What If The Great Inflation of The 1970s Never Happened?

The Actual History

The Great Inflation of the 1970s represents one of the most significant economic crises in modern American history, fundamentally reshaping U.S. economic policy and political landscapes for decades to follow. This period of sustained price increases began in the late 1960s and continued through the early 1980s, with annual inflation rates peaking at 14.8% in March 1980—the highest in U.S. peacetime history.

The origins of this inflation crisis were multifaceted. The seeds were planted in the mid-1960s when President Lyndon B. Johnson simultaneously expanded domestic spending through his Great Society programs while funding the Vietnam War without corresponding tax increases—a classic "guns and butter" policy approach. This expansion of government spending created upward pressure on prices, which the Federal Reserve, then chaired by William McChesney Martin Jr., initially failed to counteract with appropriate monetary tightening.

By the time Richard Nixon took office in 1969, inflation had already reached 6%. Nixon's initial attempts to control inflation included mild fiscal restraint and pressure on the Federal Reserve. When these measures proved insufficient, Nixon implemented a dramatic policy shift on August 15, 1971: the "Nixon Shock." He announced a 90-day freeze on wages and prices, suspended the dollar's convertibility to gold, and imposed a 10% import surcharge. These temporary measures (Phase I) were followed by more flexible controls (Phase II and III), but they ultimately failed to address the underlying monetary expansion.

The situation deteriorated dramatically with the 1973 OPEC oil embargo, when Arab oil producers cut exports to the United States in response to American support for Israel during the Yom Kippur War. Oil prices quadrupled, from approximately $3 to $12 per barrel, sending shockwaves through an economy heavily dependent on inexpensive energy. A second oil shock followed in 1979, triggered by the Iranian Revolution, pushing prices above $30 per barrel.

The economic result was the previously rare phenomenon of "stagflation"—the simultaneous occurrence of high inflation, high unemployment, and stagnant economic growth. By 1974, inflation reached 12.3% while unemployment climbed to 8.5%, creating a painful economic dilemma that conventional Keynesian economics struggled to address. President Gerald Ford's "Whip Inflation Now" (WIN) campaign, complete with buttons and voluntary measures, proved ineffective against these powerful economic forces.

Under President Jimmy Carter, conditions worsened. Carter appointed G. William Miller as Federal Reserve chairman in 1978, who failed to take sufficiently aggressive action against inflation. By 1979, with inflation accelerating to double digits and the dollar weakening on international markets, Carter appointed Paul Volcker to head the Federal Reserve. Volcker initiated a dramatic monetary policy shift, sharply increasing interest rates to restrict the money supply. The federal funds rate eventually reached an unprecedented 20% in June 1981.

This "Volcker Shock" triggered a severe recession in 1981-1982, with unemployment peaking at 10.8% in November 1982. However, it succeeded in breaking inflation's back. By 1983, inflation had fallen below 4%, and the stage was set for the prolonged economic expansion of the Reagan era.

The Great Inflation fundamentally altered American economic thinking, ending the post-war Keynesian consensus and elevating monetarism and supply-side economics. It discredited wage and price controls, reinforced the importance of central bank independence, and established inflation control as the primary objective of monetary policy. The painful experience of the 1970s continues to influence economic policy decisions to this day, with inflation vigilance remaining a cornerstone of Federal Reserve doctrine.

The Point of Divergence

What if the Great Inflation of the 1970s never happened? In this alternate timeline, we explore a scenario where a series of different policy decisions and external circumstances prevented the decade-long price spiral that profoundly shaped modern economic thinking and institutions.

The point of divergence could have occurred through several plausible mechanisms:

Scenario 1: Johnson-era Fiscal Restraint (1966-1968) In this version, President Johnson might have recognized the inflationary risks of simultaneously funding the Vietnam War and his Great Society programs. Facing early signs of inflation by 1966 (which had reached 3.5%), Johnson could have accepted the political cost of either raising taxes more substantially or scaling back domestic spending. Treasury Secretary Henry Fowler might have been more persuasive in convincing Johnson of the long-term economic risks of deficit spending during a period of near full employment.

