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A Socialist Primer on Monetary Policy and Inflation

Tim Barker

Utter the words “monetary policy” and many of us fall asleep. But that policy is crucial to how capitalists exert power. Instead of leaving it to the “experts,” socialists and the labor movement should demand a democratic say in what monetary policy looks like.

The solutions to inflation need not be anti-worker. (Vladimir Solomianyi / Unsplash)

Interview by
Daniel Denvir

Republicans and out-of-style economists warn that the Biden administration is leading the economy into runaway inflation. The Biden administration and Federal Reserve, by contrast, point to the major disruptions caused by the pandemic, arguing that the inflation we’ve seen is caused by sector-specific supply-chain bottlenecks. Upon learning of this discussion, most of us quietly choose to close the tab or change the channel — all this stuff seems way over our heads.

It doesn’t have to be that way, Tim Barker argues. Leftists can talk about inflation and monetary policy in a comprehensible way — precisely to challenge the kind of commonsense wisdom expressed in the contemporary mainstream debate on inflation, as Barker does in a recent piece in Phenomenal World.

In this piece, Barker argues that both sides of this debate share the same staunchly anti-worker premises. These premises in action can be traced back to 1979, when Carter-nominated Federal Reserve chair Paul Volcker implemented what is now known as the “Volcker Shock,” sending interest rates through the roof, inducing a recession, and crushing worker power in the US. The Volcker Shock was one of the first acts in the transition to the neoliberal era.

Barker claims that inflation is more complex than wages — and the solutions to inflation need not be anti-worker. He argues that the Left has to fight for a different interpretation of inflation and build enough working-class power so that when the time comes, we have the analysis and the strength to push for spending and planning instead of retrenchment and austerity.

Tim Barker is an historian of modern capitalism and an editor for Dissent and Phenomenal World. On a recent episode of the Dig, Dan Denvir sat down with Barker to discuss his recent article, the history of inflation politics in its class war context, and what it means for capitalism, workers and the Left.


DD

What is inflation? Why does inflation happen?

TB

At the most basic level, inflation is a rise in the prices of things. Specifically, it’s a rise in the general price level, not the rise in a specific price. You might imagine that one day there’s a big Zoomer, hipster revival of interest in the band Pavement, and then the cost of Pavement LPs goes through the roof. That would be a rise in prices, not a rise in inflation. Inflation would be like seeing a rise in prices of a general basket of goods, ranging from the gas you put in the car to the food you buy at the supermarket and the steel that a manufacturer buys as an input into other manufactured products.

What causes it? The classic textbook definition that you’ll find in an Econ 101 class is that inflation is a case of too much money chasing not enough goods. You can think about money as a claim on real goods and services — you get it and it entitles you to claim these real things with use-values that are produced in the economy. But if you were to issue too much money without adequately expanding the stuff there is to buy with it in the economy, you would see a rise in prices, because people would be bidding against each other for a limited stock of goods with more and more money.

Like a lot of textbook economics, this leaves a lot of basic questions unanswered: What’s determining the money supply? What’s determining the stock of goods and services? What is determining the pricing policies that the people who sell these things are using to decide what they’re going to charge for them?

In a way, the definition of too much money for not enough goods is a good starting point, but it leaves a lot that still needs to be explained. To understand those questions, you need to take a more institutional approach than you see in textbook economics. First of all, you need to look at the conditions of production of things that are being bought and sold.

A classic example is that in the 1970s, a powerful driver of inflation was the cost of oil. Oil is an input into almost everything — to get anything onto a shelf, you need to use some kind of energy — so a rise in the price of oil can lead to generalized inflation.

But what affects the price of oil? The answer to this question has to do with the political relationships between oil-producing countries, many of which are in the Global South; between the major oil companies, many of which are multinational but headquartered in the Global North; and between governments — like the Saudi government and the US government. You’ll need to understand what’s going on at oil refineries, and the position that the Oil, Chemical, and Atomic Workers International Union is taking in their collective bargaining.

To get behind a seemingly obvious thing like the rise in the price of oil, you need to look at these relationships of power between different social groups.

DD

What is a central bank, and what is the Federal Reserve in the United States? What do central banks do to shape the economy and to control inflation?

TB

The best way to think about a central bank is as a bank of banks. It stands at the top of the banking system and controls some of the levers that affect the kind of lending and borrowing that other banks further downstream will do.

In the US, the central bank is the Federal Reserve. It’s only existed since the 1910s. Before that, the banking system wasn’t controlled in this way. Since the 1910s and the Progressive Era, we’ve had the Fed.

The central bank controls the general availability of money and credit throughout the economy. At all levels of the economy and at all levels of the financial system, at any given time, there will be a demand for money, credit, and liquidity to grease the wheels for all kinds of economic activity. I want to buy a house, so I borrow money to do that. I want to expand my steelmaking plant, so I get a business loan to do that. There’s a big range of possibilities and terms on which I can get access to that money and credit. The terms of access to money and credit are set or heavily influenced by the central bank.

This bank has a couple of levers for doing that. Some of the most important are setting interest rates. The Federal Reserve sets the Federal Funds Rate, which is an interest rate at which banks can borrow from each other. You can imagine how the Fed controls the access of downstream banks to money and credit, and then the banks in their business and consumer lending will pass on credit at terms influenced by the terms set by the central bank.

When you read in the newspaper that the Federal Reserve has raised rates, this is usually referring to the Federal Funds Rate. Say that they raise the Federal Funds Rate. Then, a bank that’s looking to make a mortgage loan will find itself paying more to access liquidity, so they’ll charge the richer borrower more in turn, too. Something that happens at the Federal Reserve level will then trickle down to the conditions under which people looking to buy a home will be able to do so. It will affect the kind of interest they’ll have to pay to get access to that money.

DD

What is the wage share of the national income, and what role does conventional economic wisdom assign it in relation to inflation? Why is it also a useful proxy for the balance of class forces in a capitalist economy?

TB

National income is a way of thinking about the value of all the goods and services that are produced in a country in a given time span. The measure of national income that we use is Gross Domestic Product (GDP). If the national income is the value of everything that’s produced in the economy, one way to think about the national income is as the value of all the goods and services produced in the economy. But you can also look at it as the sum of incomes that are paid out in the economy, because for every good and service that is produced, someone is getting an income of some kind, whether that is wages, profits, or rents.

The sale of an item represents the value of the good or service produced. But if you look at it from the other side, this value is also an income that’s going to someone. You can think about GDP not just as a set of goods and services, but also as a set of income flowing to different places.

Within that, you can break down the national income and ask, “Where is this income going?” A certain percentage is going to wages, salaries, and other kinds of compensation to people for their labor. The ratio of compensation to labor over the total national income is the wage share. This is the chunk of the value of what’s produced that is being paid out to workers for their labor.

The ratio of total value to the value the workers are receiving is an index of how much workers are able to get out of the system. From a Marxian approach, this would be a measure of the rate of exploitation: How much of the social product is going to the people who make it, and how much of that surplus is being taken by someone who is not the direct producer?

If you look at the wage share over time, you can get a sense of how strong labor is, because you get a sense of how much of the value of what they produce they’re able to claim back in the form of compensation.

You wouldn’t want to look at the wage share as the only index of this strength, especially over the short term, because all kinds of things can affect it. But over the long term, it’s a fairly good measure, and it shows a sharp decline in labor’s share of income.

