It’s a giant gap in our history. The Great Inflation, argues award-winning columnist Robert J. Samuelson in this provocative book, was the worst domestic policy blunder of the postwar era and played a crucial role in transforming American politics, economy, and everyday life–and yet its story is hardly remembered or appreciated. In these uncertain economic times, it is more imperative than ever that we understand what happened in the 1960s and 1970s, lest we be doomed to repeat our mistakes.

From 1960 to 1979, inflation rose from barely more than 1 percent to nearly 14 percent. It was the greatest peacetime inflationary spike in this nation’s history, and it had massive repercussions in every area of our lives. The direct consequences included Ronald Reagan’s election to the presidency in 1980, stagnation in living standards, and a growing belief–both in America and abroad–that the great-power status of the United States was ending. The Great Inflation and Its Aftermath traces the origins and rise of double-digit inflation and its fall in the brutal 1981-82 recession, engineered by the Federal Reserve under then-chairman Paul Volcker and with the staunch backing of Reagan.

But that is only half the story. The end of high inflation triggered economic and social changes that are still with us. The stock market and housing booms were both direct outcomes; American business became more productive–and also much less protective of workers; and globalization was encouraged.

We cannot understand today’s world, Samuelson contends, without understanding the Great Inflation and its aftermath. Nor can we prepare for the future unless we heed its lessons. This incisive and enlightening book will stand as the authoritative account of a watershed event of our times.

Praise for The Great Inflation and Its Aftermath

"Newsweek and Washington Post columnist Samuelson is one of the rare journalists who debates politics and economics with a healthy skepticism toward conventional wisdom. Politicians would do well to study [the errors] the past that teach that choosing quick fixes only delays and worsens the inevitable.”– Booklist

"If you want to understand the economic events of the last half century, you should read. . . Robert Samuelson's The Great Inflation and Its Aftermath: --U.S News & World Report.

"Samuelson, a columnist for the Washington Post and Newsweek, presents a highly readable and thought-provoking discussion of the crippling inflation that hit the United States from the mid-1960s to 1982, resulting in four recessions. According to the author, the culprit of inflation was the 'collective failure of communication and candor by the nation's economists'; their bad advice became bad policy as both parties in the White House propagated 'economic ignorance' that led to the Great Inflation. The memory of the Great Depression led to 'a full employment obsession' — among other dangerous myths and stereotypes that were the 'major barrier' to economic convalescence — culminating in a stalemate that was only lifted during the 'accidental alliance' between Reagan and Federal Reserve chairman Paul Volcker. While business cycles seem milder now ('The Great Moderation'), the author argues that the cycle could repeat. The book's detailed sketches of the working of the Federal Reserve, stock market and corporate America give a comprehensive picture of the economy, which Samuelson describes as a 'social, political, and psychological' mechanism encompassing ideas and values as much as trade and finance." Publishers Weekly (Copyright Reed Business Information, Inc.)

In 1975, when I first arrived in Washington to work as a Senate staffer, I was taken aback by a comment from the economist Arthur Okun at a congressional hearing. Inflation was then gaining momentum. Okun, one of the most distinguished U.S. economic thinkers, bluntly admitted that we don't understand inflation — and never have.

Rarely before or since has Washington witnessed such... Washington Post Book Review (read the entire Washington Post review) humility about economic policy. Overall, the past five decades have been an age of economic hubris. In the 1960s, we sought to end poverty through federal spending. By the late '70s, we thought that controlling the money supply could solve everything. In the '80s, tax incentives were seen as capable of dramatically increasing the rate at which people saved. By the '90s, it seemed to many that Alan Greenspan could fine-tune the business cycle out of existence by tinkering with the Federal Reserve's interest rates. Now comes Treasury Secretary Henry Paulson, offering a new taxpayer-funded bailout scheme nearly as often as he changes his shirt. Almost overnight, it seems, we have become convinced that massive infrastructure spending can save us.

The dangers of this constant search for an economic panacea are clear from two important new books: Robert J. Samuelson's "The Great Inflation and Its Aftermath" and Paul Krugman's "The Return of Depression Economics and the Crisis of 2008."

Samuelson, a longtime economic columnist for The Washington Post and its sister publication Newsweek, has become the Cal Ripken of economic journalism. His meaty body of work serves as a kind of national economic encyclopedia. At first glance, Samuelson's book, which describes the implications of the great inflation of the 1970s, may seem irrelevant or out of touch, given today's growing fears of deflation. Nothing could be further from the truth.

What screams out from this book is the need for policymakers to admit, as Samuelson puts it, "how little — not how much — we know." He describes the great economic overreach of the 1960s, when Federal Reserve policymakers aimed to produce full employment, thinking they could trade a slight increase in inflation for a significant increase in jobs. As a result, Samuelson says, "too much money chased too few goods," the classic recipe for inflation. In 1962, a Hershey bar cost a few pennies and a full-sized Chevrolet $2,529. By 1994, the candy bar had jumped to 75 cents and the Chevy to $19,495. Samuelson calls this rapid rise in prices "a self-inflicted wound that resulted from collective hopefulness and intellectual overconfidence."

