how did we let inflation get out of control? we think of an inflationary period as a time when everybody loses purchasing power. yet, when prices rise, there are those who benefit. who are the winners and losers from inflation? the primary responsibility for controlling inflation rests with the national administration. finally, in the 1970s, the government was pushed to take drastic action. what was the result? rising prices became a fact of life despite the clamor to do something about it. inflation: how did the spiral begin? with economic analyst richard gill, we'll explore that on this edition of economics usa. i'm david schoumacher.

what is inflation? here at the bureau of labor statistics, they measure inflation, in a sense, with the consumer price index, totaling the costs of goods and services, then comparing them from month to month and year to year. inflation has affected everybody. some look back nostalgically to the three-cent postage stamp.

when prices go up a little, we're not surprised. but when they get out of hand, we take notice, as we did in the late 1960s when prices began spiraling upward. what caused that spiral? as the country grew in the 1950s, no one was worried about inflation. then late in the decade, the economy cooled down. that became a factor in the 1960 elections. i'm not satisfied to have 50% of our steel mill capacity unused, or when the united states had last year the lowest rate of economic growth of any major industrialized society. president kennedy called for a new frontier, a new era of energy and spirit. the election may have been close, but there is general agreement

that a supreme national effort will be needed in the years ahead to move this country safely through the 1960s. this new activist approach was to be reflected in economic policy. walter heller chaired kennedy's council of economic advisors. kennedy was our first keynesian president. it isn't that others hadn't done some keynesian things, but kennedy did it in an avowed and perceptive way. he was very cautious at first. he finally saw a more liberal approach was needed to stimulate the economy. it took the form of a massive tax cut proposed in i962. this net reduction in tax liabilities of $10 billion will increase the purchasing power of american families and business enterprises in every tax bracket.

but john f. kennedy didn't live to see his programs enacted. instead, on that fateful november day, lyndon baines johnson was sworn in as the 36th president of the united states. johnson pursued kennedy's economic proposals and pushed the tax plan through congress. how well did it work? perfectly. business week, which isn't exactly a liberal pro-kennedy publication, said it probably was the most successful tax cut in history. it came out of the textbooks. it went back into the textbooks as the fiscal measure that came closer to carrying out what people had projected for it. that was a tax cut that worked. the economic policies of the kennedy-johnson administration had stimulated demand, creating growth in the economy.

busiss was boomi. jobs were plentiful, unemployment near an all-time low. but many observers, including the president's council of economic advisors, were concerned about the appearance of inflation as the ecomy heated up. [james duesenberry] but in 1965, the real aggregate demand was risi [james duesenberry] but in 1965, it was continuing to rise into 1966. thatroced the high-capacity utilization, the ring raw materials ices, and the decline in unemployment accompanied by labor shortages. many economists felt a tax increase would take money spending would drop, inflationary pressures retreat. but ashe tax measure was debated, the white house would unleash new inflationary forces.

johnson didn't want to hear warnings about inflation. lyndon johnson had a dream of a great society. this administration today, here and now, declares unconditional war on poverty in america. lbj began to build his great society. but the big budget item wasn't the war on poverty. it was the war in vietnam. the defense department said it spent a billion dollars a month. as we und out later, it was costing more. between two and three times more. weere not fully aware, not even as economic advisors in washington, let alone e outside consultants,

we were taken unawares for several months. but by december of 1965, still early in t game, i urged him to go for a sizeable tax increase. he said, "walter, i've checked both houses of congress. i couldn't get a dozen votes." the problem stemmed from the kind of war this was. it was never declared a war. the problem stemmed from the kind of war this was. one main problem was the idea we would run it on the cheap. lyndonohnson wantedtoun ther without letting op know we'ret wa a silent, invisible wa therefore, he di't want to raise taxes. he wand to do e guns-and-butter, the domestic programs and the war. he wand to do ethe stage was se, for the surge of ilaon.

without a tax increase or other effective restraints, business, consumers, and e gornment kept spending. businesses worked near capacity, labor near full employment. expensive new factories were built, and competition for workers bid upages. the demandxceeded e economy's ability to supply, and everything began costing more. finally, the president declared a one-year 10% surtax. but was it enough? was it in time? he didn't want to fight for a tax increase on the backs of an unpopular war. it wasn't enacted till '68, and the horse was out of the barn. in the 1960s, we had a go-go economy. consumer demand ran at a feverish pitch,

as did government spending. that began a cycle of inflationary pressures that would continue for a long time. does a booming economy go hand in hand withnflation? we asked economic analyst richard gill. in the 1960s, most economists would haveaid inflation occurs when the total-- e aggregate-- demand finhe economy services is expanng faster than the aggregate supply. everybody wants more goods, whicaren't available. prices go up. this was the keynesian analysis. these are simplified keynesian-style aggregate dema and supplyurves, similar to but not exactly the same as the curves we might draw for a paicular pduct, say,efrigerars herewe aealing with supply andemand

for the total output of the nation, its gnp. on the vertical axis we are now measuring the price of output in general. that is, the price level. let's concentrate on one feature of these curves-- the shape of this keynesian-style it is drawn quite flate. rough most of its nge unwe approach thisine, which representse flate. full employment gnp.e then, suddenly it goes up quite sharply. start here, far from the full-employment ne. our level of gnp is w. our price level here. we nowry to increase aggregate demand. e tax cut of 1964, giving more income to consumers, would be a perfect example. gnp now goes up, meaning more production and jobs for everybody, but the price level remains the same.

