Sunday, May 18, 2008

Credit Where It's Due

After this article of mine ran in the April 7 issue of The American Conservative, I got a few reader comments about this part:

By the early 1980s, Ronald Reagan was dealing with the consequences of decisions made by Johnson and Nixon over a decade earlier. Part of Reagan’s legacy is the latitude he gave Paul Volcker, as risky and painful as that was, to deal with those problems.

In response, this blogger wrote: "We should note that President Carter appointed Paul Volcker to the Federal Reserve Chairmanship in 1979." One of his commenters followed that with this:

Finally, in the case of Volcker, Greenspan and inflation, you have to wonder why it took that success so long to even get a second father. For years, conservatives pretended that Carter-appointee Volcker never existed; now "The American Conservative" is crediting Reagan for giving him latitude -- that's really rich. Time Magazine 1984:

Last week they were started anew by White House Press Spokesman Larry Speakes. Immediately after the banks raised the prime rate, he told reporters, "We have been asking the Federal Reserve Board to allow sufficient monetary expansion to assure noninflationary growth. Although the economy has been growing at a healthy pace and inflation remains at a low level, it appears that the money supply is not accommodating real economic growth."

The following day the attack was picked up by Treasury Secretary Regan. In a speech to Massachusetts businessmen and community leaders, he warned that the Federal Reserve's stringent credit policies could begin to hurt. Said he: "If the Fed continues on its tight path now, it will have an effect on November and December. Does that have us worried? You bet your life it has us worried."

The commenter omits this part of the Time article that would seem to support his point:

President Reagan entered the interest-rate controversy later in the week, although he was careful not to blame the Federal Reserve. Appearing before the National Association of Realtors, he took credit for the earlier recovery in housing. But then he added: "Let me assure you we are not pleased with the recent increases in interest rates, and frankly there is no satisfactory reason for them."

These are good points and worth addressing. First, it's important to distinguish between "the early 1980's" I refer to in my TAC article and the mid-80's -- specifically May 1984, which is when that Time article ran. There was a world of difference between the two periods. In 1980, when Reagan was elected, the consumer price index rose 12.5 percent. In 1984 it was 3.9 percent. Monetary policy had already worked. The inflation genie was back in the bottle -- but with the prime rate having risen from 10.5 percent in 1983 to 13 percent in 1984, there was a widespread perception that the Fed was still fighting the last war and choking off the recovery from the severe recession of 1981-1982. And let's not forget that 1984 was an election year. After giving Volcker free rein to break inflation and then reappointing him in 1983, Reagan had good reason to view tighter monetary policy just before an election as a breach of etiquette.

As for the commenters' point about giving Carter credit for appointing Volcker, I've always interpreted that the same way Bruce Bartlett does here:

Under pressure from Wall Street, Carter reluctantly appointed Paul Volcker to be chairman of the Federal Reserve Board in 1979. Volcker had been under secretary of the Treasury for Richard Nixon and was then serving as president of the Federal Reserve Bank of New York. However, it is naïve to think that Volcker was given a free hand by Carter. His inability to fully implement a tight-money policy is why the inflation rate fell only to 12.5 percent in 1980, despite a sharp recession that year.

It was only after the election, when Volcker knew that Carter had lost, that he really clamped down on the money supply. This illustrates an important point: Presidents get the Fed policy they want, no matter how "independent" the Fed may be. ...

It is not now remembered how much pressure there was on Reagan to get rid of Volcker and have the Fed run a more accommodative monetary policy. Yet he not only supported Volcker publicly, he appointed like-minded people to the Fed whenever he had the chance. He reappointed Volcker to the chairmanship in 1983 and appointed Alan Greenspan to replace him in 1987.

The result of the Fed’s tight-money policy was a far faster reduction in inflation than most economists thought feasible. From 12.5 percent in 1980, it fell to 8.9 percent in 1981, and 3.8 percent in 1982. It is hard to explain just how remarkable this achievement was. ...

Few have better perspective on this than Bartlett. I'd be curious to see if his interpretation of the friction between Volcker and the Reagan administration in 1984 jibes with mine, and whether he has anything to add.


Anonymous Anonymous said...

Inflation coming down so fast after 1980 was due to the oil price falling like a stone.Carter couldn't cut interest rates more than he did up to 79 due to various economic issues. Carter deserves the most credit for saving the economy from the two oil spikes in the 1970s. God knows what supply-side Reagan would have done if Carter hadn't set a clear course for Volcker to follow. Barlett is hardly an impartial observer, is he?

