History withholds its wisdom from those who ignore its lessons. Forty years ago this month, the fiscal policy of President Ronald Reagan and the monetary policy of Federal Reserve Chairman Paul Volcker broke the back of the 20th century’s most destructive inflation, ushered in an economic expansion that effectively lasted a quarter of a century, and banished inflation—until now.
The buildup to the Great Inflation started in 1966, when Congress, at the urging of the Johnson administration, expanded funding for both the war in Vietnam and the War on Poverty. This “guns and butter” policy produced a double-digit surge in federal spending. By 1973 inflation was running at 8.7% and would average 9.2% for nine years—far surpassing average inflation of 3.3% between 1946 and 1972 and 2.7% from 1982 through 2019. During the 1973-81 Great Inflation, even after adjusting for inflation, federal revenue rose by an average 4.1% a year. The share of the economy taken by the federal government in taxes rose by nearly one-eighth, from 17% to 19.1%.