What role has the wage share played in inflation? A lot of conventional economic models, including the models that the Federal Reserve has used to decide on monetary policy, view the labor share as a driver of inflation. These models assume that holding all other things equal, if the labor share of income increases, inflationary pressures will increase, and the Federal Reserve will want to tighten monetary policy or raise interest rates in order to limit the growth of money and credit in the economy.

The important upshot here is that in order to slow economic activity, the Federal Reserve will react to a rise in the wage share by slowing the economy down, even to the point of inducing a recession.

The reason that they see this connection is that they think that a rise in the wage share implies a squeeze on the profit share of income. The flipside of an increase in what workers get is a decrease in the profits enjoyed by businesses.

They further assume in their model that businesses will respond to falling profits by trying to raise prices, because they want to keep their margin of profit — they’re not happy to see it fall because workers are being paid more. They will try to raise prices, and where those price increases are effective, prices throughout the economy will go up. It’s a chain of events that leads from workers’ successful claim to more of the income that the economy produces to a reduction in profits by the businesses that employ them, to increases in prices, which can become self-sustaining, and to an inflationary dynamic that is a central banker’s worst nightmare.

DD

Here’s your argument as I see it: There’s a widespread interpretation at present that the Fed has made this huge break with tradition by becoming tolerant of inflation.

You argue that the reality, though, is way more complicated — that monetary policy makers only hold to this position because they feel that it’s cost-free for them to do so. That’s because of a half-century-long decline in worker power. This means that the Fed can have monetary expansion without pushing wages up, that there will be no major hike in wages that could push businesses to raise prices, and that there won’t be a threat of serious inflation for them to worry about.

In recent Senate testimony, Fed Chair Jerome Powell said that the current bout of inflation is “not tied to the things that inflation is usually tied to, which is a tight labor market, a tight economy. This is a shock going through the system associated with the reopening of the economy.”

Powell’s statement confirms your argument that the Fed still seems willing to return to the conventional playbook, tightening up the money supply to check inflation. This would loosen the labor market and reduce worker bargaining power, because more unemployed workers would be competing for fewer jobs, even if that meant inducing a recession.

You write, “Even the most dovish mainstream economists continue to see rate hikes eventually as the key anti-inflationary policy, revealing the limited spread of more creative thinking about how to manage the price level.” What has changed for the Fed, and what hasn’t changed? Why is it important to identify this continuity in monetary ideology amid what many are describing in the daily newspaper as a high-profile change?

TB

Earlier moments Federal Reserve policy looked not only to freeze the income distribution, but to change it in a regressive fashion. It’s not just that the Federal Reserve in the eighties and nineties was afraid to let the wage share increase; it was actually undertaking such aggressive, tight monetary policy that the wage share decreased.

The Fed is now okay with a constant wage share, which means that there won’t be a progressive redistribution. It’s also a halt to the regressive redistribution that Federal Reserve policy drove for a long time. But there are sharp limits to what this truce covers.

The Federal Reserve, including Powell, doesn’t think that wages should never increase. Their recent statements show that they welcome some wage growth, which has occurred recently. The problem is that they think this wage growth should be constrained very tightly by a specific set of parameters: the rate of inflation and the rate of productivity growth. They think that wage increases are okay as long as they are kept within those parameters.

What do those parameters mean to us? The first one is the rate of inflation. If the money wages that you receive, measured in dollars, are staying the same while inflation is going up, your real wages are falling. There’s the same number on your paycheck, but what you can buy with it is going down.

The second piece is productivity growth. It’s okay for real wages to rise, as long as they don’t rise faster than the growth of productivity. The basic principle is the premise underlying the post-1945 golden age of capitalism, in which economic growth became a substitute for redistribution. It is the idea that a growing pie would allow for everyone to have more income in an absolute sense, even though the distribution of that pie didn’t change.

The idea that wage increases should be tied to the increase of productivity is a version of this idea — that it’s okay for workers to get more if the whole economy is growing, and their wage increases are proportional to that growth of the economy. That’s a way for workers’ real wages to rise without the share of profits in the economy changing at all.

Powell is okay with wages increasing, but within the bounds of this classical golden-age idea of the politics of productivity. Powell has backed away from some of the harshest politics of neoliberalism from the late 1970s through 2020, in order to return to something like the 1945–1973 model, in which productivity increases led to increases in real wages, but had to be kept within those bounds.

DD

To what extent is the current expansionary monetary policy pushing up wages, thus pushing up prices? A lot of inflation is caused by sector-specific problems related to the pandemic, like the used car market. Are there signs that the tight labor market is leading to gains in wages that businesses, to protect their profits, are passing on as higher prices?

TB

No one has an exact picture of what’s going on yet.

Most of the inflation we’ve seen so far is not the result of a generalized wage push. One of the other ways that the Federal Reserve has changed is its acknowledgement of this. As late as 2016, it thought about the labor market as a fundamental source of inflationary pressures in the economy.

But the statements made by Powell, Treasury Secretary Janet Yellen, and the Biden Council of Economic Advisors show that they now have a different way of thinking about the labor market. They think about sector-specific problems, like a bottleneck in the production of semiconductors leading to an increase in the price of new cars, which then leads to an increase in the price of used cars. They tend to center that much more.

Now the general consensus now seems to be that we do not see a generalized increase in wages across the economy, and that, in fact, wages are rising more slowly than inflation at the moment. We’re very far off from the point of increasing real wages, much less creating a wage increase that would take away from profits.

With that said, there is also evidence that in certain industries that have seen some of the most powerful and rapid expansion with the end of the shutdowns — hospitality, entertainment, outside-of-the-house dining industries — there have been increases in labor costs, which may be showing up in prices, although it’s too soon to say that conclusively. Importantly, the fact that wages are not rising across the economy does not mean that this isn’t happening in some sectors. It’s fairly clear that it is happening somewhere.

DD

Nineteen seventy-nine was the year of the “Volcker Shock,” when Fed Chair Paul Volcker sent interest rates through the roof to tame high levels of inflation. This caused a recession and, alongside Reagan’s policies, crushed worker power.

What were the economic and political conditions at the time? Why did Volcker respond with his shock? Why have its effects on worker power been so consequential and permanent for the past half century?

TB

The US economy started to see inflationary pressures from late 1965 onward. Those initial pressures were tied to the Vietnam War mobilization, which happened quickly and without a lot of time or political will for adjustments in the economy, other than inflation.

Prices increased slowly around the mid-’60s, but by 1979, when the Volcker Shock occurred, annual rates of inflation reached double digits — over 10 percent. By world standards, this inflation was not dramatic. Inflation in other countries can occur by hundreds or thousands of percentage points.

But for the United States, especially outside of wartime, double-digit inflation was relatively high. It alarmed a number of observers from across political parties and the class spectrum. There was a generalized sense of a crisis. It wasn’t a completely manufactured crisis. Everyone agreed that something had to be done about this inflation.

In the late 1970s, pressures mounted because of a few specific events. One was that, starting in 1978, there was a lot of pressure on the US dollar in international currency markets. Currency traders moved to bet against the future value of the dollar, given the strength of US inflation and their skepticism that the problem could be dealt with politically.

That dollar crisis was the immediate reason that Volcker was appointed to the Federal Reserve. Coverage of his appointment featured headlines like “The Dollar Chooses a Chairman.” People thought that pressure from the global currency markets made it important to bring inflation under control, because inflation was seen as a cause of the international skepticism of the dollar’s stability.

