Good question -- that was because of the anchoring effect and because the Fed had lost credibility during the mid 70s.
That's a good point and I had forgotten about it. It wasn't so much the actual inflation that was a problem. It was people's expectations of inflation and attendant behavior. That's why Volker had to really turn the screws to stop that psychology.
In 1970, if you bought a car then you were really paying in gold. The US dollar was a gold backed currency. An individual could exchange $35 for an ounce of gold. The US was running big deficits with the Vietnam war and the welfare state (LBJ's Great Society programs like Medicare). This caused foreigners to start rapidly redeeming gold, and if it continued the US would not have enough gold to meet its obligations. Thus, instead of cutting spending they took the cowardly way out and defaulted on their obligations. After the US went off the gold standard in 1973, the US dollar became a fiat currency backed by nothing. If you bought a car you were paying for it with pieces of paper. Those pieces of paper only have value if someone else thinks it has value (psychological). The currency was effectively repriced to reflect all this. The new fiat standard also meant that there were no safeguards in place to stop government spending. On the gold standard the government deficits were limited. On the fiat standard, the government can just endlessly print money. If you wanted an ounce of gold in 1980 then you needed $700 instead of $35.
Vietnam war, Great society program And the US handing out tons of foreign aid to other countries. This caused a Balance of payment crisis in the mid 1960s. Speculators started to convert USD into gold. The official rate was 35 dollars an ounce per gold fixed but speculators were able to arb that by selling it on other markets for more money. The run on gold was problematic and untenable so Nixon halted convertibility and confidence in the USD took a major hit. Also Nixon actually placed wage and price controls (Imagine that happening today)
What is crazy is the US has painted itself in a corner and no longer have the tools to control inflation like what Volker had.
It was lack of confidence that triggered inflation. You can print as much as you want as long as counterparts have the full confidence on the currency. Closing the gold window caused a major confidence problem.
These days, many economists would argue that decoupling from Gold gave the United States huge unprecedented leverage to manipulate its currency to its advantage.
Actually it was the reverse. The Nixon shock was caused by the U.S. government no longer being able to control the price of gold, exactly as Keynes at Bretton Woods predicted would happen. Foreign Central Banks were redeeming dollars for gold at 35$/oz whereas elsewhere gold was selling for 40$/oz. Obviously, an untenable situation.
I read some great posts and see that : Oil prices rising falling dollar wages increases gold and silver were bought and rose as alternative to dollar holding And right now in the US, I see oil prices rising, dollar weakened, aggressive minimum wage increases and metals rising. And aside from this we have the added mass govt spending, anticipated boom in spending as we reopen, and anticipated increase in taxes. And yes, as was just stated above, the Fed now does not have the tools that it did for Volker. So we could actually see higher inflation coming than we had in the 1970s.