Shock Values — how inflation shaped American democracy

On September 30 1979, Arthur Burns, former chair of the Federal Reserve Board of Governors, addressed a gathering of the world’s top economic officials in Belgrade. In his lecture, “The Anguish of Central Banking”, Burns explained why inflation had taken hold and why it would probably persist. Central bankers, he argued, had been unable to eradicate inflation because of political and social forces favouring full employment at the expense of stable prices. In such a world, even if central bankers knew that more needed to be done, monetary policy could contribute “only marginally” to reducing inflation. His diagnosis must have unsettled many in the room; perhaps double-digit inflation would never end.

Fortunately, Burns did not convince the tall man who, arriving late, took a seat on the floor. Paul Volcker, the new Fed chair, listened to his predecessor’s lament. But determined to break the inflationary fever, Volcker would soon prove Burns wrong. Less than a week later, on Saturday October 6, Volcker announced sweeping anti-inflationary measures. His “Saturday Night Special” was an inflection point, unleashing an unprecedented tightening of monetary policy that, after two recessions and much political blowback, finally subdued inflation. Central banks could bring about price stability after all.

Though Volcker won the laurels, Burns was right in one regard: inflation and politics are deeply intertwined. One look at the current circus in Washington surrounding inflation makes this plain. And the interaction between the two has a long history. Indeed, as economist Carola Binder argues in her new book Shock Values, fluctuations in prices have “shaped American democracy since its very beginning”, influencing the size, structure and scope of government. 

When prices change, some people do better and some worse. If the price of wheat increases, the farmer is happy while the consumer must pay more for bread. If prices increase broadly, the debtor is happy while the creditor must accept devalued dollars. Price fluctuations also put pressure on the government to intervene for higher prices or lower ones, more inflation or less.

Often, these political debates revolve around money: what counts as money, how much should there be, who decides. Binder skilfully traces America’s circuitous path from a gold and silver standard to a fiat currency, as well as the nation’s recurrent battles over centralised monetary power, from Andrew Jackson’s war on the Second Bank of the United States in 1832 to calls for ending the Fed today. 

But Shock Values is much more than a monetary history. Many of the most illuminating sections concern non-monetary responses to price fluctuations, such as government attempts to control prices directly by setting maximum or minimum prices. Tariffs are another way to alter prices, and as Binder reminds us, tariff disputes in the 1830s became so vicious that South Carolina threatened to secede. By the end of the book, it is hard not to see prices everywhere in history. 

Binder’s writing is clear if a bit dry, and the book could have used another round of editing. Of course, no survey of 250 years of economic history can cover every topic to every reader’s satisfaction. However, some discussion of international comparisons would have been useful; the US, after all, is not the only country to deal with price fluctuations. It was also surprising that President Richard Nixon’s wage and price controls did not receive more attention, especially as Binder was motivated to write the book after a few policy thinkers caused a splash by proposing to revive controls in 2021.

The Nixon episode was remarkable. In August 1971, Nixon — a man with a visceral hatred for controls born from his experience implementing them as a government lawyer during the second world war — imposed a three-month freeze on wages and prices, followed by a bewildering assortment of rules and regulations. That a Republican president imposed these controls, that he was persuaded to do so by a conservative economist (Burns) leading the supposedly independent Fed, that he used powers granted by a Democratic Congress, and that his move was wildly popular (at first), demonstrates just how much inflation can warp politics and beg for deeper analysis. 

Nixon’s controls ultimately failed, and inflation worsened until Volcker took charge. Indeed, while holding prices down by administrative fiat might limit measured inflation for a while, it introduces crushing distortions; the queues at gas stations of the 1970s were only the most infamous byproduct of this misguided policy. As Binder shows, the upshot of Nixon’s failure and Volcker’s success was that price stability became more clearly the Fed’s responsibility, a responsibility that it pursues today through inflation targeting.

Fifty years after Nixon’s gambit, inflation is once again a problem, but policymakers seem to have learnt from the past. There is no gimmick, no painless solution. Central bankers must act, and after a slow start, they have, bringing inflation down rapidly. Jay Powell, the current Fed chair, understands what is at stake. Sure, the Fed has not yet won the battle. It may soon face unprecedented political interference should the White House get a new occupant. But if the Fed holds fast, when Powell gives his valedictory some years hence, it can be one of victory, not anguish. 

Shock Values: Prices and Inflation in American Democracy by Carola Binder University of Chicago Press $35, 352 pages

Max Harris is a senior fellow at the Wharton Initiative on Financial Policy and Regulation

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