The Iranian Revolution also took place in 1979. It had direct effects on oil production, but also fed a general set of expectations that there would be disruption in the price of oil. Because oil is one of the most important inputs to everything in the American economy, this meant instability in oil markets and an increase in the price of oil, which would lead to dislocations across the whole economy.

Volcker came in against a background of more than a decade of inflation, with these other events raising the sense of urgency. The question was what he, or anyone else in the government, was going to do about the inflation. People had been trying to deal with it since 1966, with little success.

Volcker’s breakthrough was a revival of the old-fashioned way of dealing with inflation. In the late nineteenth century, inflation wasn’t much of a problem. Whenever it seemed likely, the workings of the international gold standard led to a deflationary response. The possibilities of economic stimulus were limited by the requirement that monetary expansion be tied to gold reserves.

There were no problems with inflation in the late nineteenth century because it was easy — almost automatic — for this system to respond to any pressure on labor markets or other markets with an increase in unemployment.

DD

But, every twenty years, economic panics destroyed the economy and people’s lives.

TB

The late nineteenth century was a mirror image of the late twentieth century, with frequent crises, depressions, and business failures. At that point, there was no central bank to sort through things. But there was no problem with too much worker power, and no problem with inflation.

Then chairman of the Federal Reserve Board, Paul Volcker, sits through a meeting in Washington, DC, 1982. (Getty Images)

By the 1970s, macroeconomic management had come a long way, meaning that the deep depressions of the late nineteenth century no longer took place. But there was the new problem of inflation. Volcker went back to the late nineteenth century playbook, and he said that the solution to inflation was unemployment. Not just a little bit of unemployment, but extreme, politically painful unemployment.

The Volcker policies led to the highest unemployment in the US since the 1930s. Volcker willing to go into a near–Great Depression level of unemployment for the first time in thirty years. At that point, it seemed like the only option left for dealing with inflation.

DD

The Volcker Shock is sometimes called the “Volcker Coup” by critics. You say that’s not quite right. The conventional story is that through the 1970s, “the Fed recklessly ignored the need for monetary rigor because discipline was unpopular with politicians and voters.” But you write that the Fed responded to union wage advances by tightening the money supply throughout the decade.

Was 1979 more of a quantitative leap than a qualitative one? If that’s the case, why is it so often mischaracterized in retrospect?

TB

In some ways, the Volcker Shock was less of a departure than it seems. Federal Reserve policy throughout the 1950s and much of the 1970s shows a surprising willingness to put up with unemployment. But there were often fairly high levels of unemployment in the 1950s, to the extent that when John F. Kennedy became president in 1961, there was over 7 percent unemployment. A big theme in Kennedy’s inaugural address was the slack in the economy. Volcker-like policies were present at earlier moments in Fed history, even during the period we think of as a time of consensus and economic good times.

Volcker’s singularity is exaggerated in a way that understates how comfortable US policymakers have always been with serious unemployment. The idea that the United States ever enjoyed decades of full employment is false. But 1979 was still a turning point.

The Volcker Shock took place in late 1979, and about a year later, Ronald Reagan was elected president. The shock came at a time when the presidency also turned towards what we now call neoliberalism, a policy of wage repression and anti-labor policies.

In the 1960s, John F. Kennedy or Lyndon Johnson would have pushed back against Federal Reserve rate increases because they saw relatively full employment as an important part of maintaining their political futures. A Democratic president had to be able to deliver something to workers and unions. This resulted in fighting between the Federal Reserve and the presidency. But Reagan, despite some disagreement within his administration and moments of tension with the Fed, supported Volcker’s policy of a recession as the medicine for anti-inflation, and even welcomed it.

Reagan wanted to break the labor movement in the US. This was famously embodied in his breaking of the air traffic controllers’ strike, where he not only broke the strike, but also imprisoned the leaders of the union and permanently replaced the strikers. This is universally acknowledged as the starting gun a corporate private-sector campaign against unions.

Reagan and his advisors thought that unemployment was a great complement to this strategy. A union bargaining in the middle of a depression will ask for a lot less than one bargaining in the middle of a tight labor market. That went both ways. Volcker was very clear that he saw Reagan’s intervention in the air traffic controllers’ strike as the most important support that the administration gave to his fight against inflation.

DD

You write that Volcker “even carried an index card schedule of upcoming union contract negotiations in his pocket. Crushing labor was not incidental to his program.”

TB

Not at all. It was an obsession.

One of the big lessons I’ve drawn from reading transcripts of Federal Reserve discussions is that while monetary policy sometimes seems abstract and technical, if you actually read about how the central bankers themselves thought about things, it’s a very concrete and almost simple story of class struggle. They were not confused or uncertain on that point.

Volcker was obsessed with unions. Transcripts from this time show that he monitored the latest news out of Detroit, the latest news out of steel, for signs of progress in their anti-inflation program. Volcker intervened in this process not just through monetary policy. In 1979, Chrysler was near bankruptcy and required a government bailout. Volcker was involved in the bailout, which involved restructuring the union’s agreements with Chrysler. In that process, Volcker had the specific goal of breaking with the patterns of collective bargaining in auto that had prevailed for the past thirty years.

DD

Volcker blamed workers and wages. But what causes of inflation actually existed at the time? Where did or didn’t rising wages factor in? How did the consensus emerge to blame inflation entirely on wages?

TB

This is something people still argue about today: What were the causes of the 1970s inflation? Can they be understood? Some economic historians try to say it’s 30 percent due to rising oil prices and 10 percent due to this, that, or the other. No one has come to a definitive answer. The important point, though, is that according to Volcker, workers were to blame.

From Volcker’s perspective, the real cause of inflation was an oil shock linked to geopolitical events in the Middle East, but then the oil shock by itself was just the beginning of the process. Say that the oil shock sets off inflation. Then there’s the question: Will workers be able to defend their real wages against inflation, or will they pay the cost of inflation?

Inflation starts somewhere else in the system. Let’s say that workers didn’t cause it at all. There’s still a question of whether the inflation will lead to workers’ real wages falling, or whether they’ll be strong enough to fight to protect their wages. Volcker was willing to entertain the idea that there might be a variety of causes of inflation. But he thought that the fact that workers were strong enough to protect their real wages was a problem, and that it would translate an oil shock into an economy-wide inflationary spiral. Even if he might admit that there were other causes of inflation, he thought that a crucial link in the chain — workers’ ability to defend their real wages — needed to be broken.

DD

Did he think: “Well, it could be oil, but what am I supposed to do about that? What I can do is crush worker power.”

TB

Absolutely, and that’s very clear from his testimony before Congress. He said that the oil shock was basically external; the costs would be borne by the US economy somehow. He was not willing to think that these costs would come out of profits, partly because he thought that profits had already been squeezed a lot through the ’70s and the system couldn’t afford to see them squeezed any further.

Volcker comes off as a villainous figure in this story. There’s good reason for that, but it’s also important to think about the way historical actors understood what they were doing. I think that Volcker sincerely believed there was no alternative to what he was doing. He believed that if you didn’t crush inflation through an induced recession, there would still, at some point, be a recession later.

He was an old-school guy — a pre-Keynesian — in his thinking. He thought that if the good times were too good, you would have to pay the price one way or another. In his own mindset, he wasn’t causing gratuitous pain; he was hastening an adjustment which would have had to happen anyway. It’s important to mention this so that we don’t make these people out to be comic-book villains who took pleasure in what they did.

