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Thursday, December 1, 2022

How to Combat Inflation During a Time of War

Many people in the United States have never experienced fast inflation, and they are seeking for lessons from past on how to control the phenomenon.

As a result, the late 1970s and early 1980s are becoming an increasingly popular topic of discussion among policymakers, particularly in light of the experiences of Paul Volcker, the former Federal Reserve chairman, who used aggressive interest rate increases to combat high inflation during those years. Mr. Volcker was recently referred to as “one of the outstanding public servants” of his generation by Jerome H. Powell, the current head of the Federal Reserve, which started hiking interest rates this week in response to consistently rising prices.

As a result of supply chain disruptions and billions of dollars in emergency government assistance, recent inflation is becoming more difficult to explain away as a transient symptom. Moreover, Russia’s invasion of Ukraine, which is driving up energy costs in particular, is a major contributor to this trend.

During the American Civil War, both the Union and the Confederate governments spent enormous quantities of money on their respective sides. Leaders on all sides of the political spectrum were very concerned about the risk of uncontrolled inflation. However, their approaches to dealing with it, as well as their outcomes, were vastly different.

Over the duration of the war, inflation in the United States reached an all-time high of 80 percent. This was a significant financial hardship for working families since earnings did not keep pace with inflation back then, as they do today. Despite this, inflation was controlled within appropriate bounds in light of the circumstances and did not threaten the stability of the economy.

The Confederacy fared significantly worse than the Union. It has been calculated that by the time the conflict ended in 1865, the South’s total inflation rate had reached an inconceivable 9,000 percent.

To be sure, the economy of the United States has evolved significantly since the 1860s. The country currently has a central bank, which is charged with the responsibility of maintaining price stability. During the epidemic, the Federal Reserve, under the leadership of Mr. Powell, has used its authority, which has helped to stabilise markets but also stoking inflation. Now, most of the attention is on the Federal Reserve to unravel these programmes and boost interest rates in order to bring prices down.

However, fiscal policy is also a role, as seen by the growing concern about deficits as President Biden implements an ambitious, and as of yet incomplete, spending agenda during his first term. During the American Civil War, the budgetary policies of the North and the South were substantially different from one another.

A 5 percent tax on land, slaves, and other property was finally levied by the South in 1864; however, it was too little, too late. The government produced so many notes that it ran out of paper and had to print them on wallpaper to keep up with demand. As the conflict came to a close, instead of cartloads of notes being pushed through the streets, people traded cotton, bacon, and salted pork for products and services, since their money was useless at this point.

The economic experience of the Civil War was considerably more severe than what the United States is now dealing with. Despite government expenditures, trade interruptions, and conflict, the Federal Reserve may be able to take decisive action to bring inflation under control. However, the lessons of history imply that when inflation becomes uncomfortably high, the country’s fiscal stewards have a critical role to play in keeping the country’s economy on its feet.

David Faber
I am a Business Journalist of The National Era
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