Episode 664: The Great Inflation : Planet Money For much of the 70s inflation was bad. Prices rose at over 10 percent a year. Nothing could stop it — until one powerful person did something very unpopular. Today's show: How we beat inflation.

Episode 664: The Great Inflation

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UNIDENTIFIED MAN #1: My colleagues on the Congress, I have the distinct privilege and high personal honor of presenting to you the president of United States.



On October 8, 1974, President Gerald Ford was about to do what presidents sometimes do in cases of emergency. He was about to give a speech in the U.S. capital to a joint session of Congress in the room where, he said in the speech, presidents had come to declare war.


The enemy this time, he said, was not human in form but just as dangerous as any military. It had the power, he said, to destroy our country, our homes, our liberties, our property and our national pride. What could do all that? Inflation.


GERALD FORD: We must whip inflation right now.


GOLDSTEIN: When Ford gave that speech, prices were rising at over 10 percent a year. That meant, among other things, that if you were a retired person, you'd saved a big pile of money, you were in trouble. Every year that pile bought less and less and less.

KESTENBAUM: Inflation was the silent thief, and every year it got worse. Inflation got worse. It went from 10 percent to 11 percent to 12 percent. It wasn't clear exactly why and no one could agree on a simple way to fix it. In that speech, Ford laid out an emergency 10-point plan. It was both simple and totally absurd. To bring down prices, he argued, you had to increase the supply of stuff and reduce demand for it. He laid out plans, for instance, that he hoped would help farmers grow more, and to reduce demand, well, he said that was where he needed the help of every American. Try to waste less food, he said. Oh, and try to drive less, too, please.


FORD: If we all drive at least 5 percent fewer miles, we can save almost unbelievably.

GOLDSTEIN: He says, tomorrow, look in the newspaper. There's going to be a form. David, you have a copy, right?

KESTENBAUM: Here, it says, dear President Ford, I enlist as an inflation fighter and energy saver for the duration. I will do the very best I can for America - parentheses, please print and then it has name, date, address.

GOLDSTEIN: Also, in Ford's inflation fighting arsenal - buttons, great big buttons for people to pin onto their shirt.


FORD: Which I am wearing on my lapel. It bears the single word win.

KESTENBAUM: Win - W-I-N - for Whip Inflation Now, get it?

GOLDSTEIN: Yeah, you can see online in the video. You know, it's the '70s. Ford has these giant lapels on his suit and this big red button - WIN

KESTENBAUM: Ford did not win against inflation or in the next election. In fact, people laughed at the Whip Inflation Now campaign. They wore the buttons upside down. But the whole thing showed how desperate we were, how at a loss we were for how to deal with inflation. Inflation was this strange disease that we could not kick.

GOLDSTEIN: Until finally we did. And the thing that finally worked did not appear on Ford's 10-point plan at all.


KESTENBAUM: Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Today on the show, how we finally beat inflation.

KESTENBAUM: It was a lonely battle fought by one very tall man who smoked a lot of cheap cigars.

GOLDSTEIN: It was painful for him and for the whole country. Millions of people lost their jobs.

KESTENBAUM: The story explains why, right now, at a time when inflation would normally be returning to strike again, we do not even think about it.


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KESTENBAUM: Inflation affects one of the most basic things in any economy - how much things cost. So when inflation goes up, it messes with people's most basic economic decisions.

BILL SILBER: Well, the inflation was really - it was a debilitating.

KESTENBAUM: This is Bill Silber, an economist at NYU.

SILBER: It sort of took over your life. You had to worry about buying things before they went up in price. Every time you turned around you'd say, well, I mean, I better buy it now rather than later and of course that's the process, which makes the inflation accelerate because everybody starts thinking that way. Just buy something because you know if you buy it now you're better off than if you wait.

KESTENBAUM: Do you remember that happening with you? Did you buy anything for that reason?

SILBER: I think I bought a house.