Scenario 2: Different Nixon Economic Policies (1969-1971) Alternatively, our timeline diverges when President Nixon, advised by a different economic team, pursues a more orthodox approach to inflation fighting. Rather than implementing wage and price controls in August 1971, Nixon might have supported Federal Reserve Chairman Arthur Burns in implementing tighter monetary policy while accepting the short-term political pain of a mild recession in exchange for price stability. Additionally, Nixon might have maintained the Bretton Woods system rather than closing the gold window, preserving a crucial check on monetary expansion.

Scenario 3: Averted Oil Shocks (1973-1979) Perhaps the most dramatic divergence would involve the prevention of one or both major oil shocks. Without U.S. support for Israel in the 1973 Yom Kippur War, or through more effective diplomatic engagement with OPEC nations, the oil embargo might have been avoided. Similarly, different U.S. foreign policy in Iran might have supported a more gradual political transition rather than the abrupt revolution that triggered the 1979 oil crisis.

For this alternate timeline, we'll focus on a combination of these factors, with the central divergence occurring in 1971. In our alternate history, Nixon—influenced by more monetarist-oriented advisors—decides against wage and price controls, maintains dollar convertibility to gold (though with adjusted rates), and supports the Federal Reserve in implementing a more disciplined monetary policy earlier in the decade. Additionally, through a stroke of diplomatic ingenuity, Secretary of State William Rogers negotiates an agreement that prevents the full-scale 1973 oil embargo.

This divergence means that while some inflationary pressure exists in the early 1970s, it never accelerates into the destructive double-digit spiral that characterized our timeline, fundamentally altering the economic and political landscape of the decades to follow.

Immediate Aftermath

Mild Economic Adjustment (1971-1973)

In this alternate timeline, President Nixon's decision to forego wage and price controls in favor of monetary discipline initially creates economic headwinds. The Federal Reserve, with Nixon's reluctant blessing, maintains higher interest rates through 1971-1972, resulting in a mild economic slowdown. Unemployment rises to approximately 6.5% by early 1972—higher than the 5.6% peak in our timeline's 1971-1972 recession.

This economic pain creates political challenges for Nixon as the 1972 election approaches. His approval ratings dip to the low 50s compared to the high 50s he enjoyed in our timeline before the Watergate scandal broke. Democratic nominee George McGovern attempts to capitalize on the economic discontent, focusing his campaign message on jobs rather than primarily on opposition to the Vietnam War.

However, the Nixon administration effectively communicates its "medicine now for health later" economic message. Without price controls distorting market signals, the economy begins to adjust more naturally by mid-1972. Nixon still defeats McGovern in November 1972, though by a somewhat narrower margin than in our timeline, winning 520 electoral votes compared to the actual 520-17 landslide.

Modified International Monetary System (1971-1974)

Rather than unilaterally ending dollar convertibility to gold, Nixon in this timeline works with Treasury Secretary John Connally to negotiate a multilateral reform of the Bretton Woods system in late 1971. The Smithsonian Agreement of December 1971 becomes more comprehensive, establishing a system where major currencies float within wider but still managed bands against the dollar, while the dollar maintains a revised gold link at $50 per ounce (rather than the original $35).

This modified system provides greater exchange rate flexibility while maintaining some discipline on monetary expansion. Federal Reserve Chairman Arthur Burns, without the distraction of administering wage and price controls, focuses more intently on monetary stability. The dollar, while devalued from its original Bretton Woods parity, avoids the steep depreciation that occurred in our timeline, maintaining stronger international confidence.

Energy Policy Divergence (1973-1974)

The most significant immediate difference emerges in 1973. In our alternate timeline, Secretary of State William Rogers (who in this scenario isn't replaced by Henry Kissinger until late 1973) achieves a diplomatic breakthrough with Saudi Arabia and other Arab oil producers in September 1973. While still supporting Israel during the Yom Kippur War, the U.S. leverages its ongoing Vietnam withdrawal and promises of a more "even-handed" Middle East approach to prevent a full-scale oil embargo.

