The year was 1985 and the global economy was only 14 years into the new monetary regime of free-floating currencies (even contrary to the hundreds of centuries littered with failures of never working in longer terms). After abandoning the gold standard in 1971, the U.S. endured a destructive decade of stagflation (high inflation coupled with high unemployment).
U.S. citizens were hurting more than at any time since the Great Depression as a savings account of $100,000 was losing roughly $10,000 in purchasing power annually (10% inflation) with debt burdens growing rapidly.
Is it a coincidence that the Federal debt, money supply, and cost of living have all increased exponentially since the stagflation decade? Readers can asses the correlation for themselves:
One man, Paul Volcker – newly appointed Fed Chairman in 1979 – knew the only way to save the dollar from runaway inflation was to curb the money supply. By doing so, the years of loose credit became tight credit and the demand for dollars soared. There were significant defaults as the debt that compounded over the prior decade now had tremendous interest payments, unemployment surged and the economy’s business activity contracted. But it had to be done…
Volcker, in office only two months, took the radical step of switching Fed policy from targeting interest rates to targeting the money supply. The days of “easy credit†turned into the days of “very expensive credit.†The prime lending rate exceeded 21 percent. Unemployment reached double digits in some months. The dollar depreciated significantly in world foreign exchange markets. Volcker’s tough medicine led to not one, but two, recessions before prices finally stabilized.
After hiking the Fed Funds rate to around 20%, inflation started declining in the early 1980s – just as Ronald Reagan was elected President.
By 1985, the side effects of the high interest rates created an extremely strong dollar. The “King Dollar†era was damaging to the U.S. economy as imports surged and exports weakened. This further added to the national deficit and domestic business pain.
