Lessons from the great inflation: Paul Volcker and Ronald Reagan's forgotten miracle created a quarter century of prosperity--and a dangerous bubble of complacency.

• Author: Samuelson, Robert J.

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IF YOU ASKED a group of scholars to name the most important landmarks in the American story of the last half-century, they would list some or all of the following: the war in Vietnam, the civil rights movement, the assassinations of the Kennedys and Martin Luther King, Watergate, the sexual revolution, the invention of the computer chip, Ronald Reagan's election in 1980, the end of the Cold War, the creation of the Internet, the emergence of AIDS, the terrorist attacks of September II, and the two wars in Iraq. Looking abroad, these scholars might include other developments: the rise of Japan as a major economic power in the 1970s and '80s, the emergence of China in the 1980s from its self-imposed isolation, and the spread of nuclear weapons.

Missing from most lists would be the rise and fall of double-digit U.S. inflation. This would be a huge oversight.

We have arrived at the end of a roughly half-century economic cycle dominated by inflation, for good and ill. Its rise and fall constitute one of the great upheavals of our time, though one largely forgotten and misunderstood. From 1960 to 1979, annum U.S. inflation increased from a negligible 1.4 percent to 13.3 percent. By 2001 it had receded to 1.6 percent, almost exactly what it had been in 1960. For this entire period, inflation's climb and collapse exerted a dominant influence over the economy's successes and failures. It also shaped, either directly or indirectly, how Americans felt about themselves and their society; how they voted and the nature of their politics; how businesses operated and treated their workers; and how the American economy was connected with the rest of the world. Although no one would claim that inflation's side effects were the only forces that influenced the nation during these decades, they counted for more than most historians, economists, and journalists think. It's impossible to decipher our era, or to think sensibly about the future, without understanding the Great Inflation and its aftermath.

Stable prices provide a sense of security. They help define a reliable social and political order. Like safe streets, clean drinking water, and dependable electricity, their importance is noticed only when they go missing. When they did just that in the 1970s, Americans were horrified. From week to week, people couldn't know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste, and pizza. People couldn't predict whether their wages would keep pace with prices. People couldn't plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded Americans' confidence in their future and their leaders.

There were widespread consequences. Without double-digit inflation, Ronald Reagan almost certainly would not have been elected president in 1980; the conservative political movement that he inspired would have emerged later or, conceivably, not at all. High inflation incontestably destabilized the economy, leading to four recessions (those of 1969-70, 1973-75, 1980, and 1981-82) of growing severity. High inflation stunted the increase of living standards through lower productivity growth. High inflation caused the stock market to stagnate; the Dow Jones Industrial Average was no higher in 1982 than in 1965. And it led to a series of debt crises that afflicted American farmers, the U.S. savings and loan industry, and developing countries.

Afterward, declining inflation--"disinflation"--led to lower interest rates, which led to higher stock prices and, much later, higher home prices. This disinflation promoted the last quarter century's prosperity. In the two decades after 1982, the business cycle moderated so that the country suffered only two relatively mild recessions (those of 1990-91 and 2001), lasting a total of 16 months. Monthly unemployment peaked at 7.8 percent in June 1992. As stock and home values rose, Americans felt wealthier and borrowed more or spent more of their current incomes. A great shopping spree ensued, and the savings rate declined. Trade deficits--stimulated by Americans' ravenous appetite for cars, computers, toys, and shoes--ballooned. At the same time, this prolonged prosperity helped spawn complacency and carelessness, which ultimately climaxed in a different sort of economic instability and the financial turmoil that assaulted the economy in 2007 and 2008.

Who Was to Blame?

Double-digit inflation was not an act of nature or a random accident. It was...