KESTENBAUM: People buying houses just because they think they'll be more expensive the next year - that is not good. Silber has written a book about this and about the man who finally did whip inflation. His name - Paul Volcker.

GOLDSTEIN: Silber remembers the first time he met him. At the time, Volcker was running the Federal Reserve Bank in New York. He was a tall guy - 6 feet 7 - always smoking cheap cigars. And Silber met Volcker at this conference right around the time inflation was taking off.

SILBER: He sits down on a couch and puts his feet up on the table rail there and says, so what's new? And the only thing I remember was that his socks were pushed down, almost touching his shoes so you saw his ankles. And I remember my mother said don't ever let your socks fall down below your ankles. And here was the president of the Federal Reserve Bank of New York who really didn't care.

KESTENBAUM: You can hear that attitude in old recordings of Volcker. He sounds like a guy who does not care what people think about his socks. Here's his answer to a reporter asking him a typical reporter question. Which do you worry more about - a domestic recession or the international effects of high oil prices?


PAUL VOLCKER: Do I have to prioritize my problems?


VOLCKER: I mean, I just have no answer to which is most important.

KESTENBAUM: Paul Volcker is now 88 years old. We went to see him, and just a note, if you are not wearing headphones, you might want to put them on. It'll be easier to understand what he's saying.


VOLCKER: How are you?

KESTENBAUM: Nice to meet you.

VOLCKER: You're interested in the 1970s.


VOLCKER: Well, you came to the right person.

KESTENBAUM: How long is this going to take, he asked, 15 minutes? We ended up talking for an hour, and he told us the story of his fight against the silent thief, against inflation. It starts in 1979 with a phone call. The White House called Volcker. Jimmy Carter is the president and he is trying to decide who he should nominate to one of the most powerful jobs in the country. Who should be the chairman of the Federal Reserve?

GOLDSTEIN: And at this moment, Volcker is running the New York Fed. He's running, like, a branch. But this is the top job. This is a big promotion.

KESTENBAUM: And the Fed is the place that gets to decide how much money there should be in the economy. So Volcker goes down to talk to Carter.

VOLCKER: And it was not a very long conversation. I don't know. In retrospect, it seems five minutes. Maybe it was longer than five minutes, but it wasn't very long.

KESTENBAUM: In that meeting with the president, Volcker is blunt. He thinks one of the reasons there's inflation is that his predecessors at the Federal Reserve had basically printed too much money.

GOLDSTEIN: And sometimes too much money can cause inflation. And there's a simple way to think about it, right? You can imagine a whole economy on an island, and on that island there are a thousand $1 bills. That's all the money on the island.

KESTENBAUM: And let's say there's also 1,000 coconuts.

GOLDSTEIN: Coconuts.

KESTENBAUM: So do the math. Like, maybe coconuts sell for $1 each - a thousand $1 bills, a thousand coconuts. Then imagine a plane flies over and it drops another thousand $1 bills on the island.

GOLDSTEIN: And the people are like, no, we don't need money. We need to get off the island. I know. OK, so nothing has changed except how many dollar bills there are on the island, right? Now there are twice as many dollar bills, so there's 2,000 $1 bills, still a thousand coconuts, the math is easy, right? Now each coconut costs $2 instead of $1.

KESTENBAUM: You've got massive coconut inflation. Now, this is a ridiculous oversimplification. We have no evidence Paul Volcker talked about coconuts with President Carter. The real world is certainly more complicated. But that is the basic idea.

GOLDSTEIN: Yeah, the basic idea is by putting more and more dollars out there, the Fed had made every dollar worth less. And Volcker tells Carter, look, if you pick me to run the Fed, I'm going to put a stop to this. I'm going to restrict the amount of money in the country. And that will slow inflation, but it might also push the economy into a recession. You know, if there's less money out there, it makes it harder for businesses to get loans to expand. It makes it harder for people to get loans to buy stuff. The whole economy could slow down.

