The Federal Reserve in the 1970s and 1980s (HOM 36-A)

all right welcome to history of money professor barth here history professor at arizona state university all right we are at lecture 36. part a we're going to take a look at the federal reserve in the 1970s and in the 1980s part b big lecture greenspan era financial crisis 2008 the coronavirus panic of 2020 and then part c the post gold era unanchored capitalism and the power of big finance i'm just going to encapsulate different trends that one can observe since 1971. what has happened to the economy what's happened to the financial sector okay so when we last spoke nixon has closed the gold window he didn't inform any of the bretton woods countries or even some of the members of his own cabinet and so it's been called by historians the nixon shock suspends convertibility of the dollar into gold formerly the the gold price was 35 an ounce u.s will no longer honor that and now floating exchange rates replace the fixed exchange rates from the bretton woods era nevertheless darla the dollar remained in the world's reserve currency what proceeds in the 1970s is a crisis in the u.s dollar and the chairman during this period is a man named arthur burns arthur burns pictured here you'll often see him in photographs with a pipe in his mouth uh arthur burns was a keynesian economist as we were most economists in those days he had some freemanites and other people in the chicago school but keynesian economics is the rule of the day and arthur burns as such believes that you can't really have moderate to high inflation and high unemployment at the same time the 1970s will throw him as well as a lot of other keynesians off guard now richard nixon early in arthur byrne's tenure as federal reserve chairman had uh quite an interesting relationship with the chairman first of all burns opposed nixon's closing of the gold window he thought it was a bad move and nonetheless he told nixon that he would fully cooperate with his executive order nixon also placed pressure on arthur burns to cut interest rates and to keep interest rates relatively low prior to the 1972 presidential election low interest rates usually at least in the short term will lead to more economic growth even if it has bad consequences later and so presidents historically prefer interest rates to be low on the eve of an election out of the thought not unfounded that a a booming economy will help their re-election chances arthur burns complied with nixon's request and so in the early 1970s you have an expansive monetary policy the link was cut between the dollar and gold price controls instituted by by richard nixon in 1971 into 1972 and even into 1973 here's the effective funds rate and you'll see this uh this rate cut in 1970 is what spurred the run on a dollar in the summer of 1971. burns raises rates a little bit in the latter half of 1971 but then cuts them in the final quarter of that year and keeps them relatively low through 1972. by the way in this lecture as well as parts b and c you'll see a lot of graphs that say fred okay you may be asking who is fred this is the federal reserve economic data okay it's from the st louis fed website it's actually a really great website if you're looking for hard data you can really find any economic data you want and you can plug into the year's custom customizable dates which is very convenient especially for making a powerpoint so rate cuts now what happened inflation and look at the inflation rate from the late 1960s through 1971 we're looking at about four to six percent inflation now six percent inflation was enough to cause a run on the dollar before but look at this look what happens to inflation beginning in early 1972 it soars from three and a half percent to 11 by early 1974 11 inflation rate that is incredibly high that means that if you had saved money early in 1972 and left in a savings account and didn't touch it it was now between 1972 and 1973 lost six percent of its value and then between 1973 and 1974 lost 11 of its value that is quite a a a high level of devaluation the price of gold went through the roof in the first half of the 1970s the price of gold toward the end of 1971 was around 40 45 an ounce in dollars now again the government is no longer redeeming federal reserve notes for gold but you still have a private gold market and went just like today there's the gold market today look at that from 40 to just shy of 200 by the end of 1974. that's a huge jump in the price of gold well burns responds to this spike in inflation by frankly doing the right thing raising interest rates and he raises them quite substantially interest rates the federal funds rate reaches double digits halfway through 1973 and almost reaches 13 which is extraordinarily high in uh toward the end of 1974. i'll give a little context throughout the 2010s the the federal funds rate in this country has been a fraction of one percent through most of the 2010s until until after from 2018 onward it's gone up a tiny little bit now it's back down to a quarter of a percent but through most of 2010s it was under one percent yeah here we're talking double digit federal funds rate well there he is arthur burns this causes a recession you know you tighten credit jobs are going to be lost look at the unemployment rate unemployment rate goes up to by early 1975 goes up to nine percent there's the stock market in 1974 and 1975 the stock market lost a lot of value went down to 3 000 this is the dow jones from a peak of 8 000 in 1965 so basically all of the gains made in the dow jones between the mid 1950s all the gains made since the mid 1950s have been erased by the mid 1970s in the dow jones index so what does burns do burns replies by cutting rates again okay he says whoa whoa whoa i moved too fast here and he cuts rates quite dramatically from 13 that high in 1975 and brings it down to 5 and keeps it at that level through the end of 1977. what happens to inflation well when burns spiked those interest rates up to 13 inflation went down inflation went down to six percent now six percent inflation is still pretty bad like if we had six percent inflation today it would be seen as well that's really way too much but six percent inflation