US Economy Crisis in 1970's

Crisis.

During the 1970s business conditions and the economy began to disappoint the expectations that Americans had built up during the post-World War II years. International events—the most important being the two oil crises of 1973-1974 and 1979—served as bookends for a decade that saw rampant inflation and slow economic growth, an unprecedented combination that led to a new term being coined, Stagflation. It also led to a decade-long lesson for the great institutions of the United States—the government, big business, labor unions -—of their growing powerlessness to affect the economy by the means of the previous forty years.

Inflation.

The effects of the Vietnam War and Presi-dent Lyndon Johnson's Great Society programs on the U.S. economy came in the 1970s in the form of increasing inflation. Inflation was also exacerbated by President Richard Nixon's political unwillingness to curb government.

"Stagflation"

The term "stagflation" -- an economic condition of both continuing inflation and stagnant business activity, together with an increasing unemployment rate -- described the new economic malaise. Inflation seemed to feed on itself. People began to expect continuous increases in the price of goods, so they bought more. This increased demand pushed up prices, leading to demands for higher wages, which pushed prices higher still in a continuing upward spiral. Labor contracts increasingly came to include automatic cost-of-living clauses, and the government began to peg some payments, such as those for Social Security, to the Consumer Price Index, the best-known gauge of inflation. While these practices helped workers and retirees cope with inflation, they perpetuated inflation. The government's ever-rising need for funds swelled the budget deficit and led to greater government borrowing, which in turn pushed up interest rates and increased costs for businesses and consumers even further. With energy costs and interest rates high, business investment languished and unemployment rose to uncomfortable levels.

In desperation, President Jimmy Carter (1977-1981) tried to combat economic weakness and unemployment by increasing government spending, and he established voluntary wage and price guidelines to control inflation. Both were largely unsuccessful. A perhaps more successful but less dramatic attack on inflation involved the "deregulation" of numerous industries, including airlines, trucking, and railroads. These industries had been tightly regulated, with government controlling routes and fares. Support for deregulation continued beyond the Carter administration. In the 1980s, the government relaxed controls on bank interest rates and long-distance telephone service, and in the 1990s it moved to ease regulation of local telephone service.

But the most important element in the war against inflation was the Federal Reserve Board, which clamped down hard on the money supply beginning in 1979. By refusing to supply all the money an inflation-ravaged economy wanted, the Fed caused interest rates to rise. As a result, consumer spending and business borrowing slowed abruptly. The economy soon fell into a deep recession.

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