The COVID-19 Pandemic and Inflation: Lessons from Major US Wars

US fiscal and monetary policies implemented during the COVID-19 pandemic have been likened to those often adopted during wars. This article compares macroeconomic policies of the pandemic period with those of major US wars since the Civil War. Inflation often surges during wars, as it did in the second year of the pandemic, and the wartime experiences can provide insights about the relative scale and persistence of inflation associated with sudden, large increases in government expenditures, such as the fiscal response to the COVID-19 pandemic. The article describes fiscal and monetary policies in each war and postwar period and traces differences in the relationships between the growth in government debt, the money stock, and inflation across the episodes to differences in the prevailing monetary regime and other institutional arrangements. The evidence from US wars suggests that the extent of government spending and the means used to finance that spending can have a significant impact on inflation outcomes. Substantial monetary financing of large increases in government spending was a characteristic of most major wars and a key driver of inflation. Further, the historical record reveals that postwar periods can be disruptive, with sharp fluctuations in economic activity and inflation, and that quick restoration of price stability requires recalibration of fiscal and monetary policy that often has been politically and technically challenging.