1970s Stagflation: Oil Shocks, Nixon's Price Controls and Paul Volcker

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The word stagflation was popularized by British Conservative politician Iain Macleod in a 1965 speech to the House of Commons warning of rising prices and slowing growth together. Postwar Keynesian policy relied on the Phillips curve, a trade-off in which lower unemployment meant higher inflation, so governments believed they could steer between the two. The 1970s broke that model. Egypt's Gamal Abdel Nasser closed the Suez Canal from 1967 to 1975, rerouting shipping around Africa. After Richard Nixon sent about $2.2 billion in military aid to Israel in the 1973 Yom Kippur War, Arab oil exporters imposed an embargo and oil prices quadrupled, as the Bretton Woods system of gold-backed fixed exchange rates collapsed.

In August 1971 Nixon imposed wage and price controls, which led producers to hold back goods and fed the gas lines, while the U.S. M2 money supply grew close to 15 percent a year. Milton Friedman and Edmund Phelps argued that persistent inflation becomes expected, driving a wage-price spiral. Neoclassical economists split the problem into real causes of stagnation and monetary causes of inflation, and Austrian economists pointed to the Cantillon effect. Jonathan Nitzan and Shimshon Bichler proposed differential accumulation, and Jane Jacobs looked to import-replacing cities. The cure came from Fed chairman Paul Volcker, who squeezed the money supply from 1979 to 1983 and pushed prime rates into double digits; unemployment peaked at 10.4 percent in early 1983.

• Macleod described the situation as the worst of both worlds, inflation on one side and stagnation on the other.
• In 1919 John Maynard Keynes quoted Lenin on debauching the currency and warned that price controls lead to barter.
• Modern textbooks treat sticky prices as explaining short-term supply shocks, but prolonged stagflation as a sign of excess money growth.
• Differential accumulation holds that dominant firms raise prices faster than smaller rivals during crises to gain relative power.
• Jacobs argued that nations are political boundaries and that resilience comes from cities that balance local production and imports.