A Grim History Repeats at the Fed

Barron's ^ | Jan. 21, 2022 | Robert Heller

[Pelham]

As Milton Freedman said in 1970, “Inflation is always and everywhere a monetary phenomenon.” Little has changed since then.

For most of the 1970s, Arthur Burns was chairman of the Federal Reserve Board. Inflation was rampant, just like now. Consumer price inflation averaged nearly 7% during his term. As Friedman diagnosed correctly, this rapid inflation was mainly caused by increases in the money supply of over 12% in the years 1971-72 and 1976-77. Instead, Burns attributed the price increases mainly to wage pressures, monopoly power, and the oil shock of the early 1970s.

Sound familiar? Inflation is again soaring, and the Fed blames supply constraints caused by the pandemic while neglecting to look at the increasing money supply as the main cause. It’s always easier to blame external factors rather than something that you control and have responsibility for.

I had the honor of serving under Chairman Paul Volcker on the Federal Reserve Board starting in 1986, when he was trying to bring inflation under control. President Jimmy Carter had appointed Volcker in August 1979 with the mandate to reduce the double-digit inflation rate. President Ronald Reagan confirmed this objective after he took office. With determination, Volcker raised the federal-funds rate to 20% by June 1981 and reduced the growth of the money supply. Not one, but two back-to-back recessions resulted.

The situation in Washington was tense while the monetary policy medicine took its course. But Volcker and the board prevailed and reduced the annual growth rate of the money supply from over 12.6% in 1979 to a much more reasonable 5.3% when he left the Fed in August 1987. Alan Greenspan continued the anti-inflationary policies. By the time I left the board in 1989, consumer price increases had moderated to only 4.6%.

The Fed was on its way to

[Toddsterpatriot]

The majority of price rises are due to DEMAND. Too many chasing a lessor supply, causing the prises to get bid higher. Wages are up due demand, too many employers chasing a limited number of emplyees. Energy is up due to less supply. Freight costs are up due to less supply.

If it wasn't a monetary issue, other prices would be falling to offset the increases you listed.

[Sequoyah101]

In oil country it did not hold prices down much.

A studio apartment in Andrews, Texas was like $375 a month IF you could get one and would be glad if you could.

Id have to dig to recall what we paid for our 900 sf 3 br first house with 1 car garage and central swamp cooler.

My wood shop now is bigger and has AC.