Brace For Hyper-Inflation, 2

Economist Allan Meltzer explains how hyper-inflation developed in the 1970s.  It wasn’t because people were stupid then.  It wasn’t because they didn’t care about inflation.  It wasn’t because they didn’t think inflation was a problem.

It was because they thought pumping money into the economy would strengthen the recovery, add jobs, etc. and because the Fed wasn’t independent enough to stand up to political pressure.

Sound familiar?

Allan Meltzer, NYT: IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

Back then, as now, the members of the Fed were well aware of the harmful effects of inflation. In private, they vowed not to let it get out of hand and several times even started to do something about it. But when their anti-inflationary moves caused the unemployment rate to rise to 6.5 per cent or 7 per cent, they forgot their promises and again began expanding the money supply and reducing interest rates.

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See Also: Brace For Hyperinflation

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