Learn › Economic history › The Great Inflation — 1971 to 1982

The Great Inflation — 1971 to 1982

The Volcker Disinflation

Explain what the Federal Reserve and other central banks did from October 1979, what bringing inflation down cost, and how those involved explained the fall.

Before you start

What you'll be able to answer

  1. What did the Federal Reserve do in October 1979, and did other countries act too?
  2. What did bringing inflation down cost?
  3. How did those involved explain the fall in inflation, and where was it by 1983?

Where this sits

The Great Inflation — 1971 to 1982 · this module is lit

  1. 15 Aug 1971The United States stops turning dollars into gold, freezes wages and prices, and puts a tax on imports
  2. Dec 1971–Mar 1973New fixed rates are agreed in December 1971, with the dollar devalued against gold; they break down, and by March 1973 the main currencies float
  3. 1972Food and commodity prices start to climb, while consumer prices across the rich world are already rising
  4. Oct 1973Arab oil producers embargo shipments to the United States and the Netherlands
  5. 1974Imported crude costs US refiners far more than in 1973; in America inflation and unemployment rise together
  6. Jan 1976At a meeting in Jamaica, IMF members agree that each country may choose its exchange-rate arrangement; gold is to lose its official price
  7. 1979Iran's revolution cuts its oil production, and the oil price rises a second time
  8. Oct 1979The Federal Reserve raises its discount rate, the rate at which it lends to banks, and most of the other countries the series follows raise an official rate within two months
  9. 1982Net bank lending to the developing countries that did not export oil halves, and a debt crisis begins
  10. 1983Inflation is below its peak in all eleven countries the series follows

The Federal Reserve's policy committee met on a Saturday in October 1979

On Saturday 6 October 1979 Paul Volcker, chairman of the Federal Reserve, the US central bank, called together its Federal Open Market Committee, which steers short-term interest rates. Prices were rising faster than expected, partly because of new rises in energy and food. The dollar had fallen against other major currencies since mid-September, and gold had reached record highs, though in the last few days before the meeting it had fallen back considerably. The staff still expected output to fall before the year ended.

Predict first

The Committee wanted money and credit to grow more slowly. Over the next six months, what do you think happened to the interest rate US banks charged each other for overnight loans?

Central banks had begun to set targets for money, and often missed them

The Council of Economic Advisers, the President's team of economists, wrote in its 1983 report that until the mid-1970s the Federal Reserve steered by interest rates, and through the 1970s put more weight on targets for the growth of money (cash and bank deposits). West Germany's central bank, the Bundesbank, set its first target for 1975. Floating the mark, West Germany's currency, in 1973 made that possible, four economists argued in 2008: while the mark was fixed, the Bundesbank created marks to buy dollars, swelling German money and bringing in inflation. It overshot its target every year from 1975 to 1978, and had to explain its misses in public. By 1979 the Fed set yearly ranges for three measures of money, 1½ to 4½ per cent for the narrowest, M1. In the third quarter M1 grew at an annual rate of about 9½ per cent, despite large rate rises.