Oil prices still rise in this timeline—from roughly $3 to $6 per barrel rather than the $12 spike in our actual history—creating pressure for energy conservation and alternative development, but avoiding the economic shock that contributed significantly to stagflation. President Nixon initiates "Project Energy Independence" in early 1974, a more moderate version of the actual Project Independence, emphasizing gradual transitions rather than crash programs.

The absence of dramatic energy price increases fundamentally alters the inflation trajectory. By mid-1974, when Nixon resigns due to Watergate (which still occurs in this timeline), inflation runs at approximately 5% rather than the 12.3% peak of our actual 1974.

Ford Administration Economic Policies (1974-1977)

President Gerald Ford inherits a challenging but not crisis-level economy when he assumes office in August 1974. Without the urgent inflation emergency of our timeline, Ford never launches the "Whip Inflation Now" campaign with its infamous WIN buttons. Instead, his administration focuses on gradual fiscal discipline.

The 1974-1975 recession still occurs but is significantly milder without the oil shock's contribution. Unemployment peaks at around 7.5% rather than 9%, and recovery begins by mid-1975. Inflation gradually declines to about 4% by 1976, considered manageable by the standards of the era.

In this economic environment, Ford's reelection prospects in 1976 improve substantially. Without the deep recession and high inflation that damaged his approval ratings in our timeline, Ford narrowly defeats Democratic challenger Jimmy Carter, who fails to gain traction with his "outsider" message amid a recovering economy.

Consumer and Business Adaptation (1975-1977)

Without double-digit inflation, consumers and businesses avoid developing the inflation psychology that proved so destructive in our timeline. Cost-of-living adjustments (COLAs) in labor contracts remain moderate rather than accelerating, avoiding the wage-price spiral that complicated inflation fighting. The stock market, rather than experiencing the prolonged stagnation of the actual 1970s, enters a modest bull market beginning in 1975.

American automakers, without the urgent pressure from both energy prices and inflation, make more gradual transitions toward fuel efficiency. While Japanese imports still gain market share, the Big Three avoid the crisis-level disruption of our timeline. Similarly, the housing market experiences more sustainable growth rather than becoming an inflation hedge.

By 1977, the U.S. economy in this alternate timeline has emerged from the turmoil of the early 1970s with inflation stabilized around 3.5-4%, unemployment below 6%, and GDP growth averaging 3.5% annually—a far cry from the stagflation that would characterize our actual late 1970s.

Long-term Impact

Evolution of Monetary Policy (1977-1985)

Without the trauma of double-digit inflation, central banking evolves along a significantly different trajectory. In this alternate timeline, President Ford reappoints Arthur Burns as Federal Reserve Chairman in 1977. Burns, having gained credibility from the successful inflation containment of the early 1970s, gradually implements more systematic monetary targeting without the drastic Volcker shock that occurred in our timeline.

The Federal Reserve establishes inflation targeting principles earlier, setting a loose target range of 2-4% for annual inflation by 1979. This more gradual evolution means the extreme interest rates of the Volcker era (peaking at 20% in our timeline) never materialize. Instead, the federal funds rate fluctuates between 6-9% during the late 1970s and early 1980s, sufficient to maintain price stability without triggering a severe recession.

This alternate monetary history fundamentally changes the development of central banking:

The Fed gains independence and anti-inflation credibility without the extreme Volcker measures
The concept of central bank independence develops more gradually rather than through crisis
Monetary policy develops technical sophistication earlier without the dramatic pendulum swings

By 1985, the Federal Reserve has established many principles of modern inflation targeting without the economic and social costs of the Volcker disinflation, maintaining inflation in the 3-4% range consistently through the early 1980s.