5/18/2008 2:31 PM  
Anonymous Anonymous said...

This is very good history. It is ancient history now but the economic obession of the 80's was money supply. Milton Freidman had put it on the table and Volker used its targeting as the basis of his monetary policy. This was a ruse on Volker's part actually since at the time, when banks still were the source of most systematic credit, the traditional discount rate setting signals still had a large role in determining credit market epansion/contraction and thus money supply.

Those days are long gone however. Money supply is ignored. Partly for good reasons as the Fed never really had control of M3and doesn't even report it anymore since it is embarrasing and the other M's are highly distorted in this modern world of massive money flows.

However the abandonment of money 'supply', monetary aggregates,as a basis of judging macro conditions or setting monetary policy goes deeper than just fashion. Let's listen to Bernanke.

“My topic today is the role of monetary aggregates in economic analysis and monetary policymaking at the Federal Reserve. I will take a historical perspective, which will set the stage for a brief discussion of recent practice…” “It would be fair to say that monetary and credit aggregates have not played a central role in the formulation of U.S. monetary policy since [1982], although policymakers continue to use monetary data as a source of information about the state of the economy.”

So there you have it. Money and credit don't actually play any significant role in the Feds monetary policy. Welcome to the rabbit hole that our financial elites have now led us.

See the discussion on this Bernanke quote at this link. Scroll down about 2/3 of the page to get to the discussion.

Monetary Developments vs. Monetary Aggregates:

5/18/2008 4:09 PM  
Anonymous Anonymous said...

Proper link for the above

5/18/2008 4:11 PM  
Anonymous Anonymous said...

Darn, it gets cut off.

Go here, to Prudent Bear

Go to
Credit Bubble Bulletin

Go to

Go to

Go to
November 10

5/18/2008 4:14 PM  
Anonymous Anonymous said...

This is pretty interesting. By the data I'm looking at, the inflation rate from 1978 to 1979 (Jan to Jan) was less than 10%, then nearly 14% from 1979 to 1980, then 11.8% from 1980 to 1981. It did then drop during Reagan's first year to less than 9% -- but the trend was begun during Carter's term.

I wouldn't trust Bartlett on the "reluctantly" word, frankly -- how the heck would he know whether Carter was "reluctant" to appoint Volcker.

To the comment above re oil -- that is a good/fair point. A couple of things were happening -- the recession got pretty deep in 1981/2, the value of the dollar started climbing a lot as the dollar appreciated due to the higher interest rates, and oil fell dramatically. So "everything is related to everything else" in this instance.

- Whammer

5/18/2008 6:46 PM  
Anonymous Anonymous said...

If CPI was calculated today as it was in 79 the current annual rate would be over 10%. Or so I have heard and it is likely in that ballpark.

Inflation is always a monetary phenomenon. The end of Breton Woods, 1972, and the onset of the floating exchange rate regiem with the subsequent dollar drop was causal in the 70s inflation in the US, but the real root was the increase in the quantity of money worldwide. Blaming Carter is beyond stupid, it's disinformation.

Some World Bank person was recently quoted as saying world money supply has doubled since 01. I don't know if that's currency or some M1,2,3 or MZM equivalent or if it's off by half. I do know that is why the world is experiencing inflation. Price increases are really a reflection of the loss of value of money.

5/18/2008 9:06 PM  
Anonymous Anonymous said...

If Bartlett is going to claim that Carter only appointed Volcker 'reluctantly' and at Wall Street's behest, he really needs a citation to back the claim. Without documentation, it sounds like it was pulled out of thin air.

Credit where it's due - Carter appointed Volcker. That's just a fact.

5/19/2008 10:00 AM  
Anonymous Anonymous said...

CR, Love your take on this one.

5/19/2008 4:54 PM  
Blogger oyster said...

Many thanks for the link, CR.

Just for completeness' sake, I wanted to note that my commenter, BSJD, turned his comment into a post at his blog, which has a couple more comments.

easy peasy hyperlink!

5/20/2008 1:23 AM  
Anonymous Anonymous said...

More thoughts on Volcker.

or try this:

I think he's wrong - today, Oil is over $100/barrel and there is no end in sight for the next 6-7 months while Bush threatens Iran and Venezuela is looking to humiliate us at every turn.

5/20/2008 3:57 PM  
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