is as bad as 11 percent but because burns cut rates in response to the stock market unemployment he's a keynesian oh okay you know unemployment's up let me let me uh lower interest rates maybe a little you know maybe inflation isn't that bad of a thing anyhow and that will bring unemployment back down so inflation goes up again beginning in 1976. six percent then seven percent eight percent nine percent inflation by early 1978 what happens to unemployment unemployment doesn't really get that much better yes it peaked at nine percent unemployment but it's still just hanging around over six percent unemployment six percent unemployment is a very good economy okay usually full employment you're looking at like maybe three percent unemployment you're always gonna have some some unemployment some people just won't work but if it's a too far above four percent unemployment that's a bit high okay that's too high you're talking about people who want to work but can't find jobs so unemployment really is still quite high especially look at unemployment in the late 1960s you had full employment right there that's quite a bit higher this is what equinox economists call stagflation stagflation where inflation is high and unemployment is high now this appeared to repudiate keynesian orthodoxy which said look deficit spending inflation you're not going to have unemployment and but in the 1970s you did you had high inflation high unemployment not only that but seemed to track right here's the inflation it's going up and then a little bit later unemployment going up inflation goes down unemployment goes down inflation goes up unemployment goes up okay and and this really puts burns and other keynesians in this strange predicament where their their theory their economic philosophy isn't working and here's the dow jones by 1978 the dow jones is still doing very poorly okay it's a little bit of a climb but then it's right back down again and so burns doesn't know what to do he's out of tools burns leaves in early 1978 he's replaced by another chairman who's only there for a year william miller not important yeah look at this is uh time magazine is this slump necessary money chief arthur burns facing an economy on the break in the late 1970s there's a lot of pessimism about the u.s economy i mean again look at the dow here the dow is lower than it was in the 1950s okay uh the u.s is facing a lot of economic competition from europe which has fully recovered now from world war ii from japan especially japan's really rising in the 1970s economically and and there's a sense that the us perhaps has peaked maybe the the u.s empire has peaked and and now it's just all declined from here on out actually if you talk to a a baby boomer and asked ask him or her you know what was your outlook on the future of the united states you know back in the 1970s when you were in your early 20s and i guarantee you they're going to tell you it was a pretty pessimistic time you know you know things weren't looking so so good this is the context by the way in which congress amended the federal reserve act not something congress does very often 1977 congress said okay we didn't specify this before in 1913 but just to make it clear you have a dual mandate federal reserve to to strive for maximum employment and stable prices and so that is the so-called dual mandate and it's still in place today that was congress amended a federal reserve back because at the time under arthur burns we had high unemployment and very unstable prices and so that dual mandate was put in there as a corrective to to make clear to the fed what their goals ought to be um burns toward the end of his tenure and then his successor raise rates a bit to 10 and again by our standard today 10 is just off the charts high interest rates it wasn't enough to stop the inflation the inflation continues to climb confidence in the dollar is falling falling falling look at this by 19 uh beginning especially in 1978 okay and then 1979 into into early 1980 inflation is back into double digits and it peaks in march 1980 jimmy carter as jimmy carter is still president inflation peaked in march of 1980 at 15 percent 15 this astronomical inflation the price of gold just went berserk in mind in 1971 the official price of gold according to the united states government was 35 an ounce by early 1980 gold is selling at more than 800 an ounce 800 an ounce from 35 an ounce less than 10 years ago ronald reagan runs for president in 1980 on a platform of change he runs an optimistic message carter somewhat like herbert hoover is a man that again he didn't ask for this perceived as weak unable to get a handle on things reagan brings a new philosophy of government uh to the table a uh more of a free market solution of deregulation lowering taxes and he runs an optimistic campaign mourning in america and actually uh the slogan make america great again dates to 1980. adopted by the reagan campaign then later made famous and fully embraced by the trump campaign in 2015 and 2016. but you can see i mean the country was like yes please uh reagan wins in a landslide in 1980. now for our purposes the the fed chair here is is most important paul volcker was chairman of the fed from august 1979 until august of 1987. now you'll notice the dates there he was actually put into that position under jimmy carter volcker is usually associated with reagan but it's carter who puts him there and volker's main objective is to is to put a stop to this inflation and it's a crisis i mean it may get worse what if we reach 20 inflation what if we reach 40 50 60 100 inflation now that as you know doesn't end up happening but in 1980 there's no guarantee that that's not going to happen it's happened in other countries and so there's a real fear here this is a crisis in the dollar and so volcker comes at it with a very tight money policy we need high interest rates and we need pretty extreme high interest rates right now to stop the inflation there he is you'll see uh in a lot of the photographs of that day he's he has a cigar in his mouth back then in in public buildings and even when giving testimony to congress you could uh smoke a cigar uh while you were giving that testimony there was