Inflation in the United States - Part 3
The next year, William Jennings Bryan ran for president on an expressly pro-inflation platform. In one of the most famous American political speeches ever given, he demanded that “you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.” Bryan lost badly to William McKinley, who campaigned on a platform of sound money, and the country would stay on the gold standard until 1933.
The outbreak of World War I caused many disruptions in the American economy even before we entered the conflict two-and-a-half years later. With Russian grain exports blockaded, demand for American wheat soared, as did allied orders for ships, railroad rails, munitions, and other war material.
As a result, prices rose nearly 100 percent in the first two years of the war. When the United States entered the conflict, the federal government set up a series of boards to negotiate prices with producers to see that prices stayed in check while assuring a supply of vital materials. The Price Fixing Committee set maximum prices for such materials as coal and steel, but these maximum prices quickly became the standard prices. The only commodity that had a fixed price by statute was wheat.
With the end of the war 20 months later, the American economy soon returned to normal. Prices fell back to more modest levels, partly due to the very sharp, but short, recession of 1920-21.
The beginning of the Great Depression in 1929 brought not inflation but deflation, which can be an even bigger problem. When inflation is serious, people tend to spend money as soon as they get it, to avoid even higher prices in the future. But in a deflationary environment, people tend to postpone purchases in order to take advantage of lower prices in the future, further depressing the economy.
The Federal Reserve had pushed up interest rates in 1928 and 1929 in order to tamp down speculation on Wall Street. But after the crash of 1929, the Federal Reserve should have lowered them aggressively and in the words of the late governor of the New York Federal Reserve, Benjamin Strong – “flood the street with money.”
Instead, it kept interest rates high. After Britain was forced off the gold standard in 1931, and the world economy spiraled downwards, the Federal Reserve still kept interest rates high to defend the gold standard in this country. As a result, the American money supply fell by a third in the early 1930s, greatly exacerbating the depression. To be sure, the huge number of bank failures in these years, more than 5,000, also contributed to deflation.
With the onset of World War II and the U.S. becoming the “arsenal of democracy,” inflation would have quickly returned as the American economy experienced shortages in many vital commodities. But strict wage and price controls were put in place and many commodities, such as sugar, butter, red meat, shoes, and gasoline, were severely rationed. Some commodities in particularly short supply, such as rubber and building materials, simply vanished from the marketplace.
But while the wage and price controls kept wartime inflation down to about 25 percent, they did not eliminate the inflationary pressures – they only postponed them. When President Truman ended wage and price controls at the beginning of 1946, inflation came roaring to life. The U.S. experienced the greatest peacetime inflation up to that point, as non-governmental spending rose by 40 percent. But the supply of goods could not expand nearly as quickly, as industry needed time to switch over to peacetime production.
In 1946, farm prices rose twelve percent in a single month and were 30 percent higher by the end of the year.
Many economists had thought that with the end of wartime government spending, the depression of the 1930s would return. It did not for several reasons. One was that during the war, with many products such as household appliances and automobiles unavailable, demand for these commodities built steadily. Further, with few things beyond necessities available in the marketplace, the savings rate was unprecedented. In 1940, Americans had held about $4.2 billion in savings, about the same as in 1929. In 1945, personal savings amounted to an astonishing $137.5 billion.
Wages, too, increased once controls were ended. As corporate profits in 1946 increased 20 percent, labor unions demanded higher wages and went on strike to get them. In January 1946, fully three percent of the workforce was on strike, automobile, electrical, and meatpacking industries.
By the late 1940s, with government usually running modest budgetary surpluses and industry once again on a peacetime footing, inflation subsided and the economy grew quickly, doubling between the end of the war and the mid – 1960s.
But it was not to last. When Lyndon Johnson acceded to the presidency on the death of John F. Kennedy, he wanted to complete the New Deal. He pushed through a number of programs, including Medicare and Medicaid, Head Start, and the Mass Transit Act. These new programs caused a breathtaking rise in non-defense federal expenditures. Between 1965 and 1968, they rose by a third, from $75 billion to 100 billion. Because of the Vietnam War, military expenses went up as well, from $50 billion to $82 billion.
This new spending inevitably caused an increase in inflation, which had been minimal since the immediate post-war years. A vicious cycle developed, with lenders demanding higher interest rates to protect them from inflation, while the Federal Reserve pumped up the money supply by buying federal bonds to keep interest rates down.
Part 4 in next week’s edition of The Roundup Record.
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