DD

You write, “Volcker was genuinely independent from narrowly defined special interests. He was a true believer.” What accounts for his ideological commitments if we can’t crudely reduce it to business interest? Even if Volcker was a true believer, was there still a material basis, however indeterminate, to be found in this broader business-led reaction to the profitability crisis of the ’70s?

The rise of Japanese and West German competition squeezed the profit margins of American corporations. You write that David Rockefeller was initially offered the job as Fed Chair, and he turned it down and recommended that President Jimmy Carter choose Volcker instead.

TB

We cannot think of Volcker as a corrupt figure who went to Washington to line the pockets of himself and his friends. But he spent his whole life in a socially specific environment: first, the Chase Bank, which was headed by Rockefeller and was by the 1970s the largest bank in the world, with significant foreign lending, and also the New York Branch of the Federal Reserve.

The New York Fed is really important, and not just because New York is a big city or because Wall Street is there. The New York Federal Reserve is also the appointed liaison with international capital markets.

Between his public service at the New York Fed and his professional background at a big international bank, Volcker brought with him a set of assumptions about what the system required to work, which he would not have seen in the terms of special pleading or narrow particularism. His thinking was more like this: If profits fall too far, or if the international value of the dollar falls too far, that will lead to a generalized economic problem in the United States, which will eventually hurt everyone, even if the people it hurts first and most are places like the Chase Bank.

A common way to think about ideology is as a way of harmonizing a particular interest —say, David Rockefeller’s interest in the strength of the dollar as the reserve currency — and a universal interest. For someone like Volcker, those interests would have been more or less similar. When he intervened to bail out international lenders, which he did in a big way during the early 1980s, he saw it as a way to prevent the collapse of the entire economic system, not as a way to help his former employer.

DD

Dean Baker, Robert Pollin, and Elizabeth Zahrt put it: “By focusing on inflation as such, rather than the issues of income distribution and profitability, the priorities of a small segment of society, i.e. the wealthy, acquired the status of a nationally-shared concern.”

The story is usually about the historical inevitability of imposing discipline upon a fundamentally broken New Deal order, however tragic. But this was, upon closer inspection, a class conflict decided in favor of capital. That conflict was mystified at the time by the construction of this hegemonic consensus.

You write that there were indeed alternatives to austerity that the Fed and the government could have pursued at the time. They didn’t really pursue them because it appeared as though there was no alternative, as the famous neoliberal dictum goes. What were those alternatives? Why weren’t they up for discussion?

TB

Hegemony works partly by taking certain possibilities off the table. The best way to think about alternatives is to go back to the simple model of the wage price spiral. The way that the Fed thinks about things is that if wages go up, profits will go down, and businesses will raise prices in order to protect their profit margins.

If you think about that as a technical description of an economic process, you might ask: Why does the intervention have to be to control wages, rather than to control pricing decisions? You might say that rising wages in the steel industry should be reflected in falling profits for steelmakers, and that the government should try to enforce that by limiting the degree to which steel prices can increase.

To some people, it sounds like that could never happen in the United States, and that our traditions of free markets and anti-state sentiment would make that impossible. But I think that’s wrong.

DD

Tell that to John Kenneth Galbraith.

TB

Absolutely! In 1962, John F. Kennedy called the head of US Steel into his office and yelled at him until he rolled back a steel price increase. It wasn’t a crazy idea. The idea that things like steel or electrical goods — the commanding heights of the economy — were so central to the economy that their pricing policy was actually a legitimate object of government intervention was not at all foreign at the time.

DD

During World War II, the US government used wage and price controls to maintain price stability, which they did to ward off inflation. But they also achieved explosive economic growth, contrary to all neoliberal and National Association of Manufacturers’ warnings to the contrary.

TB

The World War II economy was almost a totally planned economy. There were also direct controls during the Korean War. Someone in Washington decided on allocations —essentially how many cars Detroit was going to get to build the next year. The same thing happened in the early 1970s, when Nixon imposed the wage and price controls that are sometimes referred to as the nation’s first peacetime wage and price controls.

That’s a little bit euphemistic when you consider the ongoing US role in Southeast Asia at the time. But it shows that as close to 1979 as 1974, there were wage and price controls. Opinion polling from the time shows that the general public was open to this, as were some of the technocrats of the Carter administration.

Barry Bosworth, Jimmy Carter’s inflation czar at the time of Volcker’s appointment, actually resigned from government because he thought there should be mandatory controls, and the administration wasn’t willing to go for it. As crazy as it sounds to us now after decades of neoliberalism, the idea that there might be some other way — a more direct kind of control that might fight inflation — was not at all foreign at the time.

DD

Was there something about the fundamental changes to economic conditions in the 1970s that might have made those tools less useful? This was the beginning of the secular wage stagnation that we saw in the 1970s. But is there something about the beginning of secular economic stagnation that begins to change the viability of those tools?

TB

The clearest line connecting those conditions to the viability of these policies is a deep crisis of the capitalist system in the 1970s. By the late 1970s, there was widespread concern that profits were not high enough.

DD

Specifically because of competition at that time from two economies that the United States had actively nurtured after World War II: Japan and West Germany.

TB

The concentrated industrial core of the US economy that defined US economic power around 1950 was under deep threat by the 1970s. The threat started in industries like textiles, which are low on the value chain. But by the 1970s, it went up through electronics, aircraft, and other high-end things that had been the last preserves of US economic dominance.

But contemporary observers are also keen to link the profit squeeze to excessive wages. That’s more debatable empirically, but there was certainly a felt need on the part of business. By the late 1970s, these various causes of crisis had led business to organize in a big way.

Those familiar with books like Kim Phillips-Fein’s Invisible Hands or some of Rick Perlstein’s histories will know that the seventies saw a big mobilization of business, unified to an extent it had almost never been unified before, trying to push against consumer protections, against regulations of all kinds, against labor unions, and in some cases for a kind of import protection.

That mobilization by business, which by 1979 had become very powerful, was a big obstacle to a more centrally-planned or direct-control approach to the problem of inflation.

DD

You write, “Calls for tight money had always been heard in financial circles, but by the late 1970s, the executives of large industrial corporations had joined the chorus.”

Why was finance, unlike today, the lead constituency for tight money? Was it because of the conditions of heightened international competition and squeezed profits that led major industrial corporations to join that finance-led coalition?

TB

Why was finance, as personified by people like David Rockefeller and Paul Volcker, in the lead? First, financiers and asset owners are historically often among the biggest group of people opposing inflation or worrying about inflation. That’s because inflation tends to erode the value of existing wealth and assets and particularly debt.

If I’m a bank and I lend money in 1970, and then there’s a lot of inflation over the next decade, by 1980, the real value of the debt I’m owed is eroded. Inflation is good for debtors and bad for creditors.

But there are other reasons too. By the late 1970s, a huge percentage of profits for the US financial sector came from international activities. The financial sector had responded to falling profitability in the US domestic economy by increasing its activities in countries around the world, including countries in the Third World. They discovered that this was where there was still room for rapid growth.

It was also, in the 1970s, a time when many of these nations received an economic stimulus from rising commodity prices. A classic example is that US banks were hugely invested in Mexico, which benefited from the high oil prices of the 1970s. For these international bankers with an increasing share of their profits coming from abroad, it was important to keep the dollar as the world’s reserve currency.

DD

To expand the example beyond Mexico, throughout the Global South, even in non–oil producing nations, petrodollars flowed into banks, and these banks lent out money all over the Global South.

