent. by the late summer of next year." Column 903: "In this as in other areas, legislation will be necessary to supplement and strengthen the policy we have worked out with industry. The Bill will be introduced next week." Column 904: "Legislation has therefore already been prepared, for introduction if need be, which, when applied to particular cases, would make it illegal for the employer to exceed the pay limit." Columns 901 to 902: "Our policy is based on consent and willing co-operation within our democracy. We reject, for the reasons I have so frequently stated, the idea of statutory policies based on criminal sanctions against workers." The pound sign in the first quotation is written out here.
[15] The government's own assessment of the controls, written while they were still running: Economic Report of the President, transmitted to the Congress February 1974, Chapter 3, "Inflation Control Under the Economic Stabilization Act", digitised by FRASER at the Federal Reserve Bank of St. Louis. Page 101: "There can be no doubt that the controls program restrained price increases in many cases. But the question, of course, is whether holding down these prices served to hold down prices on the average or only diverted the inflationary pressure from these particular prices to others." Page 108, opening the chapter's summary: "We repeat what was said at the outset: the effect of the controls program on the rate of inflation in 1973 cannot be known with certainty either today or ever." The same page continues: "We think it would not have been much greater, however, since with the controls the rate of spending was high relative to the money supply, and output was low relative to the labor supply." And: "Still no one can disprove the thesis that the controls had a significant effect, although 1973 makes it a hard thesis to believe." Page 109: "On the other hand, if controls did hold down prices during 1973, the possibility remains that these prices will catch up in 1974 or later."
[16] A measured verdict on what the controls did to wages, prices and profits in their first two years: Robert J. Gordon, "The Response of Wages and Prices to the First Two Years of Controls", Brookings Papers on Economic Activity, 3:1973. Page 777, numbered conclusion 7: "Controls worked not by moderating the behavior of wages relative to prices, but rather by squeezing profit margins sufficiently to hold prices below their free market levels. This is not a situation that can be expected to last indefinitely, and hence the very fact of short-run success for the control program guarantees its long-run failure." Page 778 opens a separate list with its condition stated: "On the assumption that profit margins will eventually be reestablished, one can cite at least four reasons for concluding that the controls were a failure: 1. Controls will have had no long-run effect on inflation." The paper's own first numbered conclusion is a different one, at page 776, and reports nonfarm prices about 2.3 per cent a year below a simulated path during Phases I and II. The quotation marks the paper puts around the word success are dropped here.
[17] A second assessment from the same year, on what would count as the controls working at all: William Poole, "Wage-Price Controls: Where Do We Go from Here?", Brookings Papers on Economic Activity, 1:1973. Page 286: "I have always viewed the question as one of the duration of the effect of controls, not of their initial impact. Controls cannot be viewed as effective if their impact on the price level is temporary." Page 289: "The distortions and administrative costs of controls, and the extensive uncertainty attending the exit process, have bought at best minor and temporary gains in reducing inflation."
[18] A recent official summary of what happened to prices while the controls were on and after they came off: Congressional Research Service, R47273, Inflation in the U.S. Economy: Causes and Policy Options, 6 October 2022, and IF12177, Back to the Future? Lessons from the Great Inflation, 28 July 2022. R47273, page 34, under "Nixon-Era Controls": "These controls artificially put a price ceiling on most goods and services, rents, and earnings until 1973, when the controls began to be removed in stages. While the controls were in place, inflation did fall but then spiked to double-digit rates after the controls were dismantled." And on the same page: "Ultimately, this period led to pent-up demand in the economy that supply could not keep up with once the controls ended, leading to the increase in inflation." IF12177, page 2, under "Only Monetary Policy Effectively Reduced Inflation": "Policymakers took several actions to lower inflation during the Great Inflation, but most proved unsuccessful."
[19] One official sentence placing the pay and price standards beside other countries': Economic Report of the President, transmitted to the Congress January 1981, Chapter 1, digitised by FRASER at the Federal Reserve Bank of St. Louis. Page 65: "Experience with incomes policies here and abroad, including the pay and price standards, suggests that a pay TIP is easier to administer and likely to cause fewer distortions than a price TIP." Page 58, on what the term covers: "Incomes policies range from the informal pressure on a few large corporations and unions exerted by the Kennedy Administration to the formal review of price and wage increases by the Council on Wage and Price Stability (CWPS) to even more formal schemes based on the tax system." The sentence after it bounds the chapter: "While mandatory wage and price controls are the extreme form of an incomes policy, the discussion in this chapter is confined to voluntary forms, that is, forms which do not involve legal prohibition of excessive wage and price increases." The words here and abroad are the whole of this volume's cross-country content on the subject: its incomes-policy section names no other country.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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