Volckers' shock

Topics: Monetary policy, Inflation, Economics Pages: 9 (2905 words) Published: February 2, 2014
 What is the relation between the Volcker Shock and the current economic crisis?

The expression “Volcker Shock” is commonly referred to the domestic and worldwide outcome of the monetary policies undergone by Paul Volcker while appointed as director of the USA Federal Reserve. These policies, which Alan Greenspan referred to as a “milestone” and a “switch point in the economic history of the Nation”1 have a relation with the current economic crisis, and the purpose of this essay is to point out this link.

A little bit of history

I think we should start from 1971. That year, to avoid disaster, Nixon halted the dollar convertibility in gold. From 1948 to that date, the Bretton Woods system caused the massive transfer of American gold in Japanese and European accounts, and to address this problem, the age of exchange fluctuation begun. This caused Europe to accelerate the integration process, and forced United States to begin re-approaching with China. Inflation begun haunting the price system. The economic situation of capitalist countries at the time of his appointment was somehow similar to the 1973-1974 crisis, but far more serious. The United States had just lost Iran, their biggest ally in the Near East, and European currencies were recovering fast. The keynesian economists claimed that the inflationary economic crisis of 1974-1975 was only caused by the rise of oil prices pursued by the “OPEC cartel”, and responded accordingly: the newly elected Carter administration gave another chance to their macroeconomic recipes. The economic policies that led to that very crisis were given another chance, with obvious negative results. The dollar kept declining against gold. In 1976 this decline was still modest, but by 1978 the chronic economic crisis that U.S. and world capitalism faced since 1968 was about to become acute once more. By 1976 it was already evident that world capitalists didn't have long-term confidence on dollar no more, because they feared that a new sharp depreciation of this currency was about to come. The keynesian dogma of a “monetary authority” capable of lowering long-term interest rates by increasing the supply of token money was disrupted, and by 1979 as the dollar price of gold reached $ 300 the long-term interest rates topped 9%, which was even more than in the crisis of 1974-1975. By January 1980 the dollar had lost considerably more than half its gold value within a period of only five months.2 Capitalists all over the world dismissed dollar denominated in dollars and shifted to gold or commodities such as oil, leading to the first global runaway inflation in History. Throughout 20th century many capitalist countries experienced runaway inflation or hyperinflation, but this was never a problem of global scale, nor a matter concerning the core of the system, the dollar. The situations was even worse than the crisis 1929 crisis, because at the time the German mark collapsed in 1923 the massive loans provided by USA were able to restore the preexistent currency and credit system, while in the 70s nobody was big enough to lend so much money to save USA capitalism. For these reasons, Jimmy Carter substituted FED president William Miller with Paul Volcker on august 1979.

Neoclassical theory for realist purposes

What did Volcker do? He basically aligned with Bundesbank inflation control policies by increasing the federal interest rates up to 20%, even at the cost of internal recession of unprecedented scale. His purpose was to curb the worldwide demand for gold, and restore the appeal of...

Bibliography: -Nicola Capelluto “La Crisi delle relazioni globali”, edizioni Lotta Comunista, 2010
-Gérard Duménil, Dominique Lévy, “The Crisis Of Neoliberalism” Harvard University Press 2011
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