I grew up in the 1940s and came of age in the 1950s. My economic behavior and attitudes were shaped by my parents’ memories of the Great Depression of the 1930s.
My guess is that the behavior and attitudes of most Americans younger than 50s is the Great Inflation of the 1970s, when the Consumer Price Index rose more than 10 percent almost every year, peaking out at 15 percent in 1980.
Inflation turned all the rules of rational behavior upside down. People who saved their money saw the value of their savings dwindle down to nearly nothing (the stock market was virtually flat during that decade) while those who borrowed money and spent it were the prudent ones.
President Nixon stopped inflation temporarily by imposing wage and price controls, but this did not get at the root of the problem. President Gerald Ford tried an ineffective voluntary program called WIN – Whip Inflation Now. President Jimmy Carter appointed Paul Volcker at chair of the Federal Reserve Board, and Volcker acted to stop inflation in the only way he knew how – by choking off the growth of the U.S. money supply. Volcker’s action choked off the availability of credit. Many small businesses, which depend on credit, went broke.
A recession began in which unemployment went into double digits. President Carter supported Volcker. He did not try to reverse the Federal Reserve’s policies, nor did he distance himself, even though this cost him whatever chance he may have had to be re-elected. President Reagan did the same, even though the recession put his re-election at risk.
On this question both Carter and Reagan were patriots who did what they thought was necessary for the public good even when it was to their political disadvantage.
The recession came to an end, and the CPI has been low ever since. This was a good achievement, but as in other Reagan administration policies, it generated bad memes. One meme is that you can act in the interests of bankers against workers and small-business owners and not pay a political price. Another is that fighting inflation, even when inflation is as low as it is now, is the overriding goal to which economic growth, employment and everything else must be subordinated. Legislation is now pending before the House of Representatives to change the charter of the Federal Reserve from the dual mission of promoting low inflation and economic growth to low inflation only.
Click on Stagflation wiki for the Wikipedia article on 1970s inflation and how economists explain it.Click on The Inflation of the 1970s for a 1995 presentation by Brad DeLong, an economist of the faculty of the University of California at Berkeley. DeLong thought one possible cause of the Great Inflation was simply that decision-makers were slow to give priority to inflation-fighting. Another was the failure of the Johnson and Nixon administrations to raise taxes to pay for the Vietnam war. A third explanation is the oil price shocks of 1973 and 1979 combined with similar less-publicized price shocks for other commodities.Political writer Kevin P. Phillips pointed out in 2008 that the formula for calculating the Consumer Price Index was changed under the administrations of Presidents Kennedy, Johnson, Nixon, Reagan, George H.W. Bush and Clinton. All the changes made the rate of inflation seem lower. This diminishes Reagan's achievement, but he was no worse than many of his predecessors and successors, and nobody who remembers that era doubts the important victory over inflation.Click on Numbers racket for Phillips' 2008 article in Harpers about manipulation of economic statistics.
The above charts on changing methods of calculating inflation are based on information from a consulting economist named John Willliams. Click on Shadow Government Statistics for his web site.
Click on Carter, Reagan and the Misery Index for more about the Great Inflation.
Click on The Reagan Years for a menu of links to statistical information compiled by Steve Kangas on the Reagan era’s economic policies. [Added 2/25/11]