Before the Great Inflation: The Cost of Finance

Below, two graphs from an old post. Recall that after World War Two, the "post-war golden age" ran from about 1947 to about 1973. Recall also that the so-called "Great Inflation" ran from about 1965 to the early 1980s. The graphs below consider the early years of the golden age, before the onset of the great inflation.

It was growing financial cost got the inflation ball rolling. Union demands took the hit for it later. But union demands did not create the initial problem. The rising cost of finance got inflation going, and kept it going until a wage-price spiral emerged.

For domestic corporate business, financial cost increased faster than the compensation of employees:

Graph #1: Interest Costs Increased Faster Than Compensation of Employees

Consider the 1955-1958 period, the years that concerned Samuelson and Solow. For every dollar corporations paid out as employee compensation in 1955, they paid out five cents for interest costs. By 1958 that number was seven cents. For every dollar of employee compensation they paid out, corporate business spent two cents more on interest in 1958 than in 1955. Financial costs gained on labor costs.

Financial costs also gained on profits:

Graph #2: Interest Costs Increased Faster Than Corporate Profits

For domestic corporate business, financial costs increased faster than profits. Between 1955 and 1958, corporate interest costs rose from 15 cents to 25 cents per dollar of corporate profits: a ten-cent increase in interest costs, ten cents for every dollar of profit.

For the whole period shown on the graphs, corporate interest costs rose from less than 10 cents to more than 30 cents per dollar of profit, and from less than 4 cents to more than 10 cents per dollar of employee compensation. It was finance, not wages or profits, that created the inflationary pressures.