In April 1951 William McChesney Martin became Chairman of the Federal Reserve System. At his swearing-in ceremony, he characterized the control of inflation as central to the battle against Communism, perhaps even more important than the battle's more obvious military side: "[O]ur country is engaged in a struggle for its very existence as a free nation…Unless inflation is controlled, it could prove to be an even more serious threat to the vitality of our country than the more spectacular aggressions of enemies outside our borders. I pledge myself to support all reasonable measures to preserve the purchasing power of the dollar." Yet when Martin was succeeded by Arthur Burns almost nineteen years later, he had presided over a rise in inflation to 5 percent, and he called his colleagues together for a farewell confession that he had failed. (See Robert P. Bremner, Chairman of the Fed: William McChesney Martin Jr., and the Creation of the Modern American Financial System. New Haven, CT: Yale University Press, 2004.) The next decade was much worse, and by its end inflation was 10 percent and showed no signs of ending.

Then, remarkably, it did end. And the end came with no change in institutions, no formal switch to inflation targeting or even a clear statement of any long-run target for inflation, and only a brief and partial commitment to targeting any type of monetary aggregate. The Volcker disinflation brought inflation rapidly (but painfully) down, and it has been followed by a quarter century of low inflation and unprecedented macroeconomic stability.

Robert Hetzel's book is a narrative and analytic history of this period. At its core, the book's thesis is the same as that in recent work by Bradford DeLong, Thomas Mayer, David Romer and myself, and others: ideas about the functioning of the economy, not personality, tastes, leadership skills, or political pressures, are the driving force of macroeconomic policy, and large shifts in policy are the result of large shifts in ideas. (See J. Bradford DeLong, "America's Peacetime Inflation: The 1970s." Reducing Inflation: Motivation and Strategy, edited by Christina D. Romer and David H. Romer, 247–76. Chicago: University of Chicago Press for NBER, 1997; Thomas Mayer, Monetary Policy and the Great Inflation in the United States: The Federal Reserve and the Failure of Macroeconomic Policy, 1965–1979. Cheltenham, UK: Edward Elgar, 1999; and Christina D. Romer and David H. Romer. "The Evolution of Economic Understanding and Postwar Stabilization Policy." Rethinking Stabilization Policy. Kansas City, MO: Federal Reserve Bank of Kansas City, 2002: 11–78). Hetzel adds to these earlier analyses by examining many parts of this period in more depth and by adding insightful nuances of his own.

The book gets off to a rocky start. The ostensible goal of the first few chapters is to lay out a framework to guide the subsequent analysis. But, this conceptual analysis is compromised by unconventional usage of standard terms. For example, much of the discussion revolves around the concept of a "nominal anchor." It only becomes gradually clear over the course of the book that Hetzel uses this term not in the standard sense of a feature of the monetary system that makes the price level determinate, but to indicate institutions or practices—even discretionary and opaque policy, as long as it is conducted well enough—that keep expected inflation low and stable.

Another central concept in the early going is "lack of intrinsic inflation inertia." Here Hetzel's meaning is clearer. He favors a Lucas-style rational expectations view of aggregate supply, where a credible commitment to a low inflation policy can eliminate inflation at no output cost, and he gives the impression that he intends to interpret much of U.S. monetary history through the lens of this controversial hypothesis. In fact, however, the hypothesis plays only a peripheral role in the analysis that follows.

Fortunately, the attempts at overarching theories quickly fade, and the book settles down to a history of U.S. monetary policy from the founding of the Federal Reserve almost to the present, with an emphasis on the period since 1960. Hetzel artfully weaves together narrative evidence, basic data, and statistical analysis to create an insightful picture of this fascinating era.

One highlight is Hetzel's nuanced and sympathetic portrayal of Martin (which is very consistent with the analysis in Christina D. Romer and David H. Romer, "Choosing the Federal Reserve Chair: Lessons from History." Journal of Economic Perspectives 18, no. 1 [2004]: 129–62). He shows how Martin, despite his lack of interest in the modern monetary policy apparatus of models, forecasts, and communication, had a clear and sensible worldview that led him to make the main judgments concerning policy largely correctly. And, he shows how the enormous pressures from others, both in and out of the Federal Reserve, with different views about how the economy functioned caused Martin to acquiesce partially (but not fully) to demands for more expansionary policy in the final years of his chairmanship.

Another highlight is Hetzel's account of the Volcker disinflation. It is here that the issue of inflation inertia features most prominently. But, in contrast to the strong statements in the early chapters of the book, the treatment in the historical narrative is quite balanced. On the one hand, Hetzel demonstrates convincingly that for Volcker, shifting to tighter policy and sticking with it was not enough; the key test was whether expectations of high inflation were being conquered. On the other hand, he acknowledges that Volcker did not believe in entirely forward-looking expectations, and that the disinflation was much more the result of deeds than of expectations management.

The discussion of the endgame of Volcker's tenure is also excellent. Hetzel describes how the vanquisher of inflation became enmeshed in a many-player game of global imbalances, international policy coordination, and exchange rate management. Volcker and the Federal Reserve took their eyes off the ball of inflation control and domestic macroeconomic stability, with the result that the hard-won gains of the disinflation were partially lost. This in turn required another round of tight policy, recession, and slow recovery to finally achieve the elusive goal of effective price stability.

The story of how inflation rose and fell, with significant twists and turns during both its climb and its fall, is much more complicated, interesting, and important than the simple one-liners it is often reduced to—"fine-tuning," "belief in a permanent trade-off," "loss of credibility," "political pressures," "commitment to price stability," "Taylor principle," and so on. Hetzel's book deepens our understanding not just of the episodes I have had the space to single out in this brief review, but of the entire story of this important period. It deserves a place on the bookshelf of every serious student of monetary history.