Money Matters: An IMF Exhibit -- The Importance of Global Cooperation

Reinventing the System (1972-1981)

Part 7 of 7


Conflict &
(1871 - 1944)

Destruction &
(1945 - 1958)
The System
in Crisis

(1959 - 1971)
the System
(1972 - 1981)
Debt &

(1981 - 1989)
Globalization and Integration
(1989 - 1999)

War on Inflation

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Desperate times called for desperate measures. Governments around the world fought inflation in 1979 and the early 1980s by raising interest rates to record highs in order to tighten the money supply and reduce pressure on prices.


How Do Higher Interest Rates Reduce Inflation?

Central banks control interest rates on funds that they lend to individual banks and on funds loaned between banks. If the central bank raises these interest rates, individual banks are forced in turn to raise the rates they charge their customers. Borrowing money becomes more expensive, so less is borrowed. Economic activity slows, less money is earned, and less money is spent. Demand for goods and services falls. To revive shrinking demand, providers of goods and services lower their prices, and inflation slows.


He promotes inflation!



Cost of the War on Inflation

Stopping inflation came at great cost. In addition to decreasing the money supply, high interest rates reduced spending, output, and employment. The world economy was pulled into the deepest recession since the 1930s. World Trade fell in 1981 for the first time since World War II.




Stabilizing the Dollar

To slow inflation and stop the fall of the dollar, the U.S. government adopted a dramatic anti-inflationary policy in October 1979. It made borrowing money more difficult and more expensive. The policy worked, interest rates soared. By the end of 1981, inflation had been brought under control and the value of the dollar had stabilized. But the anti-inflationary policy also plunged the U.S. economy into recession.


Chain Reaction

Since capital now flowed across borders with ease, higher interest rates in one country attracted capital away from others. U.S. anti-inflationary policies pushed interest rates to record levels. As the high U.S. rates attracted capital, other countries were forced to raise their interest rates to compete. High interest rates around the world caused spending to contract sharply, throwing the global economy into recession.


Would Floating Rates
Sink the System?
OPEC Takes Center Stage Petrodollar Problem
Recycling Petrodollars Stagflation Rush from the Dollar War on Inflation

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