The Great Inflation of the 1970s was a period of high inflation and unemployment, caused by loose monetary policies, an energy crisis, and agricultural insecurity. It violated the idea that high unemployment and inflation were impossible to link. Lessons have been learned to avoid future episodes.
The Great Inflation was a period of global economic distress in the 1970s, characterized by very high inflation rates and high unemployment – a situation referred to as “stagflation”. Economic policies have been blamed for allowing big inflation to grow as much as before, and this period in history has been closely analyzed to provide lessons for avoiding future episodes of this nature. A notable feature of the great inflation was the violation of the generally accepted idea at the time that it was impossible to link high unemployment and inflation, a concept promoted by Keynesian theory, a popular approach to economics.
Several factors combined to create the great inflation. One was a loose monetary policy after World War II, designed to promote employment and economic growth. Interest rates were kept low and the money supply was kept high. This contributed to the development of inflation, as readily available credit and money tended to drive up prices. Many governments became concerned about high unemployment and opted to keep interest rates low in hopes of improving the employment situation by worsening inflation.
The 1970s were also marked by an energy crisis. Gasoline prices rose at the pump and created a ripple effect as goods and services became more expensive to produce, leading to rising costs for many consumer goods. Furthermore, agricultural insecurity could be seen during the great inflation. These factors combined to make the prices of many necessary goods more expensive, increasing inflation at a time when many people were unemployed and could not afford to buy the things they needed.
The stock market lost significant value during the great inflation, and this contributed to further economic uncertainty, undermining investor confidence and putting further pressure on the economy. Many nations experienced economic difficulties during this period, until changes in economic policy were made, driving interest rates and the money supply lower, bringing prices to a more manageable level. Other measures and controls were used when nations tried to control their inflation rates.
Although this period officially lasted between 1973 and 1975, many countries faced problems for up to 20 years after the big inflation. Economic bubbles such as Japan’s booming housing market and US tech industry growth further complicated recovery from high inflation as nations recovered.
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