35th Anniversary of Jimmy Carter’s Anti-Inflation Speech to the American People

October 24, 2013

The background to Jimmy Carter’s infamous speech on inflation, delivered October 24, 1978, was a four-percentage point rise in U.S. CPI inflation from 4.9% in December 1976, the month before his inauguration, to 8.9% in October 1978.  After asking rhetorically how to reverse inflation, the former president admitted, “I do not have all the answers. Nobody does. Perhaps there is no complete and adequate answer….I cannot guarantee that our joint effort will succeed. In fact, it is almost certain not to succeed if success means quick or dramatic changes.”  He conspicuously did not stress the application of monetary restraint and portrayed monetary restraint as more cause than solution to the problem:

Rising interest rates have always accompanied inflation. They add further to the costs of business expansion and to what consumers must pay when they buy houses and other consumer items.  The burden of controlling inflation cannot be left to monetary policy alone, which must deal with the problem through tight restrictions on money and credit that push interest rates up.

The speech also ignored the self-reinforcing vicious circle of dollar depreciation and accelerating domestic inflation other than to acknowledge their correlation.  “If inflation gets worse, several things will happen. Your purchasing power will continue to decline, and most of the burden will fall on those who can least afford it. Our national productivity will suffer. The value of our dollar will continue to fall in world trade.”

President Carter offered a laundry list of actions by government.

We will cut the budget deficit.

We will slash Federal hiring and reduce the Federal work force.

We will restrain Federal pay.

We will delay further tax cuts.

We will use Federal policy to encourage more competition.

We will set specific standards for both wages and prices throughout the economy.

We will use the powers at our disposal to make this program work.

And we will submit new anti-inflation proposals to the Congress next January, including the real wage insurance proposal I’ve discussed tonight.

But mainly, the speech placed the heaviest burden for reversing inflation on a call for responsible behavior of price setters and wage earners, setting the bar for maximum increases at 7% on each group but doing so only on a voluntary basis without the enforcement of the law.  He compared collective behavior to a crowd at a sporting event.  “It’s like a crowd standing at a football stadium. No one can see any better than when everyone is sitting down, but no one is willing to be the first to sit down.”  So he asked for patience, warning against the expectation of a quick turnaround in inflation, and insinuated that criticism of his proposals would jeopardize their eventual success:  “These proposals, which give us a chance, also deserve a chance. If, tomorrow or next week or next month, you ridicule them, ignore them, pick them apart before they have a chance to work, then you will have reduced their chance of succeeding.”

International markets would have no part of Carter’s call for cooperation.  The dollar immediately and before the prime-time speech had been completely delivered, began to tank in Asia overnight, dropping from DEM 1.8160 to an all-time low a week later of DEM 1.7030 and prompting a dramatic policy reversal just a week later.  In an unprecedented move, a one percentage point Fed discount rate hike was announced from the White House, not the central bank, along with other actions ( e.g., Carter bonds and the assembly of a huge war chest of resources to finance intervention support for the dollar).  Carter was right about one thing.  Inflation did not stop climbing, crossing above 10.0% by March 1979 and peaking eventually at 14.8% in March 1980.

I submit that the story of America’s fling with inflation in the late 1970s and early 1980s has relevance to current times and important lessons to teach.  Today’s problem is vastly different, to be sure.  Most of the post-Carter years have been ones of chronic disinflation, regardless of what was happening on the fiscal front.  Since 2000, the labor market has underperformed historical norms very badly.  While different, today’s imbalances are more severe than those faced by the Carter administration.  No, the lesson I take from this important chapter of U.S. economic history is that when economies go off the rails, it is essential for government to take the lead in fixing the problem.  Carter tried to blame the people and place the burden of the remedy on the private sector. 

He misunderstood the essential monetary dynamics of inflation and undermined the public’s confidence in his policy by all but admitting to being clueless about the problem’s cause.  Carter showed an inexcusable naivete about how to stop inflation and the role of markets in the process.  His speech rejected the remedy of recession:  “a deliberate recession would throw millions of people out of work…and must be rejected.”  In October 1979, the Fed adopted a policy of quantitative tightening, QT, which led to sky-high nominal and real interest rates.  Demand-pull inflation was smothered by the inevitable recession that followed, and that was how the problem got fixed.  There is a belief in currency forecasting circles that if not by design, then by market circumstances will unsustainable policies get changed eventually, and so it was in 1978-80.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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