TB

It was called a recycling process, where these immense superprofits coming from the petro countries went through the US financial system and then back out again. The reason that happened was that the currency of the oil market was the dollar, so these things were already naturally dollarized, and that, more generally, the dollar had become a kind of de facto world money after World War II.

The US international banking community, as it was sometimes called, had a big interest in making sure that the dollar continued to play this role. But that required that the dollar remain a stable source of value. The banking community thought that inflation at home would undermine the value of the dollar, therefore leading to countries starting to use other currencies instead of the dollar to hold their reserves and to use as the unit of international banking.

This concern was heightened in the late 1970s by the formation of the European Monetary System, which is an ancestor of the Euro. There were rumors that Saudi Arabia would start to hold reserves in Deutsche marks or in yen, instead of in dollars. There is a financial equivalent to the manufacturing competition story we’ve talked about. It was an open question whether the dollar would remain the unchallenged world money.

That’s a specific reason, beyond the general reason that bankers don’t like inflation, why people like Rockefeller and Volcker felt the situation to be very urgent in the late ’70s.

DD

What were the global consequences of the Volcker Shock, particularly for the Global South?

TB

In some ways, the effects were most serious abroad. In the United States, unemployment touched 10 percent. It caused a lot of human suffering, especially in certain places like Youngstown, Ohio and Pittsburgh, Pennsylvania. But this was not as bad as what happened in the Global South.

The reason why the Volcker Shock was a global problem is that in the 1970s, there had been a huge spree of lending to Third World countries by bankers from the Global North. During the seventies, many Third World countries had become increasingly indebted. In particular, they were indebted to US banks, which meant that their debts were dollar debts, and they’d have to pay these debts back in dollars. The Volcker Shock raised the cost of dollarized debt. It caused a huge increase in interest rates for anyone who owed dollars.

For Third World countries with huge amounts of debt, this created a problem where meeting the interest payments on these debts became impossible, let alone paying it back. That led to a cascade of sovereign debt crises. Mexico is the famous example, but it happened all over. This created an opening for an early version of the Structural Adjustment Programs, which become very common in the 1990s, in the age of the Washington consensus.

The Volcker Shock made these debts so hard to pay back that these countries needed a bailout, and the people giving the bailout were able to demand a lot in exchange. One of the things they demanded was an end to these countries’ national industrial development programs.

DD

The leverage to impose neoliberalism without the need of a military coup.

TB

Exactly. This was a new way of exercising international power, with dramatic consequences. In the history of Mexico or Brazil or countries all over Africa, these are years of deindustrialization because the conditions of being rescued from their debt involved policies that made domestic investment impossible.

DD

Why did major corporations join that finance-led coalition against inflation and for tight money?

TB

Given that the Federal Reserve was not exactly unwilling to undertake tight monetary policy before Volcker, what was new about this moment? With reference to the presidency, Reagan was on board in a way that Kennedy and Johnson wouldn’t have been. By the same token, industry was on board in a way that it hadn’t been earlier. This was made clear by companies like General Electric, which is not just a big company, but also one that carries out a lot of different kinds of manufacturing. It stood in well for this manufacturing sector in the US economy.

In the early 1970s, when the Federal Reserve actually did tighten money, there was opposition from the then-CEO of General Electric. Why is that? For General Electric, which is a big business in consumer durables, an induced recession would mean that workers are thrown out of work, or the people who do have their work are worried about their future. If those people started to save their money more, they wouldn’t have money, and as a result, they wouldn’t buy as many refrigerators and dishwashers. At that point, the CEO of General Electric actually showed resistance to tight Fed policy.

DD

A little bit of inflation means that you want to get the money out the door and make it buy stuff for you.

TB

Absolutely, and it relates to the question of import competition. Around 1970, General Electric had a lot of confidence in their ability to raise prices. They would say, “Fine, there’s inflation, but we can react to a little bit of inflation by raising our prices — and there aren’t a lot of different companies Americans can turn to for the kinds of things that General Electric makes.”

By the end of the 1970s, that sense of insulation from competition was gone, so there was less of a feeling that industrialists could just live with inflation by raising prices.

The industrial corporations themselves also became more international. International banking was expanding in the 1970s, but so was the rise of the multinational corporation —an industrial or a manufacturing company engaged in production all over the world. Sometimes this meant making cars in Argentina to sell to Argentines, but it increasingly meant splitting up the production chain, making mufflers in Northern Mexico that would then be put into cars somewhere else.

There was phenomenal growth in the multinationalization of the corporation, including the manufacturing corporation, throughout the seventies, which means that by the end of the seventies, a company like GE had a big stake in the value of the dollar because they had investments abroad and money coming in from abroad. This is one reason why the the Volcker Shock had the political support it needed to succeed, and why that support was sustained for a long time, even at great cost to US manufacturers.

The Volcker Shock and the recession it created were very bad for workers, and especially for unionized workers in these manufacturing industries. They were also not good for manufacturing in the United States, because the millions of workers who were thrown out of work stopped buying things, which is bad for people making things.

But there was another second-order effect, in which the Volcker Shock made US exports more expensive — so that companies already struggling to compete with Japan and Germany had an additional challenge because the dollar had become a lot more expensive.

At first glance, the Volcker Shock was really bad for manufacturers. But there was enough support to carry it through, at least for a few years, because the manufacturing industry had come closer to the position of finance — wanting to see the value of the dollar preserved, even at the cost of a recession in the United States.

DD

Is it fair to say that the globalization of US corporations in the 1970s also meant that their interests became financialized?

TB

It’s true that the multinationalization of the US corporation means that its interests have become significantly financialized. But I don’t want to overstate the convergence of financial and manufacturing interests, because moments of conflict still existed throughout the 1980s.

To understand that, we should think about the fact that the Volcker Shock was an experiment. Volcker himself didn’t know how bad things needed to get before he could solve the problem. His writings from the time show that he was a little bit surprised at how bad things got. He was totally fine with it, but he might not have put his money on it.

He wrote a memo a few years ago, in which he said, “I didn’t foresee what was going to happen, but of course, had I foreseen it, I wouldn’t have done a thing different.” He was very clear on that point. But it was an experiment.

Manufacturers were close enough to finance to go along with the experiment for a couple of years, but by 1982, things got so bad — the recession was so deep, scary, and potentially unstable — that there was a backlash, and Volcker started to back away from the most stringent version of his policy.

After that, conflict reemerged: US exporters wanted an easing of interest rates, and there was a give-and-take. The distinction between the interests of industrial and financial capital did not go away, but there were the conditions for at least a couple of years of a really unprecedented experiment that was founded on a partial convergence of their interests.

DD

You write, “The coalition also encompassed tens of millions of homeowners and shareholders. Always relatively large in the United States, this rentier middle class was subsequently expanded and consolidated by decades of neoliberal policy.”

Why did homeowners join the reaction against inflation and for tight money in the seventies? As mortgage debtors, wouldn’t they have benefited from inflation, because inflation reduced the value of their debts to the bank?

TB

One answer to this question is that Volcker was very careful. He made intentional political choices to shield homeowners from some of the worst effects of his high interest rate policy.

This is a point made and documented by Sam Gindin and Leo Panitch in their book The Making of Global Capitalism. They point out that Volcker made a choice to keep solvent the savings and loans institutions that had been designated housing lenders throughout the New Deal order, even though they would have failed early in the decade if left to their own devices.

