Inflation was understood more as a “lubricant” of dynamic economic growth and not as an undesirable development which, in the longer run, results in severe losses of growth and welfare. It took until the end of the seventies before there was a broad acceptance of the bitter finding that unemployment cannot simply be combated by higher inflation.
The markets quickly saw through the fact that monetary policymakers were playing with the money illusion of the market participants - on which the Keynesian approach relied. In effect, monetary policy in many countries at the end of the seventies was faced with the “wreckage” of high inflation and high unemployment as well as growing losses of credibility.