The Dilemmas of Monetary Policy
The mounting signs of financial instability discussed at the end of the preceding chapter (see section 8.5) are part and parcel of the transition toward a new global accumulation regime. They are both the manifestation of a collapsed monetary regime and the driving force behind deeper structural changes which are transforming our economy. As such, they deserve the close attention of policy-makers who are struggling with the challenges of a new era.
The changes in our credit system, a mixture of destabilization and restructuring, need to be analyzed carefully, not least in order to define the direction of monetary reform. We are, after all, in the middle of a gradual transformation toward a new monetary regime. That process has involved a series of initiatives by the U.S. government over the last dozen or so years. In the following four chapters we shall try to identify the underlying thread of these seemingly disparate measures, starting with a discussion of monetary policy changes during the 1980s.
The historic demise of the postwar monetary regime can be traced back to the dramatic switch by the Federal Reserve from a Keynesian low-interest policy to a monetarist focus on slow and steady money-supply growth in October 1979. As already discussed (see section 7.7), that policy change aimed at breaking the "debt-inflation" spiral underlying the stagflation crisis of the 1970s. It did so, but only by triggering the worst downturn since the 1930s. Insofar as this Great Recession of 1979-82 marked the beginning of a major restructuring process in our economy, its historic significance reaches far beyond that of a purely cyclical event. In this chapter we shall analyze how the monetary policy of the Federal Reserve has evolved since then.
Six months after Volcker's fateful policy switch, in March 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act