Volcker did this as a way to prevent a collapse in the housing credit markets that would have alienated too many middle-class homeowners. He made some specific choices to insulate these people from the worst of it.

That said, it became hard to get a mortgage at this time. It was bad for homebuilders, and you can imagine that homeowners should have welcomed inflation. Another way to think about why homeowners took Volcker’s side is that, at this point, homes weren’t the only assets people owned. A lot of people owned stocks, and the stock market in the late seventies was really abysmal, to a degree that we kind of forget today.

Now we know that despite 2008 or the 2020 coronavirus crash, if you put money in an index fund at some point in the twenty-first century, you will now have much more money than you put in initially. Over the 1970s, the big stock market indices like the Dow Jones lost real value. If you had put money in an index fund in 1970, you would have lost money by 1979.

If we think about this asset-owning middle class not just as homeowners, but as people owning different kinds of assets, we can see how freaked out people would have been by this, and how willing they would have been to sign onto a program that said something had to be done. In most cases, they probably couldn’t tell you all the different manifold effects the Volcker Shock would have had, but there was an atmosphere of crisis.

This is the same moment of big middle-class tax revolt that is most famously embodied in California in a big revolt against property taxes. It’s an example of something that isn’t linked straightforwardly to interest rate policy, but suggests a mood among homeowners for something new.

Part of what neoliberal policymakers did was to package these things together which might not have necessarily had a lot to do with each other — saying that if you’re someone who hates taxes, you should also be upset about unions, and you should also be upset about inflation.

DD

And hey, this is all related to black people trying to move into your neighborhood.

TB

Absolutely. The Fed’s decision to control inflation by causing unemployment was a huge assault on black workers. At any given time, then or now, black unemployment has been much higher than white unemployment. We look at the Volcker Shock in a big-picture sense and say, “Unemployment went to 10 percent. That seems bad, but it’s not the end of the world. It’s not like the Great Depression, when a quarter of the workforce was unemployed.”

But for black male workers under 30, you saw Depression levels of unemployment. If we’re looking at how Volcker was able to build popular support for something that included a manufactured recession, it’s important to remember that a disproportionate amount of the cost was borne by black workers.

DD

This happened at a time when there was a general conservative reaction against not only the New Deal order, but the Civil Rights Movement.

TB

It’s hard to separate those things. It’s unclear whether Volcker thought about this at all. This is a story with a lot of unintended consequences — that goes for the Third World debt crisis, too. In one interview, Volcker said that Africa was not on his radar in 1979 and 1980. It was a blind spot; he didn’t say “Okay, I am the empire. I am going to screw the Third World developmental model.”

DD

He didn’t say, “I’m going to crush all of the postcolonial ambitions of national liberation fighters worldwide.” That was more incidental for him.

TB

The US central bank is like a big elephant that crushes a lot of stuff underfoot, some of which it knows about, some of which it doesn’t. But even if we don’t think there are individual bad intentions, there’s still the way that the central bank is structured. It has good representation of financial interests. It works closely every day with bankers, and to some extent, the Federal Reserve is a kind of private-public partnership in which private banking is well represented. But there are no labor representatives sitting on the Fed committee that makes decisions about interest rates. There is certainly no representative of the African American community.

The historian David Stein’s work reminds us that the Volcker Shock marked the end to a big, widespread, well-organized movement, centered in the black freedom movement, to guarantee full employment. Two years before the Volcker Shock, Congress passed the Humphrey-Hawkins Full Employment Act, which was supposed to commit the government to restoring full employment. It actually included a mandate for the Fed to target unemployment as well as inflation. This was a social movement victory that led to legislation forcing the Fed to take unemployment into account when it makes policy. That social movement had been led by stalwarts of the black freedom movement.

The Humphrey-Hawkins Act got its name from its cosponsors, one of whom was Hubert Humphrey and one of whom was Augustus Hawkins, who represented South Central Los Angeles and thus had a front-row view to the crisis of unemployment among urban black Americans. The Volcker Shock was directly or indirectly a response to this movement.

DD

We often describe the New Right coalition as one that unites big business with the religious right. Was this anti-inflation coalition the material basis for the New Right?

TB

The anti-inflationary coalition was the material basis for the New Right. The work of someone like Melinda Cooper in her book Family Values reminds us that you shouldn’t make a clean separation between cultural conservatism and the economic base.

Take someone like Milton Friedman, who we know is part of the anti-inflation consensus. His whole thing was about limiting the growth of the monetary supply. He hated unions. But we think of him as a classical liberal or libertarian. He’s a secular Jewish figure — not Pat Robertson. But even someone like Friedman, when he talks about what’s bad about inflation, will say that a society with inflation is a decadent society where people don’t think about the future.

DD

Where people aren’t disciplined into making personally responsible decisions.

TB

This includes sexual morality. Even someone like Friedman, who was the malaise of the seventies, mingled the rise of the price level with a collapse of old-fashioned sexual morality. If that was true for Friedman, it was much more true for an evangelical Christian.

These things mingle in interesting ways, in which the need for discipline is at once something you’re doing to the labor market, but also something you’re doing to unwed mothers on welfare, and to hippies, and to all these different people who had been able to slip from the bonds of traditional bourgeois morality in the sixties and seventies.

DD

What about President Jimmy Carter’s ideology? How did the leader of a Democratic Party that had for so long embraced full employment, and until quite recently, come to so readily embrace austerity?

TB

There’s a rule that politicians hate recessions, and that they’ll do all kinds of stuff to not have recessions, even to the point of being irresponsible. There’s an idea that they’ll juice the economy before an election. Carter is the staggering exception to that rule.

He appointed Volcker, knowing full well what he was going to do, and then he stood by Volcker as he induced a recession in an election year! Volcker was appointed in August of 1979. The Shock started in October of 1979. The election was a month later! Only once, in an extremely mild way, did Carter even question anything that Volcker is doing. What was he doing, and why wasn’t he he more sensitive to this?

One way to understand it is to think about Carter as an individual. He was not connected to the labor-liberal traditions that had sustained someone like Hubert Humphrey, a more classic New Deal Democratic. Carter came out of the New South. As a New South governor, he supported pro-business developmentalism.

He was antiracist by the standards of Georgia, but not by anyone else’s standards. He got in a lot of trouble in the 1976 Democratic primary by saying that he supported efforts to preserve neighborhoods’ “ethnic purity.” This caused a huge amount of flak, and he had to rhetorically support the Humphrey-Hawkins Full Employment Act to contain some of the damage that he caused with black Democrats. But his heart was never in it.

DD

He was used to appearing as a racial moderate, just by comparison with Lester Maddox.

TB

Yes — even though he went to Brazil, visited a town full of the descendants of ex-Confederate soldiers who moved to Brazil, visited the grave of his wife’s ancestor who was there, and by his own account was moved to tears by how much this town had preserved the feel of the old South. He was a racial moderate in American terms, but was not especially concerned about effects on black people.

He also didn’t have a good relationship with unions, so he wasn’t concerned about its effect on unions. He was an evangelical Christian, so he was not averse to a gospel of virtue through discipline. The familiar version of this is him going on TV wearing a sweater and telling everyone to turn their thermostats down.

DD

The Crisis of Confidence speech.

TB

The Crisis of Confidence speech, which sometimes liberals look back fondly on because, hey, at least he was taking the energy crisis seriously, and that’s better than Reagan ripping the solar panels off the roof of the White House. But Carter was also preaching a gospel of personal responsibility and self-denial as the solution to a problem, which was a much more structural matter of political economy. There are a number of personal reasons you might point to that Carter was open to this.