Transformed Political Economy (1977-1992)

The absence of the Great Inflation dramatically reshapes American politics and economic ideology. Without the stagflation crisis, the rejection of Keynesian economics is less absolute. Instead, a more moderate synthesis emerges, combining elements of Keynesian demand management with greater attention to inflation risks and supply-side incentives.

President Ford's second term (1977-1981) features moderate tax reforms rather than the dramatic Reagan tax cuts of our timeline. His "New Economic Realism" emphasizes balanced budgets, incremental deregulation, and steady growth. Ford's Treasury Secretary, William Simon, implements targeted tax reductions focused on investment incentives rather than across-the-board rate cuts.

When Republican George Bush defeats Democrat Lloyd Bentsen in the 1980 election (Reagan, without the inflation crisis energizing his message, never gains the same political momentum), he continues this moderate economic approach. The "Bush Prosperity" of 1981-1989 features average GDP growth of 3.8%, inflation stabilized around 3%, and unemployment declining to 5% without the boom-bust extremes of our timeline's 1980s.

Key differences from our timeline:

Supply-side economics emerges as a moderate influence rather than a dominant paradigm
Financial deregulation proceeds more cautiously without the inflation-driven pressures
Income inequality increases more gradually without the combined effects of inflation, Volcker recession, and dramatic tax cuts
Labor unions maintain greater strength without the double blow of inflation and the early 1980s recession

By the early 1990s, this alternate America has a more balanced economic structure with a stronger manufacturing sector, less financialization, and more economically secure middle class.

Global Economic Structure (1980-2000)

Without the Great Inflation and subsequent Volcker shock, developing economies never experience the debt crisis of the 1980s that occurred in our timeline. The more stable dollar and moderate interest rate environment allows Latin American and other developing economies to manage their dollar-denominated debts without the defaults and "lost decade" that actually occurred.

The International Monetary Fund and World Bank evolve differently, developing more gradual approaches to economic liberalization rather than the abrupt "Washington Consensus" that emerged from the crisis atmosphere of our timeline's 1980s. Privatization and market reforms still occur globally but at a more measured pace with greater attention to social cushioning.

In Europe, without the inflation crisis demonstrating the challenges of coordinating divergent monetary policies, the development of European monetary integration takes a different path. The European Monetary System still forms, but the eventual Euro project develops more cautiously, with stronger convergence criteria and fiscal coordination mechanisms—potentially avoiding some of the structural weaknesses that would plague the Eurozone during the 2010-2012 debt crisis.

Japan avoids the extreme bubble economy of the late 1980s that resulted partly from global imbalances exacerbated by volatile U.S. monetary policy in our timeline. Without the Plaza Accord of 1985 (which itself was a response to imbalances partially created by Volcker's tight monetary policy), Japan experiences more sustainable growth through the 1980s and 1990s, avoiding its "lost decades."

Technological and Energy Development (1975-2010)

The absence of dramatic oil price shocks fundamentally alters energy and technology trajectories. Without the urgent pressure of energy crises, alternative energy development proceeds more gradually. Solar, wind, and other renewables still develop but receive less government support and investment than in our timeline. Nuclear power, without the coincidental Three Mile Island incident occurring during an energy crisis atmosphere, maintains stronger public support and continues expanding through the 1980s and 1990s.

Automotive technology evolves differently. Japanese manufacturers still gain market share with fuel-efficient vehicles, but American manufacturers adapt more gradually rather than experiencing the crisis-driven restructuring of our timeline. Electric vehicle technology develops more slowly without the urgent push from energy price volatility.

Computer technology and the digital revolution proceed on a similar trajectory to our timeline, as these developments were largely independent of inflation dynamics. However, venture capital and technology financing develop different patterns without the high interest rates and subsequent financial deregulation that shaped our timeline's investment patterns.