KESTENBAUM: That is not the kind of thing a president likes to hear, but...


UNIDENTIFIED WOMAN #2: Earlier today, the president announced his choice for chairman of the Federal Reserve Board. He is 51-year-old Paul Volcker.

KESTENBAUM: Volcker got the job. Apparently Carter's first picks said no, understandably, because at that moment, running the Fed, that is the kind of job where everyone in the country could end up hating you. Also, as a practical matter, it did not pay very much.

GOLDSTEIN: Is it right? Did you have to take a pay cut?

VOLCKER: Yeah, like, 50 percent.

KESTENBAUM: A 50 percent pay cut.

VOLCKER: (Laughter).

KESTENBAUM: But it was a promotion.

VOLCKER: (Laughter) Yeah, theoretically, yeah.

GOLDSTEIN: Volcker's wife decided to stay in New York and he went on his own down to D.C. He's a cheap guy. I'm just going to say it. From what everybody told us, Volcker is...


GOLDSTEIN: I like the word cheap - as a cheap person. And so he rents what apparently is just this tiny little apartment in a building that basically served as, like, a dorm for college students.

JANICE VOLCKER ZIMA: I remember a lot of things about the apartment.

GOLDSTEIN: This is Paul Volcker's daughter, Janice Volcker Zima.

ZIMA: He had this couch. I want to say couch in quotes 'cause it was kind of this foam rubber thing with bolsters (laughter) you know, it was, like, really - it was kind of silly.

GOLDSTEIN: At this moment, your father is, like, truly one of the most powerful people in the country.

ZIMA: (Laughter) Yeah, yeah.

KESTENBAUM: She says sometimes when she would visit there would be a keg in the hallway from a student's party. So that is where Paul Volcker would wake up in the mornings and then he would go to work at the big fancy Federal Reserve building, you know, white stone, wrought iron.

GOLDSTEIN: And remember, at the time, inflation is really bad. It's over 10 percent a year. And so pretty much right away in October of '79, just after he takes office, Volcker calls this secret emergency meeting. He calls in Fed officials from around the country.

KESTENBAUM: It's like he puts the bat signal up. Here's Bill Silber, the economist who wrote the book.

SILBER: They were 19 people who would be coming, and this was so sensitive that he advised them to come and stay at different hotels.

KESTENBAUM: There's, like, 19 hotels in Washington, D.C. So they meet on a Saturday and they agree on a plan to fight inflation. Paul Volcker is so eager to share this with the world he calls a press conference that day. And it was not the best time for a press conference. This was a Saturday on a holiday weekend and the pope was in town.

GOLDSTEIN: Reporters do come, and at the meeting, Volcker makes what he thinks is this big dramatic announcement. The Fed, he says, is going to stop printing so much money. He says, there's going to be a strict limit on how much money is out there. And of course, you know, if you follow the Fed, you might be thinking, like, oh, isn't that always what the Fed does? But this thing had kept happening in the years before this, in the '70s where, like, the Fed would, like, start to tighten it down and then the economy would get bad and they'd be like, OK, more money, more money. And Volcker at this meeting is saying we are not going to do that anymore.

KESTENBAUM: And today, when you hear about the Fed doing stuff, it's always in terms of interest rates. Like, the Fed is going to raise interest rates by a teeny bit or lower it by a teeny bit. Here, Volcker was making a change. He was like, we are not going to worry about interest rates. We are going to focus on the amount of money in the economy. The interest rates, they'll do whatever they need to do. The number they're going to focus on, the amount of money in the economy, there's a technical term for it. It's M1. It is the sum of all the currency out there, all the dollars, and the money people have in checking accounts. Volcker thought M1 had been rising too fast driving up inflation. He was going to put a stop to it.

GOLDSTEIN: Volcker figured this would be his big hammer of a weapon that he could use just crush inflation.

