Onscreen title: USA, 1979
Larry Lindsey, Assistant to the President for Economic Policy: Jimmy Carter was maybe the high point of Keynesian behavior. And it simply was not working.
George Shultz: Toward the end of Carter administration, with inflation out of control, Paul Volcker was made chairman of the Federal Reserve. He understood the problems.
Paul Volcker was steeped in the ideas of Austrian School economics. (...) Volcker believed that inflation was one of the worst of all economic evils.
Paul Volcker: It came to be considered part of Keynesian doctrine that a little of inflation is a good thing. And of course what happens then, you get a little of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the was to slay that dragon.
Volcker used a blunt weapon: He tightened the money supply. The economy went into a nosedive. Facing a presidential election, Carter was reluctant to back such harsh measures. Carter's rival was the Republican Ronald Reagan. Reagan shared the same economic philosophy as Margaret Thatcher. For over 20 years, he had been campaigning against the Keynesian orthodoxy and for Hayek and Friedman's idea of free markets and freedom.
Newt Gingrich, Speaker, U.S. House of Representative, 1995-1999: Reagan knew Hayek personally; he knew Milton Friedman personally. And Reagan was, in a sense, their popularizer. So he was the person who would take these people who were very profound but not very easy to communicate. I don't think you'd ever get Hayek on the Today show, but you could get Reagan explaining the core of Hayek with better examples and in more understandable language.
Ronald Reagan, U.S. President, 1981-89: Vote for me, if you believe in yourself, if you believe in your right to control your own destiny and plan your own life, yes, and have a say in the spending of your own money. The president is going to have more government on the backs of the people and of business and of industry, the working people, in order to try to solve he problems that were created by too much governments on our backs. We can get government off our backs, out of our pockets. This kind of indifference to economic disaster must be ended, and it'll be ended by having a different kind of leadership.
( ... )
Milton Friedman: The situation was this: The only way you could get inflation down was by having monetary contraction. There was no way you could do that without having a temporary recession.
George Shultz: Obviously, who want a recession? But I can remember President Reagan using those famous words: "If not now, when? If not us, who?"
Reagan offered Volcker his moral support in the fight against inflation. As Volcker tightened the money supply, the economy slowed and contracted. Unemployment hit 10%. Nobody had realized quite how tough it will be. All across heartland of America, ordinary people were hurting.
Darren Smith, Farmer: Well, the interest rates, that just eats up your profit. It becomes very difficult to keep your business running right. 1980s, the interest rates were up to 20% or better. It was very interesting times. I remember, you know, cash flows got very tight as things got tighter and tougher. Creditors forced salesㅡyou know, "Come up with the cash or we're going to have to liquidate you." It's a hole that almost seems impossible that you can get out of.
Paul Volcker: If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5%, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived thought it.
It had take three yearsㅡthree years of growing public anger, three years of real hardship for millions of Americans. But by 1982, the dragon of inflation had be slain.
Paul Volcker: What changed drastically in the 1980s and running through today is the kind of presumption that inflation is bad. The primary job of a central bank is to prevent inflation. That's a very different environment than '50s and '60s.
Reagan and Volcker had set the United States on a new economic course.
Ronald Reagan: From our very first day, we have been working to undo the economic wreckage they left behind.
They called his policy Reaganomics. It had four key elements.
Larry Lindsay: The first was the concept of sound money. The second was deregulation. The third was modest tax rates. And the fourth was limited government spending. Sounds pretty conventional now, but when Reagan was elected he was vilified by his opponents as being some radical extremist.
Ronald Reagan: They just can't accept that their discredited policies of tax and tax, spend and spend, are at the root of our current problems.
Reagan's tax cuts, the biggest in history, led to huge deficits. But the economy started to grow steadily again.
Milton Friedman: There's no doubt in my mind that those actions of Reagan, lowering tax rates, plus his emphasis on deregulating unleashed the basic constructive forces of the free market, and from 1983 on, it's been almost entirely up.