By 2010, this alternate America has:

A more balanced energy portfolio with greater nuclear component and somewhat less developed renewable sector
A stronger domestic manufacturing base with less extreme offshoring
More gradual technological development in energy efficiency
A financial sector that, while innovative, is less dominant in the overall economy

Contemporary Implications (2010-2025)

By 2025, the absence of the Great Inflation has created a distinctly different American economic landscape. The most profound differences include:

Monetary Policy: The Federal Reserve operates with a 3% inflation target rather than 2%, allowing more policy flexibility. Without the trauma of 1970s inflation, there's less inflation phobia among policymakers.
Income Distribution: Income inequality, while still present, is significantly less extreme than in our timeline. The share of national income going to the top 1% is approximately 14% rather than the 20% in our actual 2025, reflecting the absence of policies and economic shifts that concentrated wealth.
Industrial Structure: Manufacturing represents 15% of GDP rather than the actual 11%, reflecting more balanced development without the extreme financialization driven partly by post-inflation policies.
Housing Markets: Housing is more affordable relative to incomes, as real estate never fully developed its role as an inflation hedge. Homeownership rates are 3-5 percentage points higher across all demographic groups.
Public Debt Perception: Without the inflation crisis and subsequent ideological shifts, attitudes toward government debt are more pragmatic and less partisan. Public debt stands at approximately 85% of GDP rather than exceeding 120%.
Energy Transition: The clean energy transition proceeds from a different starting point, with nuclear power providing 25% of electricity (versus 19% in our timeline) and a more gradual but still substantial build-out of renewable capacity.
Global Economic Balance: International economic integration has proceeded more gradually and with stronger institutional frameworks, potentially avoiding some of the backlash against globalization that emerged in our timeline.

The COVID-19 pandemic still occurs in this timeline, but the economic response differs notably. Without the historical inflation trauma, central banks and governments implement aggressive support measures with less concern about potential inflation consequences, potentially enabling a stronger recovery with fewer distributional side effects.

When inflation does temporarily surge in 2021-2022 due to pandemic disruptions, policymakers respond with less alarm and more measured adjustments, avoiding the sharp interest rate increases that characterized our timeline's response. By 2025, this alternate America has navigated the pandemic's economic challenges with less extreme policy swings and more attention to inclusive growth.

Expert Opinions

Dr. Christina Romer, economic historian and former Chair of the Council of Economic Advisers, offers this perspective: "The Great Inflation fundamentally rewired both economic thinking and institutional structures in ways we still live with today. In a timeline where inflation remained moderate throughout the 1970s, we would likely see a more balanced macroeconomic paradigm—neither purely Keynesian nor monetarist. The Federal Reserve would still focus on price stability, but likely with more attention to employment and financial stability as co-equal objectives. Without the trauma of double-digit inflation, the policy pendulum swings of the past five decades would have been far less extreme, potentially delivering more consistent prosperity across economic groups."

Professor Barry Eichengreen, expert on international monetary history at UC Berkeley, suggests: "The absence of the Great Inflation would have profoundly altered the international monetary system. Without the volatility of the 1970s demonstrating the challenges of managing fixed exchange rates in a world of capital mobility, we might have seen earlier development of currency blocs with coordinated floating. The dollar would still be predominant but likely less overwhelmingly so. Developing economies would have avoided the debt crisis of the 1980s that set back development for a decade in many regions. Perhaps most significantly, the Euro project might have evolved with stronger fiscal coordination mechanisms from the beginning, potentially avoiding the structural flaws that became apparent during the Eurozone crisis."

Dr. Claudia Goldin, economic historian focusing on labor markets and gender, provides this analysis: "Without the Great Inflation, women's labor force participation would still have increased substantially due to cultural shifts, technological changes, and rising education levels. However, the economic necessity that drove many households to need two incomes during the high inflation era would have been less pressing. This could have led to more varied work arrangements emerging earlier—including more part-time professional options and flexible scheduling. Additionally, without the severe manufacturing decline partly accelerated by inflation and subsequent policies, blue-collar men's earnings would have eroded less dramatically, potentially altering family structures and gender dynamics in working-class communities. The income gap between college and non-college workers might have widened more gradually, allowing greater social mobility."