KESTENBAUM: It did not crush inflation. In fact, after the announcement, inflation gets worse. The next month inflation rises from 12 percent to 12.5 percent. A few months later, it goes up to 14 percent.

GOLDSTEIN: Volcker's hammer (laughter). It's, like, the worst superhero tool ever. It did not crush inflation, but it did crush jobs. The unemployment rate that was at 6 percent when Volcker had that press conference started going up. A year later, the unemployment rate was at 7.5 percent and rising.

KESTENBAUM: Here at National Public Radio, All Things Considered was on the story. We got this off reel-to-reel tape.


KESTENBAUM: They should bring back that version of the theme song.


UNIDENTIFIED MAN #2: The recession is here. The only disagreement among economic experts now is over how bad it will be.

UNIDENTIFIED WOMAN #3: Another sign of recession - industrial production was down again last month. Last month's drop was the largest in five years. The National Weather Service says there is no longer an ash plume coming from Mount Saint Helens. The volcano erupted...

GOLDSTEIN: So just keeping track, now we have a recession and inflation and also a volcano is erupting - lose, lose, lose.

KESTENBAUM: Normally, I think when you have a recession, there isn't, like, one person you can be angry at. This time there is - Paul Volcker.

GOLDSTEIN: And suddenly, it's like all of America is mad at Paul Volcker. The homebuilders are mad because nobody's buying new houses so they start mailing two-by-fours to the Fed. Car dealers start mailing in car keys because nobody can borrow money to buy a new car. A congressman starts calling for Volcker's impeachment.

KESTENBAUM: Volcker's daughter, Janice, as it happens, is looking to borrow money herself right around this time because she is trying to buy her first house. She said it was just this basic home.

ZIMA: You'd look straight to the front door and it had one window on one side, one window the other side. It was a straight box.

GOLDSTEIN: Like if a little kid drew a picture of house.

ZIMA: Yeah, that's what it would look like.

KESTENBAUM: The mortgage rates at the time were 13 percent or higher things, thanks, of course, to her dad. And she says she would ask her dad for financial advice. Like, should we buy the house? And I feel like, you know, we ask our parents for advice all the time, but her dad actually was the one person in the world who knew and who had control over mortgage rates.

GOLDSTEIN: Yeah, but when she asked him, she said he would just kind of make this sound, like kind of a moan or a groan.

ZIMA: You know, he was like (imitating groan). I mean, well, I don't know, you know, or (imitating groan). It's just - he's got this one thing that he does where he just sort of mumbles and doesn't give you an answer, but that's the way he gets around everything.

KESTENBAUM: He was using Fed speak on you.

ZIMA: (Laughter) Yeah, yeah, that's what it is.

GOLDSTEIN: He talked that way to reporters, too. Here's somebody asking him a question at the National Press Club.


UNIDENTIFIED MAN #3: How high an unemployment rate are you prepared to accept in order to break inflation?


VOLCKER: I (laughter) it kind of puts me in a position of I accept or unaccept or whatever. Let me - you know, my basic philosophy is over time we have no choice but to deal with this inflationary situation

KESTENBAUM: Here that. He didn't answer the question.

GOLDSTEIN: Complete dodge.

KESTENBAUM: Publicly, Volcker is confident that his medicine is going to work, that by restricting the amount of money in the economy eventually inflation is going to come down. But in the short term, his medicine is making the patient sicker. And in private, he is less confident.

Did you ever have doubts in there?

VOLCKER: I never had a doubt in my life (laughter) of course, you worry.

GOLDSTEIN: Volcker had this rug in his office and he said he just paced back and forth.

VOLCKER: Paced a hole in the rug - didn't have a rug anymore. I ruined it (laughter). I'm joking, but I - of course you worry.

GOLDSTEIN: People were mad at Volcker, but, you know, as always the case with the Fed, people didn't really understand what the Fed was doing. Robert Krulwich - you know, the reporter who you might know from "Radiolab" - back then he was NPR's business correspondent. He tried to explain the Fed with an opera. Here's Krulwich doing his fake fancy announcer voice.