we have growth without inflation. look here. we faced this in the late 1960s. demand was already high. the great society progms had been launched. the vietnam war suddenly gives demand a big shot in the arm. our aggregate demand cur suddeshifts up here.d look at the difference. the increasing demand's effect goes io higher prices. we're already producing at the economy's capacity. supply does not increase. we have entered the wod of demand-pull inflation. keynesians felt that e economic cure was simple. lower demand by raisiaxes. if aax cut can raise demand, a tax increase can rece demand. we can never know how this remedy would ve worked. a tait wasn't tried. can rece demand.

what is certain ishat inflation was to become, in the years following, a more complex and painful phenomenon. inflation, a source of anguish and despair as it undermines puhasing power and eats away at savings. it's hard tola inflatio when it spreads rapidly, many are unprotected, particularly those on fixed incomes. but tfrom unexpected wrising prices. just who are they? people in debt can gain from inflation. the great middle class traditionally goes io debt to buy a house. when interest rates on existing mortgages are lower than the rate of inflation, home owners win. they repay their loans with cheaper inflated dollars while their property values rise. mr. and mrs. lawson found

they had a windfall from inftion. i alize that inflation has been a serious problem for manyeoe, i alize that inflation has been but it really hasn't affected us too much, with our house payments remaining essentially constant. the interest rate-- it was an fha loan o5 1/4%. we're fortunate that inflation really hasn't bothereds. there were other winners. this wave of inflation coincidedwith t credim of the late sixties. consumers wereedtouy on cret y now before prices go up. pay later with cheaper dollars. consumers were spending money. increased demand was creating jobs. so businesses would seem to be winning, t many soon had second thoughts.

business does not fare well overall during inflation. at the initial stages, some businesses think they are better off because profits seem to rise. you have a situation where your inventory cost is low. you purchased goods previously. inflation comes along and you raise prices. suddenly,costs gin to. you get a bigger profi you have this uncertainty. suddenly, most businesses are worse off. you that often leads usty. to recessions. among those clearly worse off were senior citizens. mostly they lived on fixed incomes. they had no extra money. how could they meet raises in rents, heating, or food? it seemed that when youecame old, if you had not been fortunate enough

to put aside or prepare to take care of yourself when you were aging, that you didn't deserve any better. that was a common feeling. but the seniors organized and made their voices heard. in those marches, we achieved recognition that social security was still inadequate. our long goal was to secure a way in which we could link the consumer price index to regular ireases, so you wouldn't haveo beg congress and beg an administration which maybe was conservative and didn't want to give us anying. we felt that if that was automatic with the consumer price index increases, that would be better. it would be less political. we finally achieved that.

others hit hard by inflation werehe working poo anthe unemployed. most of their money went for necessities. the prices of those basics-- food, fuel, housing, health-- were rising the fastest. like the seniors, the poor attemptedto oanize, but eir effos were not . the senior citizen movement, in terms of participation, has been a more effective movement than the poor. the poor are not organized. they vote less than others. they joigroups less than others. the poor aren't like the organized workers. even the organized worker had in new york,ping up. first the sanitation workersstr. shortly afterwards, firemen and police went out. en came the transitanteach.

each group, fighting to hold on to a decent living. wesked victor gottbaum, who represents new york public employees, to recall those turbulent days. i present workers. if they're taking a beating, i hear about it. they don't make unfounded or loud demas. a sewer laborer says, "mary goes into atarket.vic, ite that's what i hear. a hospital worker says, "it's becomi awful." at's what i hear.r. woers wonhigher settlem, but that raised costs and boosted prices. in all ecomic sectors all over the country but that raised costs ination became entrenched. it was hard to keep up. it was harder to feel sure who was winning. the cry to do something came from more quarters. was there any real hope

that the inflation momentum would run out of steam? were we victims of our expectations that inflation would continue? we asked richard gill. that the inflationary momentum would run out of steam. when inflation gets going, all groups feel they are losers. sanitation workers, teachers, senior citizens, rich man, poor man,l you name it. losers. severybody faces higher prices and thinks, "i'm being ruined." this perception that everyone is losing is unjustified. if prices are going up incomes are going up, too. not everybody is losing all the time. still, when this uncertainty about the future becomes contagious, things can get bad for everybody. it's difficult running an efficient, productive economy

