Judging from the history of English wheat prices, the great inflation of the last 40 years has been the sharpest in seven centuries. The economic history of those four decades suggests that the great inflation was primarily an historical legacy of the great depression.

The great depression left a lasting imprint on the policy makers of the 1940’s. World War II demonstrated that massive deficit spending would eliminate unemployment—despite the fact that, on the eve of the war, unemployment was substantial (17 per cent in 1939). Intent on keeping the economy growing and avoiding the postwar deflation forecast by many economists, Congress passed the Full Employment Act of 1946.

The seeds of inflation were probably first sown in the 1960’s when running a deficit budget in prosperous times became acceptable. Although transfer payments grew only modestly during the first four years of the new Democratic administration, by 1965 the United States was beginning to fight two wars—Viet Nam, and the war on poverty.

When President Johnson convinced Congress that major increases in social welfare spending were needed, he unleashed a powerful new political force. Transfer payments grew at a rate of 14.6 per cent from 1965 to 1970 and at a rate of 17 per cent from 1970 to 1975. In 1975, they rose at a rate of 24.6 per cent.

Certainly the decade of the great inflation has some unusual features—Viet Nam, the war on poverty, and later fuel and food inflation. Yet there is a significant historical precedent for the investment experience of that decade both in the United States and in other countries.

In the face of rising inflation, stock prices have repeatedly fallen in the past. In both the German hyper-inflation of 1918-1923 and the French inflation of 1919-1927, common stock values depreciated sharply in the first two years of the inflation and rose sharply when the inflation ended. The decline in the S&P 500 measured between January 1973 and January 1975 was 55 per cent measured in deutschemarks and 77 per cent measured in gold. The capital loss in the U.S. stock market was in the range of the disastrous German and French experiences, measured in gold equivalents. In terms of gold, on the other hand, the spectacular market recovery in the U.S. was in line with the sharp market recoveries following the inflations in Germany and France.