Volcker shock
볼커 쇼크
The anti-inflation policy of the US Federal Reserve under Chairman Paul Volcker from October 1979 to the summer of 1982, which tightened money hard by targeting bank reserves and the money supply instead of interest rates and let the federal funds rate rise to about 20 percent. It broke double-digit inflation but brought the two recessions of 1980–82 and unemployment above 10 percent, and by raising interest rates worldwide it helped set off the Latin American debt crisis.
In depth
Prices rose persistently in 1970s America. The Fed tightened in 1973 but eased again in the face of higher unemployment before inflation had been contained, and inflation, having bottomed out at 5 percent in December 1976, moved higher once again. By January 1979 prices were 7.7 percent above a year earlier, and the dollar had lost 12 percent of its value against major foreign currencies since late 1976. President Carter moved Fed Chairman G. William Miller to the Treasury and nominated New York Fed President Paul Volcker in his place. At his confirmation hearing in July 1979 Volcker pledged to make fighting inflation his top priority; he took office on 6 August.
On the evening of Saturday 6 October 1979, at a rare press conference, Volcker announced the results of an unscheduled meeting of the Federal Open Market Committee held earlier that day. The Fed had been managing the money supply by holding the federal funds rate within a narrow range; it would now manage the volume of bank reserves instead. Constraining money growth directly through reserves meant that interest rates would move far more widely in the market. "The other side of the coin," Volcker said, was that the daily rate "is apt to fluctuate over a wider range than had been the practice in recent years." Under high inflation it was hard to know whether nominal rates that looked high were tight in real terms, and the new policy was also meant to signal that the Fed was serious and so to break inflation expectations.
The first attempt was insufficient. When the credit-control programme launched by the Carter administration in March 1980 precipitated a sharp recession, the Fed eased up. In late 1980 and early 1981 it tightened again, letting the federal funds rate approach 20 percent, and the prime rate reached 21.5 percent in 1981. The economy entered recession again in the third quarter of 1981, and unemployment peaked at 10.8 percent in late 1982. Indebted farmers drove their tractors to Washington and blockaded the Fed's building, homebuilders mailed it pieces of lumber, and car dealers sent coffins containing the keys of unsold vehicles. A congressman threatened to introduce a bill to impeach Volcker, but Volcker would not back down: "We have set our course to restrain growth in money and credit. We mean to stick with it."
In July 1982, when the data showed that the recession had bottomed out, Volcker told lawmakers that he was backing off his tight monetary targets. Inflation, which had peaked at 14.8 percent in March 1980, fell below 3 percent by 1983. The Fed's historians judge that by breaking with traditional procedures and persevering through a large recession the Fed re-established credibility for low inflation, laying the groundwork for the "Great Moderation" that followed. Monetarist economists, by contrast, did not recognise Volcker's policies as fully monetarist, and Friedman opposed the Fed's policies even in this period.
The shock spread beyond the United States. High American interest rates pulled up rates worldwide, and in 1981 the world economy entered a recession. The European Monetary System was strongly disturbed, and the Volcker shock was deeply criticised in Europe. Latin American countries that had borrowed at low rates in the 1970s found their debt burdens unsustainable, and the debt crisis began in August 1982 when Mexico announced that it could not meet its payments. Studies of neoliberalism count the Volcker shock among the starting points of the neoliberal turn, which put the control of inflation ahead of other goals.