In the Reagan years, the recession was a secondary recession. The initial recession took place in Carter's final year in office, 1980. The recession was one of the reasons for his defeat.
The cause was clear: the Federal Reserve had decreased the rate of monetary inflation. First in Nixon's recession (1969—70), then in Ford's recession (1973—75), the Federal Reserve responded by pumping up the money supply. Nixon took the nation off the international gold standard on August 15, 1971. This removed any external pressure on the FED's expansion of money.
G. William Miller, who lasted a year and a half under Carter, oversaw a serious expansion of money, which was translated into prices by way of a series of OPEC oil price hikes in 1979. This seemed like a replay of the crisis of 1973.
Carter persuaded Miller to resign in August of 1979. He gave him the figurehead office of Secretary of the Treasury. He replaced Miller with Paul Volcker.
Volcker and the Board of Governors decided that the only way to call a halt to escalating prices and rising interest rates was to reduce the FED's purchase of assets. Volcker announced the new policy in October. The FED would let the federal funds rate rise. It would let all other rates rise. Rates rose.
The bank prime rate rose. It hit an unprecedented 20% in April 1980. This was the mid-point of Carter's six-month recession. The rate backed off to 11% in late July. Technically, the recession was over. But then the rate started climbing again. It reached 21.5% in mid-December. It was at 20.5% the following July. It slowly declined, but did not reach 9.5% until June 1985.
The economy tanked. It could not survive on a prime rate anywhere near 20%. Volcker was determined to wring price inflation out of the economy, and he did.
Price inflation continued upward. It hit 13.5% in 1980.
It took time for the FED's policy to effect a reversal.
The
price of slowing prices was a rising unemployment rate. It hit 10.8% in December 1982. The recession had ended the previous month. The unemployment rate fell to 8% a year later. This is regarded as "one of the most dramatic recoveries since employment and unemployment statistics have been collected. . . . " (Bureau of Labor Statistics.)
Price inflation also fell rapidly. It was down to 3.2% in 1983. No one had predicted such a rapid decline.
Unemployment declined more slowly. It was down to 7.2% in November 1984. Reagan was re-elected by a landslide.
The economy recovered. The stock market boomed from its bottom at 777 on August 13, 1982.
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