But he was also under pressure. The dollar crisis started around 1978. In some senses, Carter was a hostage to the international currency traders, who were able to blackmail him into pursuing certain policies by threatening the dollar. There are moments he would try to do something more moderate than the outcome of the Volcker Shock, and then a reaction in the markets would force him to backtrack.

DD

Where does Carter fit in to the story of neoliberalism as it’s often told, which has Reagan pioneering neoliberalism from the right, and a neoliberalized Democratic Party under Bill Clinton affirming it from the center-left?

TB

I am extremely frustrated when I read people like Paul Krugman. Krugman has pushed for fuller employment, more economic expansion, against austerity. But even someone like Krugman, who is now willing to write columns about how great unions are, about how we don’t need really need to worry about inflation — a really dovish figure like Krugman always starts the story with Reagan.

If you read Krugman’s New York Times column on labor unions, why they’re good and why it was bad they got rid of them, Krugman cites a statistic on labor density from 1980 to suggest that as late as 1980, everything was okay. What happened is that Reagan comes in, is inaugurated in 1981, does PATCO, and caused the crisis.

A narrative like that leaves Krugman no room for thinking about a) the Democratic Party and figures like Carter, and b) the role of central bankers like Volcker, who Krugman and everyone else in his profession still admire. Realizing that the story starts in 1978 or 1979 means that you can’t blame it all on Reagan and the Republicans and you need to seek a deeper explanation. You need an explanation that is political-economic.

When Krugman tries to answer the question of what went wrong, he leans a lot on the racism of Reagan’s political base, about which there can be no question. But whatever racism there was in American society didn’t appear whole cloth in 1981 — it was also reflected in the abandonment of full employment policy. Abandonment of full employment happened in 1978 or 1979, and there’s a series of things there that you can point to, of which Volcker’s appointment is just one.

It’s important not just in the way that it’s important to blame the Democrats, but because in order to get the history right and understand why it happened, we need to understand the structural causes that made this a bipartisan policy — not a coup, and not the imposition of the Republican Party.

DD

What role did the neoliberal theory of monetarism and the so-called natural rate of unemployment, developed by Milton Friedman, play in creating the new common sense about how government and the Fed should deal with inflation? What is monetarism, and what is the so-called natural rate of unemployment?

TB

Monetarism is a way of thinking about the economy, and particularly about monetary policy, which is what the Fed does. The key figure here is Milton Friedman, who, over the course of the postwar decades in the US, moved from an academically respected but marginal figure to one whose ideas were very mainstream in the academy, among business people, and among regular people like you and me, who would have watched his PBS documentary and discover the evils of the minimum wage.

The key idea of monetarism is that inflation is just a problem of the money supply. There are many complicated, intertangled, real-world causes of inflation. There could be an energy crisis, a collective bargaining agreement, or a political standoff. Friedman’s theory had the virtue of saying that none of that really matters — what matters is just the money supply, and if there’s inflation, it means that the money supply is growing too fast, and the Fed should limit the growth of the money supply.

Its lesson is beautifully simple, and it starts from the basic definition of inflation — that it’s too much money chasing too few goods. The slope that Friedman comes up with to sell this monetarist idea is that inflation is always and everywhere a monetary phenomenon. He emphasized the central bank as the site of anti-inflationary policy, as opposed to any other kind of government intervention.

DD

This is fascinating, given that neoliberals believe that the market needs to be protected from the state, but in the case of monetarism, they believe that the state is pulling the strings.

TB

This separates Friedman from the more intense libertarians. If you probe any libertarian thinker far enough, you’ll find things they think the state should be doing. But this, in particular, was a fault line between Friedman and other libertarians; he really did see a role for the Federal Reserve as a planner.

It doesn’t seem that way at first, but the idea that the whole level of economic activity and things like inflation and output should be determined by the Federal Reserve setting the monetary supply in the right way is a thin version of economic planning. It would bring Friedman into conflict with some more libertarian economists.

In his analysis of the Great Depression, Friedman thinks that the Depression was caused by the Federal Reserve not expanding the monetary supply enough. He is honest enough to admit that this goes both ways, and that in some cases, you should have monetary expansion, which is really a kind of stimulus. Friedman, for all his libertarian activism, is also someone who accepts a big role for the government and a big role in controlling the money supply.

Monetarism provides Volcker with his stated rationale for the Volcker Shock. Volcker was appointed in August of 1979, but the Volcker Shock started in October of 1979, and it started with Volcker’s announcement following a meeting of the Fed’s Open Market Committee that he would target the growth of the money supply, instead of targeting interest rates.

Before, you could imagine that the Federal Reserve made policy by saying, “Interest rates are at 5 percent, but there’s too much inflation, so we’ll try to get them up towards 7 percent.” That would be one way of tightening money — focusing on interest rates as the instrument of that policy.

Volcker announced that they wouldn’t target the interest rate anymore. They would target the growth of the money supply. “This quarter, the money supply grew by 20 percent, but there’s inflation, so we’re going to make sure it grows next quarter by no more than 10 percent.” That’s a different kind of monetary tightening, focused on the growth of the money supply as the instrument of policy.

That is essentially what a monetarist, like Friedman, would prescribe. In his stated rationale, Volcker embraces monetarism; this is a huge victory for Friedman’s school of thought. What Volcker actually thought he was doing is a good deal more complicated. He was never a doctrinaire monetarist. Volcker was, to his credit, skeptical of all kinds of simplistic schools of economic thought. He hated simplistic, fine-tuning Keynesianism. He was also never a monetarist. He was a practical central banker, not a theoretician. In fact, he confirmed later in interviews that he wasn’t moved to induce the Volcker Shock because he had suddenly become a convert to the idea of monetarism.

So why did he do it? The answer is actually interesting. He said that monetarism provided him with a political cover.

Volcker replaced the management of interest rates with the management of the money supply. He did this because he knew that if the Fed said it was targeting interest rates, and then interest rates went to the highest point they’d ever been in history, people would blame the Fed. They’d say, “All of a sudden, I’m trying to borrow money to buy a car, and they’re telling me I’m going to have to pay 25 percent interest on this.”

He knew that by focusing on limiting the money supply, which would inevitably have the effect of raising interest rates, he would put a buffer in between the decisions that he and the Fed made, and the consequences on the market. They’d say, “All we’re doing is limiting the growth of the money supply. It’s the market that’s pushing interest rates up.” This is an example of how Volcker was a canny political actor, not just a technocratic central banker.

The final confirmation of this instrumental or practical monetarism is that in 1982, the recession was getting too deep. It had a number of bad effects, including triggering Third World debt defaults like in Mexico — which posed huge problems for the international banks, precisely Volcker’s big constituency. His noble experiment in killing inflation actually started to conflict with the health of the US financial system at a big level.

What did he do? He backed off from the monetarism. He stopped the money supply targeting. He eased up a little bit. From then on, he didn’t present his choices in a monetarist framework.

Commentary from the time shows that Friedman and his followers were upset about this. They saw, correctly, that Volcker abandoned monetarism, which they said was a disaster that would bring back inflation. But it didn’t — which confirms both that Volcker was not really a dyed-in-the-wool monetarist, and that the monetarists were not totally right about the causes of the inflation, because Volcker’s abandonment of this did not lead to the return of inflation.