ROBERT KRULWICH: There aren't very many operas that deal exclusively with the subject of interest rates, but this one I think is the most magnificent of all.

KESTENBAUM: And then a little while later, in the middle of the opera, Paul Volcker.


UNIDENTIFIED SINGER: (Singing) (Unintelligible).

VOLCKER: Ladies and gentlemen, we're face to face...

UNIDENTIFIED SINGER: (Singing) (Unintelligible).

VOLCKER: ...With economic difficulties really unique in our experience.

UNIDENTIFIED SINGER: (Singing) (Unintelligible).

KESTENBAUM: When we interviewed Paul Volcker, he said who is that guy who used to work at NPR? He remembered these stories and he said they made him really happy in those dark days when he was pacing through the rug in his office.

VOLCKER: This guy Robert Colt (ph) - Colt.


VOLCKER: Krulwich - come up with these little parodies of what was going on (laughter).

KESTENBAUM: You weren't insulted by that.

VOLCKER: (Laughter) No, it was great. Robert Krulwich would cheer me up. It's true, no question about it.

KESTENBAUM: It was a dark time for Paul Volcker.

GOLDSTEIN: Yeah, you know, it was a long slog. I mean, when you look, two years after that big emergency meeting and press conference, unemployment was at 8 percent and rising. Inflation was still a 10 percent where it had been two years before.

KESTENBAUM: If you look at the textbooks, like, once you restrict the amount of money in the economy, inflation should start to get better. But it was not getting better. The reason was something that did not get a lot of attention in the textbooks at the time. Inflation wasn't going away because people didn't believe it was going to go away. Part of the problem was in our heads.

GOLDSTEIN: Yeah, everybody just thought inflation was, like, this permanent feature of the landscape, right? And when that happens, you have this whole cycle, right? Workers go to their bosses and say, hey, give me a raise because there's going to be inflation and the bosses are like, sure, you can have higher wages and I'll just raise my prices.

KESTENBAUM: So you have inflation.

GOLDSTEIN: Done. It's like this self-fulfilling, self-creating thing.

KESTENBAUM: Volcker said this became clear to him when he met with a bunch of businessmen and he told them we are going to deal with this inflation and that's the way it's going to be. What do you say? And one businessman says I don't believe you.

VOLCKER: He said I just had a wage negotiation with my workers and I agreed to give them a 13 percent increase for the next three years.

KESTENBAUM: Thirteen percent wage increase for the next three years.

VOLCKER: Each year for the next three years 'cause that's what I think inflation's going to be. That was one reflection of the mood at the time. Good luck (laughter).

GOLDSTEIN: And that's what the problem was, right?

VOLCKER: That's what the problem was, precisely. That was so ingrained that this guy was willing to make a three-year bet that prices were going to go up - I don't know - 14, 15, 13 percent a year.

KESTENBAUM: Is there a lesson about what inflation is? Like, I think we traditionally think of it as being too much money out there, but this really showed that it was something else. A lot of it was - it's something that's in people's heads.

VOLCKER: Well, these behavior patterns are in your head. That's why Congress don't always understand (laughter) that they are the - the more abstract mathematical models they make the more they lose sight of they're dealing with human beings and emotions and those things change.

KESTENBAUM: Human beings and emotions, those things can take a long time change. Bill Silber, the economist, the guy who wrote the book, told us that if somehow after that first press conference everyone had woken up the next morning and magically just believed that inflation was going to go away it would have gone away pretty quickly. We might even not have had to go through that whole recession. But of course that did not happen.

GOLDSTEIN: Yeah, and in fact, what's striking is how long it did take for Volcker to convince everybody that, you know, that he meant what he said, that he wasn't going to just start printing money again.

