Delanceyplace.com 2/20/09--The Last Great Economic Crisis

In today's excerpt-the last great economic calamity in U.S. history: the recession of 1981-82, a very different crisis than the one we now face. In the late 70s, inflation in excess of 10% was ravaging the economy, the result of loose monetary policy, oil shocks, and Vietnam-era spending. Some surveys of that time show that an astounding 70 percent of the Americans cited it as the major problem. By the mid-80s, inflation had returned to low levels after Fed Chairman Paul Volcker, a Jimmy Carter appointee, had attacked it with high interest rates, and then-president Ronald Reagan had allowed Volcker's approach. But the cost was high:

"Americans detested inflation. We seemed to have lost control, both as individuals and as a society, over our fate. ... Among government officials, there was a widespread fatalism about continued inflation. President Carter often seemed forlorn at the prospect. Early in 1980, he was asked at a press conference what he planned to do about the problem. He replied, 'It would be misleading for me to tell any of you that there is a solution to it.' His resignation was common. ... Later, Carter himself judged that inflation had been the decisive issue [in his election loss], more important than his mishandling of the Iranian hostage crisis. ...

"Inflation was rationalized as a reflection of the deeper ills of American society. It was not a cause of our problems; it was a consequence of our condition. Specifically, it was said to show that the nation was becoming ungovernable. Americans had more wants than could be met. ...

"Volcker [took the view that inflation was simply a monetary phenomenon-the government had printed too much money, and] took a sledgehammer to inflationary expectations. He raised interest rates, tightened credit, and triggered the most punishing economic slump since the 1930s. In December 1980, banks' 'prime rate' (the loan rate for the worthiest business borrowers) hit a record 21.5 percent. Mortgage and bond rates rose in concert. By the summer of 1981, consumers had trouble borrowing for homes and cars. Many companies couldn't borrow for new investment. Industrial production dropped 12 percent from mid-1981 until late 1982. In many industries, declines were steeper. In autos, it was 34 percent (from June 1981 to January 1982), and in steel it was 56 percent (from August 1981 to December 1982). By 1982 the number of business failures had tripled from 1979. Construction starts of new homes in 1982 were 40 percent below the 1979 level. Worse, unemployment exploded. By late 1982, it was 10.8 percent, which remains a post-World War II record. ...

"There was an outpouring of bills and resolutions to impeach Volcker, roll back interest rates, or require the appointment of new Fed governors sympathetic to farmers, workers, consumers, and small businesses. Rep. Jack Kemp (D-N.Y.), a prominent Republican 'supply-sider,' wanted Volcker to resign. In August 1982, Sen. Robert C. Byrd of West Virginia, the Democratic floor leader, introduced the Balanced Monetary Policy Act of 1982, which would have forced the Fed to reduce interest rates.

"Reagan's popularity ratings collapsed. In May 1981, early in his presidency, Reagan's approval had reached a high of 68 percent. By April 1982, it was 45 percent (46 percent disapproved); by January 1983, it was 35 percent, the low point (56 percent disapproved). ...

"Even now, the social costs of controlling inflation seem horrendous. Over a four-year period (1979-82), the U.S. economy's output barely increased. Since 1950, there had been nothing like that. Unemployment peaked in 1982 near 11 percent-a figure that, a few years earlier, would have been widely judged inconceivable. ... The number of business failures in 1982 (24,908) was nearly 50 percent higher than in any other year since World War II, and it would double to 52,078 by 1984. From 1979 to 1983, farm income declined almost 50 percent."

Robert J. Samuelson, "Lessons from the Great Inflation," Reason, January 2009, pp. 51-5