"With hindsight, we know that the idea that the economy's adequate, if imperfect, performance could be substantially improved was a pipe dream," he writes. "The resulting policies not only didn't do what they promised, they actually did the opposite — led to more, not fewer, recessions; to higher, not lower, unemployment; to slower, not faster, economic growth. ... What is relevant for our era is that these policies were not undertaken on ignorant whim. Rather, they embodied the thinking of most of the nation's top economists."

Samuelson's book also describes the painful cure administered by Paul A. Volcker, chairman of the Federal Reserve from 1979 to 1987 and now Barack Obama's pick to head the White House Economic Recovery Advisory Board. In an unspoken alliance with Ronald Reagan, Volcker "bludgeoned the economy" with interest-rate hikes, deliberately producing the recession of 1981-82. As the economy stumbled, cars went unsold, office space lay vacant, and unemployment topped 10 percent. This "glut" of labor and goods finally broke the back of inflation; though Volcker's policies were "punishing," the nation went on to experience two decades of vigorous, non-inflationary growth.

To Samuelson, the overconfidence of 1960s policymakers should give us pause: "The law of unintended consequences went into overdrive," he warns, "and might again."

Krugman, a New York Times columnist and last year's recipient of the Nobel Prize for economics, is perhaps his generation's greatest expert on foreign exchange, the flow of money across borders. He argues that the Asian financial crisis of the late 1990s, in which several nations' currencies collapsed, was a dress rehearsal for our current global crisis, in which stocks and bonds in many countries have plummeted. In both cases, he writes, policymakers practiced "amateur psychology" in a futile effort to move markets. In the earlier crisis, the U.S. Treasury Department and the International Monetary Fund encouraged countries to raise interest rates to bolster their currencies, a policy that Krugman says "exacerbated slumps instead of relieving them."

Krugman's book, an updated version of his 1999 volume "The Return of Depression Economics," contends that the Federal Reserve is now mired in a Japan-style "liquidity trap" in which interest rates are so low that cutting them has little impact. We also have an essentially unregulated banking system — the root of the credit crisis — that is unable or unwilling to lend. While a depression isn't likely, Krugman concludes, "depression economics" — "the kinds of problems that characterized much of the world economy in the 1930s but have not been seen since" — has returned. The value of virtually every asset in the world, from corporate shares to real estate to oil reserves, has fallen. This is destroying demand, making it harder to get lenders to lend and spenders to spend.

Reading both books, I wondered about President-elect Barack Obama's intellectually gifted economic policymakers, including Volcker, economic czar-in-waiting Larry Summers, Treasury Secretary-designate Timothy Geithner and future Council of Economic Advisors director Christina Romer. Will they, too, succumb to hubris? America's roads and bridges are crumbling. But it would be dangerously over-confident to believe that infrastructure spending alone constitutes a recovery program. How will building a bridge thaw frozen credit markets? And how will construction projects revive an economy that is 85-percent service oriented? In the 1990s, Japan offered no fewer than eight massive infrastructure spending programs, each to little avail because its financial system remained unreformed. The Japanese economy survived its "lost" decade largely because its corporate sector could export goods to a booming world economy. If only we were so lucky today.

My suspicion is that American consumption patterns (what economists call the marginal propensity to consume) are returning to the lower levels that prevailed before the last few decades. Thus, the Obama stimulus plan may be far too small to dramatically effect the economy. Team Obama will, I suspect, have no choice but to cajole the Federal Reserve to buy massive numbers of mortgages directly and try to stop the slide in housing prices by creating an explosion of mortgage refinancing.

But this is no time for policy arrogance. Samuelson's and Krugman's books suggest that economics should be viewed less as a science than as a social art. How quickly the global economy recovers will depend on more than numbers: interest rates and the size of a fiscal stimulus package. It will depend on psychology: whether Obama can restore confidence and optimism.

The world desperately needs a big-think financial doctrine. The problem is not a lack of capital or liquidity, but a lack of trust in the financial system. Team Obama needs to use its considerable brainpower to outline nothing less than a global financial architecture for the 21st century. This, however, will be a process of muddling through, a sorting out of possible solutions by trial and error. As Samuelson and Krugman show, there are no quick-fix panaceas. The age of hubris is, or should be, over.

David Smick is chairman of the financial advisory firm Johnson Smick International and the author, most recently, of "The World Is Curved: Hidden Dangers to the Global Economy."

Reviewed by David Smick, Washington Post Book World (Copyright 2006 Washington Post Book World Service/Washington Post Writers Group)
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Robert J. Samuelson is a columnist for Newsweek and The Washington Post. He began his journalism career as a reporter for the Post in 1969. He is the author of The Good Life and Its Discontents: The American Dream in the Age of Entitlement, 1945-1995 and Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong a collection of his columns. He lives in Bethesda, Maryland, with his wife, Judy Herr. They have three children.