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The Recession of the Early 1980s

In: Money, Banking, and the Business Cycle

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  • Brian P. Simpson

Abstract

This and the next four chapters present historical evidence for the validity of Austrian business cycle theory (ABCT). I start with an analysis of the deep recession of the early 1980s.1 This recession provides the best illustration in recent history of the causes of the business cycle. It does so for three reasons. First, it was a fairly severe recession. This means the factors causing the cycle exerted a strong influence on the economy. Second, the recession of the early 1980s is also a great recession to study because the episode was like an economic experiment. The Federal Reserve chairman at the time, Paul Volcker, made an explicit effort to reduce inflation in the late 1970s, and he actually did end up reducing the money supply growth. He even announced his intentions in advance. So we get to see, given that he did this, what effect it had on the economic system. This is probably as close to an economic experiment as one can get in an economy. This was a situation in which the money supply and prices were rising rapidly and then the increase in the money supply was abruptly reduced. The effects this had, as I will show, were dramatic.

Suggested Citation

  • Brian P. Simpson, 2014. "The Recession of the Early 1980s," Palgrave Macmillan Books, in: Money, Banking, and the Business Cycle, chapter 5, pages 113-141, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-33149-6_6
    DOI: 10.1057/9781137331496_6
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