By Leo Panitch, Martijn Konings
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The Federal base rate rose from an average of 8 per cent in 1978 to over 19 per cent at the beginning of 1981 and did not consistently return to less than double digits until after 1984. The Fed’s brief embrace at this time of the Friedmanite goal of controlling the money supply was contradicted by the diversity of financial instruments that had already developed – and that would soon spread much further under the impetus of extremely high interest rates. As Greenspan (1997) later explained: ‘Increasingly since 1982 we have been setting the funds rate directly .
Regulation was reconceived to emphasize managing, as opposed to preventing, the volatility implied by more open financial markets: improving supervision, requiring self-regulation and, of course, setting interest rates and acting as lender of last resort. This was especially necessary since, alongside the enormous shake-out that interest rates approaching 20 per cent brought about in 36 Contours and Sources of Imperial Finance American industry in the early 1980s, an enormous shake-out in the financial sector also began at this time.
The Federal Reserve now explicitly took responsibility for directly declaring an interest rate that would project an unwavering anti-inflationary commitment so as to become the global anchor of a dollar-based world economy. This gave it, as Volcker put it, a central ‘role in stabilizing expectations [that] was once a function of the gold standard, the doctrine of the annual balanced budget, and fixed exchange rates’ (quoted in Johnson 1998: 178). The only possible alternative to this would have involved extensive American capital controls over Wall Street, with cooperation from the European states.
American Empire and the Political Economy of Global Finance by Leo Panitch, Martijn Konings