Jim Reber: Monetary Policy for the WIN

It may be hackneyed to say that history repeats itself, but that doesn’t mean it’s untrue. Look no further than business and interest rate cycles. We’ve all seen charts and tables lately that display the confluence of short- and long-term interest rates, the relationships between fed funds and unemployment, and correlations of mortgage costs and housing prices. 

As it turns out, exactly one-half century ago, many of the same forces present today in our domestic and global economies were at play. It caused the Federal Reserve to take aggressive and even unprecedented action that would have consequences in the near and intermediate term. There was also a campaign from the White House to drum up public support that, in retrospect, was almost comical. Since we’re at the 50th anniversary of these events, and there seem to be a few parallels today, let’s see what was causing community bankers some heartburn in 1973.

Crude references

The roots of the economic distress visited upon the American people back then was an oil embargo orchestrated by a cartel of Middle East oil-producing countries known as the Organization of Arab Petroleum Exporting Countries (OAPEC). This was in retaliation for what the cartel deemed was the Western democracies’ support of Israel in the Yom Kippur War in October 1973.

However, the U.S. economy was already on shaky ground prior to the embargo. High levels of deficit spending (by 1970s standards) to help finance the Vietnam War had pushed inflation into the 6% range early in the decade. In response, the Federal Reserve board, chaired by Arthur Burns, began raising fed funds aggressively. From a starting point of 5.5%, the benchmark overnight rate reached 10% by the end of the year, which was the first time we had ever seen double-digit fed funds. 

Meanwhile, the stock market was tanking (S&P 500 Index was down 17% in 1973 and another 30% in ’74), partly in response to the oil embargo that went into effect in October. This caused the price of crude oil to skyrocket. With that came increases in overall inflation and concerted efforts by the Fed and the Ford administration (which took office in August 1974 upon the resignation of Richard Nixon) to get prices under control.

Although the embargo only lasted for six months, the price of a barrel of crude oil quadrupled, and annual inflation rates hit over 11% by December 1974. Gross domestic product (GDP), as we’ve been reminded, is reported in “real” terms (i.e., net of inflation), so it too was caught up in this vortex. That period is now referred to by economists as the 1973–75 Recession and was our first dose of “stagflation,” in which persistently high prices accompanied moribund economic activity.

All aboard

President Ford’s advisors hatched a plan to drum up grassroots support for inflation-fighting ideas, and Congress established a conference on ways to address it at the consumer level. From that came the “Whip Inflation Now” (WIN) initiative, the much-derided campaign for reclaiming price stability. The administration even produced a collection of pins, buttons, t-shirts and earrings for those engaged citizens who were willing to take their inflation-fighting commitments to the streets.

A lot of the inflation pressures in 1973 resulted from supply shortages. The commodities in play were different from 2023 (e.g., crude oil versus food/autos/housing) but the fundamentals were the same.

The chairman of the Council of Economic Advisors at the time was none other than Alan Greenspan, who in his memoirs called the campaign “unbelievably stupid.” It’s highly unlikely the aggregate activity by those festooned in WIN apparel amounted to a constriction of demand that moved the needle one iota. Still, between the Fed’s pressure on interest rates (fed funds hit 13% in mid-’74), and unemployment hitting 9% in 1975, inflation eventually retreated to a more modest but still problematic level in the mid-6%s. This helped lead Ford to defeat in the 1976 presidential campaign and set the stage for inflation to really get loosed later in the decade.

Seeing is believing

What did we learn from this history lesson? I think there are three takeaways:

1. A lot of the inflation pressures in 1973 resulted from supply shortages. The commodities in play were different from 2023 (e.g., crude oil versus food/autos/housing) but the fundamentals were the same. Only when supplies met demand did prices get back in line.

2. Inflation-fighting campaigns are multiyear efforts. Core inflation averaged over 11% from 1979–1981, at a time when fed funds averaged 13%. This may be an extreme case in terms of the values, but not the durations.

3. It’s easier to print a bunch of tchotchkes that proclaim to “WIN” than to actually whip inflation now. I think Jerome Powell would tell you the same thing.