Economic history · Nothing Left to Hold It
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.
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.
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.
Step 1 of 8
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 scale. The 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?
Module 7 of 12 in Nothing Left to Hold It
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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".
[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.
[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.
[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.
[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.
[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.
[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.
[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.
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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