It's Beginning To Look A Lot like 1970s Inflation
A quick History of Protectionist Periods and inflation.
Looking back on several past protectionist policy periods, which tend to happen every 30-40 years, they have produced periods of secular inflation. We’ll look at two periods that appear very similar to today. Those periods began in 1922 and 1972, and why they look much like the present period. Without going into too much detail, I will briefly explain why the periods are similar to each other. I’m not a historian or an expert on these historical periods, but I do believe the similarities are undeniable, and with a basic understanding of these periods, it’s very easy to draw parallels.
To set the stage, what is protectionism? Simply, it entails trade barriers and subsidies intended to protect domestic industries and jobs from foreign competition.
The chart below highlights the three most recent periods of protectionism in U.S. history in gray and the post-World War II era in green.
Regarding the World War II period, inflation rose during the war as the country funded the war effort. Inflation then spiked higher again after the war due to supply chain issues and post-war demand. As GIs returned home demand for consumer goods and services increased. It took time to meet that demand leading to post-war bout of inflation. Since this period has a bit of an asterisk next to it because of the war, I’ll focus on the 1920s and 1970s relative to today.
The inflationary period of the 1920s began in 1922, around the passing of the Fortney - McCumber Act. This act raised tariffs on certain industries to nearly 40%. Ultimately, the tariffs sparked retaliation from countries against some U.S.-exported goods. Most notably, farmers felt the most pain as a result of the legislation. During the 1928 campaign, Hoover pledged to help struggling farmers. This pledge led to Smoot Hawley in 1930, which increased agricultural tariffs. During 1922 - 1937, inflation had three separate runs to 5%, interrupted by the Great Depression.
As U.S. troops entered the Vietnam war, inflation began to rise, reaching 6% as the 1970s arrived. Following the end of the gold standard, inflation retreated for several months before beginning to climb again in the summer of 1972. Inflation would remain a problem in the U.S. until Paul Volker, along with a more trade friendly Reagan administration, was able to tame inflation in the early 1980s.
There were protectionist policyies in place before the 1970s arrived. Since the mid-1960s the U.S. had “quota agreements” with other countries, including South Korea, Japan, Taiwan, and several European countries. These “quotas” limited imports from these countries. These policies were protectionist.
Then, the energy crisis of the early 1970s was responsible for putting additional upward pressure on inflation. The oil shock of the early 1970s was, in part, also a protectionist policy imposed by the OPEC countries against the West. What was known as “the embargo” was put in place against the West as a result of the West’s support for Israel in the Yom Kippur War. The embargo all but stopped oil imports into the U.S., causing serious disruptions and recession. This shows that the U.S. is not immune to adverse effects of policies imposed on it by others.
In none of the periods (including WWII) did inflation spike and simply go away. In each period, inflationary pressure returned after the initial spike, sometimes more than once. This appears to be a likely scenario this time around as well. We may be arriving at another confluence of inflationary pressures. Tariffs, the financing of deficits, and geopolitical risk are converging to produce a familiar and predictable outcome.
Don’t be surprised if we are at the beginning of a period of secular inflation. If so, this is not something the Fed and fiscal policymakers have had to face in the past 50+ years. There seems to be little political courage on either side of the aisle to make tough fiscal decisions, once again leaving the weight of the problem squarely on the shoulders of the Fed.