The end of the 1970s and the Volcker shock

In 1976, the Bretton Woods system is formally buried by theJamaica Accords.In the early 1980s, all developed countries allow their currencies to fluctuate. For the first time in history, the whole world is on a pure paper money standard, with one exception: Switzerland formally keeps the franc pegged to gold until 1999.

• In 1979, the USdollar is under tremendous pressure due to the persistently high inflation of recent years. In August of that year, Paul Volcker takes over as head of the Federal Reserve.
• In March 1979, theEuropean Monetary System is created. For the first time, all exchange rates of the participating countries are linked to each other by means of the European currency unit (ECU). This later becomes the euro.
• That summer, core inflation in the US reaches 12%. The gold, silver and commodity markets react sensitively and prices shoot up, which makes the Federal Reserve under Volcker nervous.
• In October 1979, the politicians and central bankers of the West meet at an IMF gathering in Belgrade. In the United States, the White House has long since declared the fight against inflation a “national priority”. In Belgrade, Paul Volcker seeks the advice of the Europeans, consulting with German Chancellor Helmut Schmidt and Bundesbank Chairman OtmarEmminger, among others.

  “In Belgrade … it became obvious to Volcker that a collapse of the US dollar was a very real possibility, perhaps leading to a financial crisis and pressure to remonetize gold, which the United States had fought doggedly for over a decade. To forestall this, there was only one possible course of action: do whatever was necessary to strengthen the dollar.”[1]   Volcker cuts his trip abroad short and returns to Washington prematurely on October 2:“With his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness on exchange markets.”

• He organizes a secret Federal Reserve meeting on Saturday, October 6, 1979.
• Volcker prevails, setting the stage for a general change of course within the Federal Reserve. Controlling money supply growth should be the most important tool in the fight against inflation in the future. The reserve requirements for banks are tightened.
• In 1979, annual inflation in the US rises to 14%. In the following year, the gold price was to peak at around USD 850. At the beginning of 1981, short-term interest rates would peak at around 20%. Volcker would succeed in stopping inflation – at the expense of the US economy, which slides into recession.

[1] Moffitt, Michael: World’s Money, 1983, p. 196