Paul Adolph Volcker (born September 5, 1927) is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). After 1987, he went back to his high-paid Wall Street job. Since February 2009, he has been Chairman of the Economic Recovery Advisory Board under President Barack Obama.
The Federal Reserve pushed short-term interest rates UP: - average 11.2% in 1979. - was raised by Volcker to a peak of 20% in June 1981. - the prime rate rose to 21.5% in 1981 as well. Volcker kept American interest rates at these extremely high levels in almost THREE years, until late 1982.
Reduced manufacturing output Median family income by 10% Raised unemployment to nearly 11%BUT Got inflation below 4%, and it stayed roughly this low or lower for the next 20 years.
Highinterest rates quickly spread to the rest of the advanced capitalist countries. Soaring interest rates meant higher interest payments on foreign debts: from 10-20% in two years. Twoshocks that impacted the American policy on the Third World: Oil price increased --> raised import costs on LDCs. Recession in the West reduced demand for developing country exports.
Many African countries, having borrowed heavily in the 70s as: Nigerias debt in a short time went from $9 billion to $29 billion. In the last half of 1981, Latin America borrowed a billion dollars a week, mostly to pay off existing debt. In 1982, Mexico announced that it had run out of money. Brazils debt exploded, doubling from $50 billion to $100 billion in six years. By 1983, thirty-four developing and socialist countries were formally renegotiating their debts, and a dozen more were in serious trouble.
This “lost decade” witnessed two surprising developments: A wave of Democratization (from South Korea to Thailand, from the Philippines to Zambia). The heavily indebted countries jettisoned import- substituting industrialization. Between 1979 and 1985 the advanced industrial countries turned from the conflict and confusion of the 1970s to economic integration. Starting around 1985, developing countries moved to export, open markets, privatize and deregulate.