KESTENBAUM: Finally, at the end of 1981, more than two years after that emergency meeting, people started to believe Volcker. Inflation dropped to 9 percent, then 7 percent, 6 percent, 4 percent. But by the time it was all over, prices had risen so much that a dollar was worth a lot less than it had been a decade before. Inflation had eaten away at more than half of the value of a dollar.

GOLDSTEIN: Yeah, it would be like if in 1972 you had closed your fist around a dollar bill and then a decade later you opened up your fist and poof there's just 43 cents there.

KESTENBAUM: Volcker and the Fed finally eased up. They let the amount of money in the economy grow a bit. And the jobs came back. The recession was over.

GOLDSTEIN: But it had been a bad recession. Unemployment had gotten up over 10 percent, which is even higher than it was after the financial crisis a few years ago.

KESTENBAUM: Bill Silber, the economist and NYU who wrote the book about Volcker, says most economists think he did the right thing. But there are things people wonder about.

SILBER: There are people who say you could have done it with less pain. You could have done it more gradually. You didn't have to slam on the brakes and throw 12 percent of the working force out. You didn't have to really put the screws to the economy the way you did. You could have done it more slowly.

KESTENBAUM: What do you say to that, that maybe it could've been done more gently, without as much pain?

SILBER: I think it's possible. I really do. I think it would have been possible to do it more gradually, and the question is would it have gotten fixed as quickly and as permanently.

KESTENBAUM: We asked Volcker about this.

Do you have any regrets?

VOLCKER: Regrets about what? I got regrets every day I'm sitting here. I don't have any regret that we carried out a fight on inflation.

KESTENBAUM: That you carried out the fight against inflation.


GOLDSTEIN: Volcker told us that in the '70s the Fed had tried doing things gently, and it didn't work because it didn't convince people. You know, he said gently wasn't enough to change what was in people's heads to make them really believe.

KESTENBAUM: Just after we interviewed Volcker, the latest inflation numbers came out. Inflation today is basically nonexistent - an annual rate of 0.2 percent. And if you look at what people think inflation will be in the future, it's also very low. This is despite the fact that there is a lot of extra money out there. The Fed created it after the financial crisis.

SILBER: The inflation's nowhere. Zero inflation. How could we have zero inflation when the economy is, by a measure of unemployment, quite robust?

KESTENBAUM: And the Federal Reserve has printed $3 trillion out of nowhere and thrown it out of the country.

SILBER: And the Federal Reserve has printed $3 trillion that is just sitting in banks waiting to explode into spending. And the answer is people believe, at least for now, that the Federal Reserve will not allow inflation to get out of control.

KESTENBAUM: Thanks, you would say, to Paul Volcker.

SILBER: I think that's true.


KESTENBAUM: Will you tell the story of what you told your daughter when we were going out to interview Paul Volcker?

GOLDSTEIN: Yeah. So she saw me in the morning. I think I was wearing, like, a blazer or something that I don't usually wear. She's 5. She said, where are you going? And I said I'm going to talk to the guy who used to be in charge of how much money everybody has. And he decided everybody should have less money and everybody got mad at him.

KESTENBAUM: That's a shorter version.

GOLDSTEIN: Yeah. I mean, I think it hits the main points.

KESTENBAUM: (Laughter).

GOLDSTEIN: You can email us at planetmoney@npr.org. or tweet us - @planetmoney. Our show today was produced by Nick Fountain.

KESTENBAUM: Special thanks today also to Jane Gilvin in our library who helped us find a lot of the archived audio for this story.

GOLDSTEIN: If you're looking for something else to listen to, check out Alt Latino. It's a music show with everything from psychedelic to tropical music to Mexican folk. You can find that npr.org/podcasts, on the NPR One app or wherever you get your podcasts. I'm Jacob Goldstein.

KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.


KESTENBAUM: (Vocalizing).

GOLDSTEIN: They should do, like, an EDM version.

KESTENBAUM: Boots and socks and boots and socks and boots and socks and boots and socks.


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