an fomc meeting in october 1979 and at that meeting they decided okay we've really just got to spike these rates and uh between october of 1979 and april 1980 rates the federal funds rate went from 11 and a half percent to 17 and a half percent tried that then cut it and then you know the inflation is still going out of control and so they raised it even higher reaching a peak by june of 1981 of 20 20 federal funds rate 20 percent and it it had huge consequences you can't raise interest rates to that high of level without causing a contraction and so look at that 1979 you know if you thought this was bad in 1977 1978 it fell even further now by 1981 in the early months and first year of the reagan administration the dow jones is at like 22.50 okay dow jones is that's a huge drop since 1965. look at that unemployment is now into double digits paul volcker was very very unpopular and actually ronald reagan early in his administration was very unpopular too i mean you see the landslide here uh you know by early 1982 a lot of the country is very fed up and uh and and and has become disillusioned by ronald reagan look at the uh unemployment rate its climbs climbs from uh summer of 1981 to summer 1982 from seven percent to almost 11 the uh the high interest rates made made it very very difficult to obtain a car or or home loan the prime rate which is even higher than the federal funds rate reached almost 22 percent that's the rate that you and i borrow i mean i would would you buy a house with a 22 interest rate heck no man i'm not i'll rent thank you very much uh so the construction uh construction sector did very very poorly construction worker unemployment reached 22 percent 22 for construction worker unemployment all the industrial sectors did poorly manufacturing shed over a million jobs between 1980 and 1982 the automotive industry which was already really struggling because u.s automakers were making bad product in the late 1970s and early 1980s u.s automotive automobiles today are have become a lot better uh but back in those days they were just crap and uh and japanese competition foreign competition was was uh out doing them so the automobile industry was already struggling as it was but in between 1980 and 1982 auto plants closing the unemployment rate for auto workers rose from four percent in 1978 to 24 by the end of 1982. so things are looking really bad farming also did very poorly and in fact uh this was actually 1979 before rates were 20 this is when rates were 11 farmers stormed washington dc in their tractors and at one point blockaded the echoes building the federal reserve building to protest the high interest rates so pretty dramatic there's someone wearing a jimmy carter mask so you know the federal reserve not very popular at this time well look at those high rates what what was the effect inflation went down it worked it worked it was just very painful right for for about two for about a year and a half maybe two years quite painful economically but by 19 the end of 1982 inflation had been brought down to three percent okay and it remained between between two and four percent through the rest of paul volcker's tenure at the federal reserve and so you actually have to look at it say okay he stopped the inflation the gold price calmed down from a peak of over 800 in 1979 and 1980 the gold gold price settled at around 300 to 400 an ounce if you had bought gold at that price you lost a lot of money volcker felt confident enough by 1982 to begin lowering rates now this is still 10 right here so midway through 1982 you still have double digit federal funds rate but you know and he has to raise it a little bit here and you know never go never falls below five percent under paul volcker never falls below five percent nevertheless he's able to lower it and and the economy gets moving again unemployment falls from double digits to uh to seven percent hangs around that area again that would still be seen as too high you could say maybe this is an uneven recovery um but the uh look at the stock market dow jones from a low of 2200 points dow jones recovers this is through the rest of reagan's administration okay now jones basically before you know a brief stock market crash in 1987 which we won't go into because we have to move on um you know that's almost tripling in the stock market reagan volcker the mood shifted in 1983 1984 and reagan became very popular again look at the presidential election 1984 absolute landslide absolute landslide in favor of ronald reagan [Music] as for reagan large tax cuts booming economy after 1982 and yet major increases in federal spending especially military spending and so actually deficit spending under ronald reagan increases a lot here is the uh there's a chart of the u.s national debt in terms of trillions of dollars under ronald reagan for the first time we reach a trillion dollar national debt and by the time he leaves office we're approaching three trillion dollars of national debt and then by the end of george h.w bush's administration who was reagan's vice president were over four trillion dollars of national debt okay the size of the scope of government even though he had deregulation and and tax cuts the federal government was still very large still lots of spending and so reagan goods rhetoric solid rhetoric in in a lot of respects but the results are are more of a mixed bag and in fact actually as the national debt rose and you know interest rates while volcker was able to cut them this is still fairly high it's over five percent seven you know close to ten percent um you saw a substantial rise in federal uh interest costs interest costs on the national debt so you know it's a bit of a bit of a mixed bag uh it's paul volcker his tenure ends in august of 1987. and a new man takes it home alan greenspan the new mr dollar alan greenspan so for part b of this lecture we'll take a look at greenspan and we'll go all the way all the way up to a present okay it's going to be just a good solid survey so looking forward to that see you there bye

Channel: Professor Barth

Views: 3,654

Keywords: 1973-1975 recession, 1980-1982 recession

Id: f-_ga9xXJXA

Length: 25min 55sec (1555 seconds)

Published: Wed Dec 02 2020