The 'Great Stagflation' of the 70s was caused by banking rules, not just oil prices.
April 16, 2026
Original Paper
Credit Crunches and the Great Stagflation
SSRN · 6566852
The Takeaway
We’re taught that the 1970s economy was ruined by high oil prices and bad luck. But this paper points to 'Regulation Q'—banking rules that created severe credit crunches. These crunches didn't just stop people from buying things; they acted as a 'supply shock' by making it impossible for companies to get the working capital they needed to actually produce goods. When you can't make stuff, prices go up and output goes down—the definition of stagflation. This challenges the idea that the Fed can fix everything just by moving interest rates. It means that the 'plumbing' of banking regulations can be the real driver of whether you can afford your groceries.
From the abstract
We argue that severe credit crunches in the banking system contributed to the Great Stagflation of the 1970s. The credit crunches were due to Regulation Q, a banking law that capped deposit rates. Under Reg Q, Fed tightening triggered large deposit outflows that led banks to contract lending. The credit crunches line up closely with stagflation in the time series. To explain this, we add Reg Q to a standard model where firms use bank loans to finance working capital. When Reg Q binds and credit