Inflation in the 60's
In the early years of the 1960s, prices were relatively stable, rising at a very slow rate. Between 1960 and 1965, the Consumer Price Index, a measure of the general price level, rose 6.54%, with an average annual percent increase of approximately 1.14%. This was particularly remarkable in light of the fact that the Kennedy Administration and early Johnson Administration had implemented policies which were designed to stimulate economic growth and reduce unemployment. Economic planners generally have to make a trade-off between maintaining low unemployment and low inflation. The Council of Economic Advisors, under Walter Heller, constructed a plan to maintain a healthy level of growth within controlled parameters that limited inflation. A stimulative tax cut was proposed, and then successfully implemented. In addition, the Federal Reserve resolved to maintain low interest rates, and the Kennedy Administration put pressure on industry and unions to keep price and wage increases to a minimum to ensure that there would be no upward pressure on the general price level. Thus, until 1965, the American economy was growing, the unemployment rate was falling, and there was almost no inflation.
Beginning in 1965, however, the general price level began to rise at an increasing rate. The CPI rose 23.07% from 1965 to 1970, with an annual percent increase of about 4.25%. While industrial production continued to rise and unemployment continued to fall, the economy came under severe pressure. The rapidly increasing general price level was unpopular, and eroded the incomes of the elderly and other Americans living on fixed incomes. High inflation also discouraged people from saving money, and increased the pressure on the dollar, which was already in a precarious position because of its role in the international monetary system. An increase in the demand for loans for defense contractors led the Federal Reserve to raise the discount rate from 4 to 4.5%.
The major disruption to the delicate balance achieved in the first half of the decade was the war in Vietnam. In July of 1965, President Johnson committed American forces to Vietnam. Wars generally bring about inflation, but the unrelieved financial demands of the war became a serious burden on the economy. The Defense Department estimated U.S. expenditures in support of obligations in Southeast Asia as $103 million in 1965, $5.8 billion in 1966, $20.1 billion in 1967, $26.5 billion in 1968, and $28.8 billion in 1969. Johnson did not want to consider it an all-out war, so he was reluctant to request that Congress pass a tax to finance the war. For two years, he held back, thus blowing a growing hole in the federal budget. Johnson's desire to maintain the Great Society domestic programs while fighting the war in Vietnam contributed further to federal debt. The production requirements which the war effort necessitated also pushed the economy beyond the careful constraints the Council of Economic Advisors had suggested to promote non-inflationary growth.
By 1966, the government wage and price controls were breaking down. This, combined with rising interest rates signaled the end of non-taxationary solutions to control inflation. After an economically painful 1966, Johnson was forced to overcome his resistance to taxes. On January 10, 1967, in his State of the Union Address, Johnson said, "I recommend to the Congress a surcharge of 6 percent on both corporate and individual income taxes—to last for 2 years or for so long as the unusual expenditures associated with our efforts in Vietnam continue." Congress did not pass the tax until 1968, at which point the legislation levying a tax also required a reduction in government expenditures. On June 28, 1968, Johnson signed the Revenue and Expenditure Control Act into law, with its $10 billion tax increase and a $6 billion spending reduction. Many Great Society supporters were concerned that the spending reduction would threaten domestic social programs. Nevertheless, Congress was unable to cut the full $6 billion from the budget, and the fiscal 1969 budget ended up with a $3.2 billion surplus and intact Great Society programs.
Along with the American failures in Vietnam, the inflation of the late 1960s was a major factor in the breakdown of the Johnson Administration. Beyond its actual economic effects, it contributed to a general discontent with Johnson and his policies. In addition, the "Great Inflation" proved difficult to eradicate, continuing to plague the American economy into the 1970s, and defying control until 1982.
Percent Change of Consumer Price Index (1960-1970)
YEAR CPI (1967=100) % change from previous year
1960 88.7 —
1961 89.6 1.01
1962 90.6 1.12
1963 91.7 1.21
1964 92.9 1.30
1965 94.5 1.72
1966 97.2 2.86
1967 100.0 2.88
1968 104.2 4.20
1969 109.8 5.37
1970 116.3 5.92