The 1970s in the U.S. was an unusual economic period marked by stubborn inflation that hit people’s wallets hard. It wasn’t just a simple rise in prices but a complex tangle of factors pushing inflation upward. Understanding what fueled inflation in that decade helps explain why the economy struggled and why economists strongly shifted their approach afterward.
Monetary and Fiscal Policies of the 1970s
The roots of inflation stretched deep into government decisions about money and spending. Public policies shaped both how much money was circulating and how much the government was borrowing and spending, creating the perfect storm for rising prices.
Keynesian Economic Policies and the Phillips Curve
Back then, economists still believed in the Phillips Curve—the idea that inflation and unemployment had a clear tradeoff. Policymakers thought tolerating some inflation might mean lower unemployment. This led to an active use of Keynesian economics, which pushed for government spending and monetary expansion to promote full employment, but often without much concern for inflation risks.
The problem was inflation expectations started to climb. People and businesses began to expect prices to rise, so they started raising wages and prices preemptively. This self-fulfilling cycle made inflation harder to control.
Government Spending and Fiscal Deficits
The U.S. was spending big. The costly Vietnam War drained resources. At the same time, ambitious social programs under President Lyndon Johnson’s Great Society expanded government support for education, health, and welfare. These programs increased government deficits dramatically.
Running these large deficits meant the government needed to finance its operations by borrowing or relying on money creation, both of which put upward pressure on prices. The policy focus on economic growth and job creation often overshadowed concerns about inflation.
Federal Reserve’s Monetary Policy Stance
The Federal Reserve in the early ’70s kept interest rates relatively low to support growth and government borrowing. This easier money policy flooded the economy with liquidity, allowing spending and borrowing to surge.
But the Fed misjudged how much this would fuel inflation. The lack of a firm commitment to controlling money growth allowed inflation expectations to embed deeper into the economy. Instead of reigning in price rises, these policies encouraged inflation to spiral higher.
External Supply Shocks Impacting Inflation
Not everything was domestic. Global events hit the U.S. economy hard, pushing costs up outside the control of American policy.
Collapse of the Bretton Woods System and Dollar Unanchoring
In 1971, President Nixon ended the dollar’s convertibility to gold, dismantling the Bretton Woods fixed exchange rate system. The U.S. dollar became a floating fiat currency, losing the discipline imposed by the gold standard.
This shift increased currency volatility. It amplified uncertainties in international trade and finance, which helped push commodity prices, especially oil, higher. The unanchored dollar no longer served as a stabilizing force, making inflation more difficult to control.
The 1973 Arab Oil Embargo and the 1979 Iranian Revolution
Oil shocks were the headline inflation driver. In 1973, the Arab oil embargo sharply cut supplies, causing oil prices to quadruple. Again in 1979, the Iranian Revolution led to a further spike.
These energy price surges weren’t just about gas at the pump—they ricocheted through the entire economy. Higher energy costs raised the price of transportation, manufacturing, and heating, sparking “cost-push” inflation where prices rose because production itself got more expensive.
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Rising Food Prices and Other Commodity Shocks
Adverse weather and global conditions caused food prices to rise sharply during the decade. Bad crops, droughts, and other natural factors reduced food supply, adding more inflationary pressure.
Commodity prices across the board—including metals and raw materials—increased, pushing production and living costs higher. These shocks stacked onto already rising energy costs, making inflation even tougher to break.
Consequences and Policy Responses to 1970s Inflation
The result wasn't just rising prices but a messy economic situation called stagflation—high inflation paired with slow growth and unemployment rising. This contradiction puzzled economists and policymakers alike.
Stagflation: The Dual Challenge of Inflation and Unemployment
Traditionally, inflation and unemployment were seen as opposite forces, but the 1970s defied this. Inflation soared while the economy stalled and unemployment climbed. Businesses faced higher costs but struggled with weak consumer demand.
The usual tools to fight inflation or boost employment failed. Wage and price controls were imposed but only delayed inflation without solving the root problems. The economy was stuck in a tough spot.
Volcker’s Monetary Tightening and Its Effects
The turning point came with Federal Reserve Chairman Paul Volcker in the late 1970s. He raised interest rates aggressively—at times pushing them above 20%—to squash inflation expectations and reduce money supply growth.
This approach was painful. It led to sharp recessions and high unemployment for several years. However, it successfully broke the wage-price spiral and brought inflation down from double-digit levels to a more stable 3-4% by the early 1980s. Volcker’s policies restored confidence in the Fed’s ability to control inflation.
Conclusion
The inflation of the 1970s wasn’t caused by one simple factor. It was the combined effect of large government spending fueled by Keynesian policies, an accommodating Federal Reserve, costly wars, and social programs, along with major supply shocks from oil crises and commodity price surges. The collapse of the Bretton Woods system also played a key role in increasing currency and price instability.
This tough decade taught a critical lesson: managing inflation expectations is as important as managing the money supply itself. The U.S. experience showed that unchecked spending and monetary policies, mixed with external shocks, can lead to prolonged inflation that’s tough to control. Today’s policymakers still draw from this era, balancing economic growth goals with the imperative of keeping inflation stable.