Inflation Destabilizes Presidencies and Nations

1970s provide cautionary tale for 2020s politicians

Rapid inflation in the 1970s was so virulent in the U.S. that it destabilized American politics. The ambitions or dreams of three presidents — Richard Nixon, Gerald Ford, and Jimmy Carter — were shattered by inflation. This could be a cautionary tale for politicians in the 2020s. Inflation claimed two political victims in 2024 alone: Joe Biden and Kamala Harris, not to mention flipping the U.S. Senate, returning it to Republican control.

If Donald Trump and J.D. Vance are not careful, inflation could also lead to political headaches if not downfalls. Their contradictory proposals — to provide huge tax cuts, overstimulate the economy, add trillions to the national debt; and deport 12 million undocumented immigrants are likely to lead to worker shortages, higher food prices, and construction costs.

Brace for Stagflation? High Inflation and High Unemployment?

CNN: “Jamie Dimon, head of America’s largest bank, JPMorgan Chase — and commonly referred to as the ‘president of Wall Street’ — spent much of 2024 warning that there’s an elevated risk that the US experiences 1970s-esque stagflation, which is when economic growth stagnates while inflation heats up.

“I look at the amount of fiscal and monetary stimulus that has taken place over the last five years — it has been so extraordinary; how can you tell me it won’t lead to stagflation?” Dimon said at a conference in May.

With Donald Trump promising trillions in tax cuts to overstimulate the economy and broad-based tariffs, the prospect of stagflation increases, CNN reported.

Since Trump cannot run for re-election in 2028, he cannot choose the shrewd but cynical path of Richard Nixon. He shrewdly but cynically delayed the worst impact of inflation until after the 1972 election by imposing wage and price controls in August 1971 and abandoning the gold standard. But in doing so, he violated conservative laissez-faire principles to refrain from intervening in the free market.

Once inflation was unleashed in Nixon’s second term, one could argue that it played a role in Nixon’s forced resignation in 1974 ostensibly due to the Watergate scandal, and to the loss of his successors Gerald Ford in 1976 and Jimmy Carter in 1980.

Inflation was finally broken in 1983 and price stability was finally achieved in 1984, and continued — except for a blip in 1991-2, leading to the loss of the presidency by George H.W. Bush. But price stability continued mostly for 30 years, until 2007, when the Great Recession began. It then victimized George W. Bush and John McCain, the unpopular outgoing president and Republican standard bearer in 2008.

A downward economic contraction continued into 2009, followed by a slow recovery from the Great Recession into 2016, when the American economy finally fully returned to pre-2007 growth.

In Donald Trump’s first term beginning in 2017, faster growth was stimulated by huge tax cuts, leading to full employment through 2019. But then another economic crash began in the spring of 2020 as a result of pandemic shutdowns. The breaking of supply chains by the pandemic along with huge stimulus spending by both the Trump and Biden administrations ignited inflation once again.

In 2024, inflation receded without a recession — a triumph for American economic policy that economists hailed as a “soft landing.” But it was not fast enough for the majority of voters to feel that the economy was as good as it was during the first three years of the Trump administration.

Stanford University historian Jennifer Burns explained in The Wall Street Journal, “How Inflation Ended Neo-Liberalism, and Re-elected Donald Trump,” 1971 was when the U.S. and the rest of the world moved to floating exchange rates.

“Currencies competed against each other in global capital markets. This, along with new computer technologies contributed greatly to globalization.”

Trump “has inflation to thank for his victory,” Burns wrote, but he “shows little understanding of its dynamics.”

Run-away Inflation in History Has Wrecked Havoc. So Have Bubbles

Run-away or hyperinflation has been one of the causes of political extremism and instability throughout history. Wikipedia offers a litany.

Most famously, hyperinflation sparked the rise of Nazism in Germany in the 1920s and 1930s, due in large part to the punishing terms the victors, especially France, imposed upon Germany in reparations for “starting” WWI. The Treaty of Versailles, which took effect in 1920, saddled Germany with an extreme war debt. As Investopia explained: “Prohibited from making payments in their own currency, the Germans had no choice but to trade it for an acceptable “hard currency” at unfavorable rates. As they printed more currency to make up the difference, the rates worsened, and hyperinflation quickly took hold. At its height, hyperinflation in Weimar Germany reached rates of more than 30,000% per month, causing prices to double every few days. Some historic photos depict Germans burning cash to keep warm because it was less expensive than using the cash to buy wood.”

Investopia also cited hyper-inflation in Eastern Europe after WWII. “The worst hyperinflation ever recorded took place in Hungary in 1946 at the end of World War II. As in Germany, the hyperinflation that occurred in Hungary was a result of a requirement to pay reparations for the war that had just ended. Economists estimate that the daily inflation rate in Hungary during this period exceeded 200%... During this period, prices in Hungary doubled every 15 hours.”

Last Inflationary Period of US

In the United States, the decade from 1973 to 1983 was an inflationary period, with interest rates rising to nearly 20 percent, making borrowing for business expansion extraordinarily difficult. The stock market lost nearly 50 percent of its value over a 20-month period. Unemployment rose to a double-digit level.