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Can we return to 2% inflation without causing a recession?
There aren’t many comparable chapters in US financial history but the great inflation period of the 1960s to 1980s can provide some insights
Bayani S Cruz 20 Feb 2024

I do not often do a book review, but the recent Lunar New Year holiday marking the beginning of the Year of the Dragon gave a me a chance to read through “Investing in US Financial History: Understanding the Past to Forecast the Future” by Mark J. Higgins, published by Greenleaf Group Press, 2024.

The main thesis of the book is that the solution to challenges and issues facing the world today, particularly high inflation and slowing economic growth, can be found by examining and learning from previous events in US financial history.

Reading a financial history book is generally an intellectually tiring exercise that involves understanding complex subjects and themes as well as understanding complicated data and statistics.

In this book, the author manages to compress into about 600 pages multiple financial events that took place from the late 1700s to the present, a period of over two centuries.

Ordinarily it would take several volumes for a reader to cover over two centuries of developments that led to the evolution of the US financial markets to what it is now. Such an endeavour would involve reading through and trying to figure out dozens of books, journals, and newspaper articles over a long period.

Manageable format

Higgins manages to compress such voluminous readings into a manageable, easy-to-understand format that is not too difficult even for a layman to understand and appreciate.

After reading through the book, the reader will appreciate that, while it’s not  perfect, the US financial system is probably the most sophisticated and complex in the world today, being a product of market forces that evolved naturally.

A huge chunk of the book is devoted to how the American financial system developed from the country’s experience as a British colony, the creation and evolution of Wall Street, the origins of a central banking system that later became the US Federal Reserve, etc.

While this makes for interesting reading for a student of history, most of it is purely academic in this day and age.

But there are two chapters that are very relevant to the financial and economic challenges that are facing our world today. The first is the chapter called “War and Pestilence” (a play on Leo Tolstoy’s “War and Peace”), which discusses and analyzes the events that led to First World War and the Great Depression that preceded World War II.

Parallel events

To avoid spoilers, I will not go into details, except to say that many of the events that happened during this period worryingly parallel many of the events that are happening in the world today.

The other chapters of the book that appear to be most relevant to today’s situation are those covering the great inflation period of the 1960s, 1970s, and early 1980s.

While many people blamed those events, such as when the inflation rate soared to as high as 14% in 1980, on market forces, particularly skyrocketing oil prices, currency speculators, etc., Higgins makes it clear that monetary policies, which financed massive budget deficits and were supported by political leaders at the time, were largely to blame.

It wasn’t until the late former Fed chairman Paul Volcker raised interest rates to stratospheric levels – the Fed funds rate as high as 19% in 1981 – that inflation eventually declined, dropping to 2% in 1983 before staying at around 3.5% in the mid-1980s. Of course, the result was that the US economy went into a recession in 1980 to 1982.

Fast-forward to today, Higgins argues that returning to price stability means bringing down inflation to the Fed’s target of 2%. The annual inflation rate in the United States went up to 3.4% in December 2023 from a five-month low of 3.1% in November, higher than market forecasts of 3.2%, as energy prices went down at a slower pace.

It's happened before

The question now should be, has anyone avoided a recession after a long period of price instability? Has anybody navigated a return to 2% inflation without causing a recession? There aren’t many comparables at present but the great inflation period provides some insights.

In any case, for any analyst or student of history, reading the relevant chapters in Higgins’ book makes it much easier to understand what is happening now because it has happened before.

For instance, when Fed chairman Jerome Powell said in his speech following the Fed’s January 30-31 2024 meeting: “We know that reducing policy restraint too soon, or too much, could result in a reversal of the progress we've seen on inflation and ultimately require even tighter policy to get inflation back to 2%”,  he was actually referring to what happened in the 1960s and 1970s.

One thing that makes Higgins’ book interesting is that he provides “points of interest”, which are basically short rundowns of events or personalities that add colour to the overall discussion.

For example, it will be interesting to note that Alexander Hamilton, an American politician who helped draft the US constitution, was the first US secretary of treasury, and later died in an infamous duel, was also a very talented central banker who was centuries ahead of his time in terms of monetary policymaking.

I would recommend this book to financial analysts, other journalists, economic and financial students, or to anyone who may be interested in getting insights into what is happening in the financial markets today.

Jennifer Lee
Jennifer Lee
managing director, head of large corporate, institutional banking group
DBS Hong Kong
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