And the Last Shall Be First – It Was the Peanut Farmer, Not the Tall Guy or the Iron Lady

Warren Mosler
(Cross-posted with permission of the author from
The Center of the Universe)

(Editor’s note: I think this reaction of Warren’s to the death of Margaret Thatcher is pretty unique and also the best statement I’ve seen of his view of why the “stagflation” of the late 70s and early 80s went away. Hint: President Jimmy Carter had more to do with it than Paul Volcker, and Thatcher is much less important to what happened next, than the Keynesian failure to handle the stagflation, and the resulting shift to monetarist economics. Here’s Warren!)

Here’s how I remember it all.

I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970′s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70′s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that President Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70′s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.


It was the blind leading the blind then and it’s the same now.

And that’s how I remember it/her.

And i care a whole lot more about what happens next than about what happened then.


(Editor’s note: So, we have ignorance about the fiat monetary system and “chance” to blame for the displacement of the Keynesians by the monetarists, the victories of Thatcher, Reagan, and neoliberalism, and the ensuing decades of increasing evolution to a new feudalism. This is the broad scope of change over the past 40 years. In viewing this change, we can’t forget what it’s done and is still doing to people. Bill Mitchell’s retrospective on Thatcher is very good on that. Don’t miss it!)

(Cross-posted from New Economic Perspectives.)

14 responses to “And the Last Shall Be First – It Was the Peanut Farmer, Not the Tall Guy or the Iron Lady

  1. There is some conflation here of inflation of the currency and the cost of living. They are not quite the same thing.

    The cost of living is influenced by the interaction of:

    1. The money supply, whether it increases or decreases. In general, an increased supply means more money chasing consumer goods that causes a general increase in prices, although this is not the complete story.
    2. Supply and demand for particular commodities will change the price of goods, but not the supply of money, since an increase in demand for one commodity will cause an equivalent reduction in demand for some other commodity, ceteris paribus.
    3. The currency exchange rate vs other currencies, but for the US this is a minor consideration since international trade is conducted largely in USD
    4. Interest rates on borrowed money.

    I too was appalled when Paul Volcker increased the interbank lending rate to 15%, which caused the economy to sharply contract, when it was already correcting for overpriced commodities. Still, I cannot complain, as I cashed out of inventory near the price peak and parked the cash at a bank for 15% rolling it over every month, adding the interest to the principal each time.

    Now that the US imports about 50% of its crude oil, which today is priced at around $91 per barrel

    this affects the balance of trade and is effectively sucking money out of the US economy, although US domestic producers are doing quite nicely.

    Despite all the above having an impact on the cost of living, the real issue confronting most Americans is the great disparity in wealth and income that has arisen in the past thirty years. In the US, the concentration of wealth proceeds apace to the detriment of most people. This arises since in our current monetary system, all money is created as interest bearing debt, whereby No Debt = No Money. For someone to be wealthy, many other people have to be in debt to him, either directly or indirectly. Few seem to realize this fact that for every new billionaire who appears on the Forbes rich list, other people have to be his debt. Since most people are now maxed out with debt, the US government steps in and puts itself into debt, which further enriches an already rich elite. Conservatives then insist that the solution is to cut government social spending.

    The problem is that not only do great riches take spendable money out of a consumer economy, especially when $30 trillion of it is held offshore in tax haven banks, it confers great political power to corrupt the democratic process.

  2. Sunflowerbio

    Warren, you didn’t mention the first big shock, the 1973 oil embargo, brought on by the Arab-Israeli conflict that year. When the Saudis cut off the flow of oil, prices shot up and shortages caused long lines, which got everyone’s attention and ended the illusion that the good times would last forever.

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  4. Well written, plus it was Reagan who deregulated the crude oil market, for very different reasons.

  5. We were one of those farms that got caught with a small debt that was managable till the interist rate went out of sight to finnaly land on22.5% as a prime rate , That tall guy killed America’s small farmers at least all those who used the credit system to buy tractors and stuff!

    • “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. – attributed to Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)

      “I believe that banking institutions are more dangerous to our liberties than standing armies.” – Thomas Jefferson

      • Your first quote is spurious according to (official Jefferson site). They point out that “inflation” and “deflation” were not terms used in that manner at the time.

        The second quote is a paraphrase from one of his letters. Interesting is the second half though, “and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

        • If you read carefully, I did say “attributed.” Whether or not Jefferson said it in debate, does not mean that these words do not ring true.
          Here are some more banking quotes for your consideration:

          They demonstrate that allowing privately owned banks to create money as interest bearing debt has been, and still is, an epic swindle perpetrated on the public. This is studiously ignored by the main stream media and those economists who benefit from the status quo. Why do Paul Krugman and Dean Baker not speak up ? It would be the end of their current lucrative careers as media pundits.

  6. Panacea is at hand.

    (Author’s note: BobbieG. This comment isn’t relevant to this post. Next time you do it your comment will be deleted without further comment or notification. That includes metacommentary on this comment. If you want to comment on HVPCS further, you’ll have plenty of opportunity. Don’t worry about it!)

  7. An interesting take on the 70s which deserves some thought.

    However, Mr. Mosler does conflate the “wage and price controls” of Richard Nixon with oil shocks. Nixon’s wage and price controls were implemented about two years before any change in oil prices. This earlier inflation (from 1-2% in the early 60s to about 6% around 1970) seems uniformly ignored by those who blame oil price shocks for the high inflation of the period.

  8. Dear NEP and with respect to Mr. Mosler,

    Can anyone comment on the use of currency in Venezuela? If one assumes, hypothetically, that some American nations are trying to achieve equality of outcomes, how should Venezuela or Ecuador structure their money and fiscal policy to achieve those goals. Does anyone have knowledge of these two countries or others that would allow detailed discussion?

    • This would be interesting to have a discussion on. From what I understand, Ecuador uses US dollars and has interests rates at over 10% to attract foreign capital. To my mind Ecuador’s revolution, the one the government proclaims, is entirely false. Pure neoliberal politics involved, I recently travelled through there and felt sick at the duplicity of the message.

      Venezuela on the other hand is employing capital controls, which from speaking to Venezuelans is one of the middle class’s main oppositions to Chavismo. They measure their wealth in $US and see this declining as the exchange rate is devalued, while they can’t get their money out of the country.

      Latin America is a strange place. The open veins of latin america kind of sets out the trajectory from the very beginning. The 1% here are the original land holders and control almost every aspect of internal production, distribution and sales.

      • Regarding Ecuador, their President Rafael Correa is an economist educated in Belgium and the US.

        Rafael Vicente Correa Delgado (born 6 April 1963), is the President of the Republic of Ecuador and the former president pro tempore of the Union of South American Nations. An economist educated in Ecuador, Belgium and the United States, he was elected President in late 2006 and took office in January 2007. In December 2008, he declared Ecuador’s national debt illegitimate, based on the argument that it was odious debt contracted by corrupt and despotic prior regimes. He announced that the country would default on over $3 billion worth of bonds; he then pledged to fight creditors in international courts and succeeded in reducing the price of outstanding bonds by more than 60%. He brought Ecuador into the Bolivarian Alliance for the Americas in June 2009. To date, Correa’s administration has succeeded in reducing the high levels of poverty, indigence, and unemployment in Ecuador.

        He expelled the US military from Ecuador and has given refuge to Julian Assange in their London Embassy.

        Ecuador began using the US dollar as its currency, before he was elected President. It presumably works quite well, because Ecuador has a positive trade balance with the US.

        The economy has fared quite well over the past ten years. Poverty has been significantly reduced.

    • You might find this video of interest with regard to central banking and currencies in various countries.