through the 1970s inflation that resulted from its breakdown. He was eventually called on to break the back
of inflation as head of the Federal Reserve from 1979 until 1987. He did more to shape and guide the dollar-
based monetary system before, during, and after these years than any other person. I was lucky enough to
have gotten to know him well so I can personally attest to the fact that he was a person of great character,
capabilities, influence, and humility—a classic hero/role model in a world that lacks hero/role models,
especially in economic public service. I believe that he and his thinking deserve to be studied more.
As a result of going off the gold-linked monetary system that constrained money and credit growth, there was a
massive acceleration of money and credit, inflation, oil and commodity prices, and a panic out of bonds and other
debt assets that drove interest rates up and caused a run into hard assets like real estate, gold, and collectibles for
most of the next 10 years, from 1971 to 1981.
I remember inflation psychology very well; it led Americans to borrow money and immediately take their
pay checks to buy things to “get ahead of inflation.” The panic out of dollar debt also led interest rates to rise
and drove the gold price from the $35 that it was fixed at in 1944 and officially stayed at until 1971 to a then-peak
of $850 in 1980. I remember inflation becoming the biggest political problem, which led President Nixon to
create controls on prices and wages, which created great economic distortions that, along with Vietnam and
Watergate, brought him down. Then President Ford passed around buttons that said “WIN,” which stood
for “Whip Inflation Now.” I remember President Carter facing even worse inflation problems, and he
brought Volcker back as head of the Fed to break the back of inflation. Volcker was effective, but it cost
Carter his presidency. I saw up close how the loose money and credit policies of the 1970s led to dollar-
denominated debt being liberally lent by banks to borrowers around the world, especially to those in fast-growing,
commodity-producing emerging countries, and I saw how the world was in the bubble phase of the debt cycle in
the late 1970s. I saw how the panic out of dollars and dollar-debt assets and into inflation-hedge assets, as
well as the rapid borrowing of dollars, risked leading dollars and dollar debt to cease being an accepted
storehold of wealth.
While most people didn’t understand how the money and credit dynamic worked, they felt the pain of it in the
form of high inflation and high interest rates, so it was a chronic political issue. At the same time, in the 1970s
there was a lot of pain, conflict, and rebellion due to the war in Vietnam, oil embargoes that led to high gas prices
and gas rationing, labor union fights with companies over wages and benefits, Watergate and the Nixon
impeachment, etc. At the time, it was also widely believed that the labor unions were out of control with their
demands for more pay and less work and needed to be controlled, so liberalism was losing popularity and
conservatism was gaining popularity. These problems peaked in the late 1970s as inflation spiked and 52
Americans were held hostage for 444 days at the US Embassy in Tehran, Iran. Americans felt that the country was
falling apart and lacked strong leadership. At the same time economic conditions in communist countries were
even worse.
In China, Mao Zedong’s death in 1976 led Deng Xiaoping to come to power in 1978, which led to a shift in
economic policies that included capitalist elements like private ownership of businesses, the development of debt
and equities markets, entrepreneurial technological and commercial innovations, and even the flourishing of
billionaire capitalists—all under the strict control of the Communist Party. This shift in Chinese leadership and
approaches, while seemingly insignificant at the time, was going to germinate into the biggest single force to shape
the 21st century.
The 1979-82 Move to Tight Money and Conservatism
President Carter, who like most political leaders didn’t understand the monetary mechanics very well, knew that
something had to be done to stop inflation and appointed a strong monetary policy maker, Paul Volcker, as head of
the Federal Reserve in August 1979. In October 1979, Volcker announced that he would constrain money (M1)
growth at 5.5%. I ran the numbers, which led me to figure that, if he really did what he said he was going to
do, there would be a great shortage of money that would send interest rates through the roof and would
bankrupt debtors who could not get the credit they needed and would drive up their debt-service expenses
to levels that they couldn’t afford to pay. While it was unimaginable that he would do that, Volcker stuck to
that plan despite great political backlash and drove interest rates to the highest level “since Jesus Christ,”
according to German Chancellor Helmut Schmidt.