when pces change all the time. but whether justified or not, thisear of falling behind can be major facr causing inflation increase. sanitation workers feel they're falling behind. they strike, getting higher wages. now other public employees see they're behind. they demand even higher increases. now coal miners,assembly li, sales clerks, see they're falling behind. up we go. wages, prices, wagesprices. the spiral is upon us. how on earth can it be stopped? by the end of the 1960s, the question wasn'only real, but urgent. president johnson shrugged off the importance of inflation. but by early 1969, when the inflation rate climbed to over 5%, it could no longer be ignored. the business community and consumer groups

demanded that something be done. the responsibilityas left to richard nixon. the primary responsibility for controlling inflation rests with the national administration and its handling of fiscal and monetary affairs. but would this president be willing to accept the traditional keynesian approach to reduce demand by increasing taxes? chief economic advisor paul mccracken exains nixon's reluctance. i don't know oany political situation short of a war, where there isn't hesitancy about increasing taxes. that's the least popular thing the political system wants to hea increased taxes were likely not only to cut inflation, also to slow the economy. nin believed t 1960 economiclowdown had costim theresidency, and his eye was w on t 197elections.

nixon was a lahe feared increased revenues woulincreasegovernment. if taxeswouldn't be ra, why t cut backasegovernment. on federal spending? it would have been irresponsible to start with a cleaver, slicing everything, partly because, i'm sure, a year or so later, government would be trying to increase partleverything i'm sure, they could increase. better to stay in the middle of the stream. if increasing taxes or cutting the budget werenpalatableichard ni, perhapthby restricting is ca functthe money supply,supp ination should ao contract the fed cooperated. the resu? one thing that was expected en by coress

was that the price level would respond to restraint, monetary and fiscal restraint, much more rapidly than, in fact, it did. so there was a teency to say, "well, t policies are failing." as the restrictive policies did take hold, the economy slowed down. unemployment mounted. there was an outcry against this made-in-washington recession. but inflation was barely affected. it was entrenched. people expected it to continue, and it did. could stronger medicine contain it? critical economists and poticians calledould stronger medicine for the government? to freeze prices and wages. those controls worked during wartime, but they had never seriously been considered in times of peace. controlled wage and price ceilings interfered with the free market and laissez-faire traditions.

elecons were 18 months away. someing had to be done. but could a conservative like nixon accept price controls? the time has come for decisive action, action that will break the vicious circle of spiraling prices and costs. i am today ordering a freeze on all prices and wages throughout the united states for 90 days. we were having an inflation before the controls resulting from the expectation that inflation would go on so people were asking for wage increases, and businesses were raising prices in the expectation of inflation. the theory was, if youould stop this process for a while, people would get over that expectation of inflation. a free market could resume with a low inflation rate.

but we only created the expectation that when controls eed, prices would zoom again. prices did zoom up again when controls were lifted. price and wage controls proved ineffective in the long run. even when we took inflation seriously, controlling it was easier said than done. was there anything that could have worked? richard gill offers his commentary. wage and price controls were adoed because the keynesian remedy for inflation-- cutting backaggregate mand-- suddenly seemed inadequate to our new situation. cutta keynesian-style inflation, we recall, looks like this. suddenly seemed inadequate to our new situation. demand is too high, so we cut back, say, by raising taxes. we lower prices without having real effect on gnp or employment. suppose our aggregate supply curve

is different from the keynesian. suppose the whole supply curve looks like th. suddenly, we're in a new world. prices are too high up here, so we cut back aggregate demand to here. prices do fall, but-- and this is a huge but-- so, also, does our gnp. to lower inflation, we plunged the economy into a recession. we traded off some of our employment to bring inflation down. these diagrams present an oversimplified picture of what was going on at t time. generally, we can say that by the early 1970s, prices had a ndency to rise bere fulemployment was ached. inflationary pressures were being felt even when there was substantial unemployment in the economy. no wonder economists turned from keynesian

to other remedies. sad to say, our problems were just beginning. the late sixties boom had its positive aspects-- lots of jobs and a growing economy-- but e continuing demand pulled uprices. the spiral of inflation began, and there was no quick fix. once started it perpetuated itself. as weewere learning to cope with inflation, it was becoming more complex. by the 1970s, inflation was continuing to grow, but demand fell off and the economy stagnated. stagflation, a problem we'll consider in a future edition of economics usa. this is david schoumacher. captioning made possible by the annenberg/cpb project

captioning performed by the national captioning institute, inc. captions copyright 1986 educational fi center annenberg media ♪ for information about this and other annenberg media programs

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♪ annenberg media ♪ for information about this and other annenberg media programs call 1-800-learner and visit us at www.learner.org. annenberg media ♪ one of its major banks, the knickerbocker trust, closes. one man commits suicide. the banking system nearly collapses. what is it about banking that could lead to such a calamity? inhe92, the banking system helped spread prosperity. inhe92in t 1930s, it dragged americaown. how could a holiday put an end to the deepening crisis? banking deregution cost taxpaye almost a half trillion dollars. did banks need more regulation or less? our nation has long tried to protect the banking business, but we've never eliminated all the risks. the banking system: why must it be protected?