The Change in Regimes
Fiscal and Monetary Policies and the Economy
The changes in fiscal and monetary policies, the dollar, oil prices, and regulatory policies that accompanied the first Reagan administration constituted a dramatic change in regimes that broke the back of an extended sixteen-year inflation cycle and reestablished the attractiveness of securities markets. Ronald Reagan took office opposed to the wage and price controls, regulatory bent, and energy policies of the Carter administration, and espoused strong ideological commitment to free markets, lower taxes, economic growth, and the intention to lead the free world fight against communism -- themes particularly attractive to international owners of capital.
Monetary policy was an equally important part of the new regime. Paul Volcker and the Federal Reserve are well recognized for their prolonged effort to reduce inflationary expectations, but it is worth a historical reminder that the Federal Reserve's aggressive easing in mid-1980 left its reputation in tatters, and that its effort only achieved constancy after Reagan was elected and personally gave it strong support. Less well recognized is the vital institutional role of the Federal Reserve in maintaining the stability of the international and domestic banking systems from 1982 to 1984, when the growth in both the economy and the securities markets could easily have been derailed by financial crises reminiscent of the 1930s.
Fiscal and monetary policy combined unintentionally to produce a 55% rise in the dollar between 1980 and February 1985 that was an important part of the change in regimes. Linked to this strong dollar, but also some-