DD

And the so-called natural rate of employment. This is a Friedmanite innovation that becomes more normalized in mainstream than monetarism.

TB

It’s also an idea associated with Friedman, but as you say, it has more staying power. The idea is that the natural rate of unemployment answers the question of what full employment really means.

When we say full employment, we almost never mean zero percent unemployment. At different points, governments have had different targets. Even in the heroic days of American Keynesianism, the Lyndon Johnson White House was aiming for something like 4 percent or maybe, at the limit, 3 percent. But unemployment never really goes to zero.

The natural rate of unemployment is an intervention in this debate over the actual target for employment. It shows that there’s a level of unemployment in the economy below which you will cause inflation to increase. The natural rate of unemployment is related to the NAIRU — the Non Accelerating Inflation Rate of Unemployment.

These ideas are different in some minor respects, but the idea is the same: there’s a level of unemployment below which the economy cannot go without suffering damage. One form that damage will take is inflation.

Economists try to estimate the natural rate of unemployment for the economy and use that estimate in order to guide policy. If the natural rate of unemployment is 7 percent, then the Fed will start to tighten policy if they see unemployment approaching 7 percent, because they know that if you go to 6.5, you’ll start to pay for it in some way, probably inflation. This idea has a long life that lasts after the 1980s, after Volcker, and long after people have stopped taking strict monetarist ideas seriously.

In the 1990s, Janet Yellen, who is now Secretary of the Treasury and was formerly Jerome Powell’s predecessor as head of the Federal Reserve, was just a member of the Fed Open Market Committee. She helped to make interest rate policy under Alan Greenspan, who was then the head. In the mid-’90s, as unemployment approached 5 percent, Yellen personally visited Greenspan in his office and said that they needed to raise rates because the economy was headed for 5 percent, and that’s what she thought the natural rate was. Yellen was still thinking this in the nineties.

She’s still thinking it in the transcripts, if you look at 2015. In 2015, they were dealing with the slow recovery from the 2008 recession, which dragged on and on. The economy had technically expanded — the recession is over — but it seemed slow. So the Federal Reserve began to experiment with a more expansionary position on monetary policy. But at least as late as 2015, they still thought that the natural rate of unemployment had changed, not that the doctrine needed to be given up altogether.

They would say, “Perhaps we haven’t been expansionary enough. We thought the natural rate was 6 percent, but it’s really 5 percent, so we should take a more expansionary position.” They weren’t saying, “This whole idea is bogus.” They’ve moved much closer to that now; Yellen and Powell’s statements since about 2016 show that they’ve come much closer to rejecting the idea, but the idea guided policy at least through the second Obama administration.

DD

A 1999 article from the economist Robert Pollin argues that Friedman’s idea of the natural rate of unemployment, upon closer inspection, conceals a Marxist or Kaleckian (Polish economist Mikal Kalecki) — idea.

Pollin writes, “According to Friedman, what he terms the natural rate of unemployment is really a social phenomenon measuring the bargaining strength of working people as indicated through their ability to organize effective unions and establish a livable minimum wage.”

How does neoliberal monetarism, according to Pollin, just restate in mystified form the Marxist idea of the reserve army of the unemployed? What does that reveal about the mystified premises of neoliberalism?

TB

Let’s start with the idea of what the natural rate of unemployment is. It’s a point of unemployment below which there will start to be pressure on prices; there will start to be inflation.

Why is it that lower unemployment will lead prices to rise? The answer is that lower unemployment increases workers’ bargaining power. Workers’ bargaining power means that wages will rise, and a rise in wages at a certain point will lead to a rise in prices. There’s a chain running from unemployment which is “too low” to an increase in workers’ bargaining power, as well as to inflation, which is a problem. So you decide that unemployment has to remain at a certain level so that workers don’t demand too much, and you prevent inflation.

Put that way, it sounds like a conspiracy. But this is all over the Federal Reserve transcripts. I quote some of them in the piece I wrote for Phenomenal World, but you could find a million more of them if you wanted. There’s a direct sense that this is how things work. One famous example is that in the nineties, Alan Greenspan was testing the limits too of how far unemployment could go. He was willing to think that maybe the natural rate had changed. And Greenspan posed the question: what has changed that allows us to have lower unemployment without the inflation that we saw in the seventies?

His answer is that workers are discouraged and insecure. He quotes studies that ask workers, “Are you worried about losing your job? Do you feel confident asking for more in your job?” He quotes these studies as evidence of worker insecurity and says very clearly that worker insecurity is the reason why we don’t have to worry about inflation quite as much as we used to.

And it’s not just people like Greenspan who believe this. A piece from the Economic Policy Institute (EPI), a solidly left-wing-of-the-Democratic-Party think tank, says very frankly that inflation is caused by workers having too much power. There’s a widespread idea from across the mainstream political perspective that workers’ bargaining power becomes a problem at a certain point.

If you’re a hardcore Marxist, you might say — and this gets back to Pollin’s idea of a convergence between Friedmanite and Marxist thinking — that the consensus is right. Actually, at a certain point, workers’ bargaining power is a problem for the system. And if you’re far enough to the left, your response to that is that the system needs to give way. But if you don’t take that perspective, you say that the workers’ bargaining power needs to give way.

DD

Pollin writes, “Economists have long studied how workers’ wage demands cause inflation as unemployment falls. However, it is never the case that such demands directly cause inflation. This is true by definition, since inflation refers to a general rise in product prices. Workers, by definition, do not have the power to raise product prices. Inflation happens as unemployment is falling, when business owners respond to workers’ increasingly successful wage demands by raising product prices so they can maintain profitability by passing on their increasing costs.”

But, as you suggested, in terms of how class power plays out, businesses pass on wage increases as higher prices to maintain their profitability. In cases where inflation is wage-related — even though it’s driven by capitalists’ profit-protecting response to wage increases, not directly by wage increases — what should the Left’s position be? Should our position be that inflation is fine, or that inflation is sometimes indeed a problem, so we should demand that the government use some sort of other tool to manage it?

In other words, do some left policies, under capitalist conditions, indeed risk sparking inflation or even hyperinflation?

TB

That’s the million-dollar question, and we really do need an answer. In the short run, I don’t see a lot of evidence of really serious inflationary pressures; most observers don’t.

We should stipulate that it’s not an immediate problem. But if we get fuller employment, we can expect that at some point, workers’ demands will cut into profits. If we don’t get that, we’re not getting what we want. We can say that if we ever get the policies we’re fighting for, there will be some pressure on profits, which are, by historical standards, as a share of income, very high. We should be eating into those.

If that happens, the businesses that can raise prices will do so, and then we will be back in this situation. I can’t tell you whether it will happen in five years or ten years and then what do we do?

A lot of people on the center-left still say that we’re not there yet, but then when we do get there, the solution is simply to raise interest rates the way we’ve always done. So, clearly, people who are to the left of the EPI need a better answer for that. What is the answer? Making price and profit the object of public policy.

That sounds foreign to us now, but it wasn’t for a long time. Look at the World War II example, which is the example that people on the center-left are now using to show how we can have an expansionist economy that helps everyone. In the New York Times op-ed section, JW Mason and Mike Konczal laid out a strong case for the best version of this expansionist turn. Their example is the World War II economy, during which incomes rose and the economy expanded even as the federal deficit reached record levels, proved all these naysayers wrong.

But if you go back and ask what made the World War II expansion possible, there was a centrally planned economy in which there was an excess profit tax, controls on prices, controls on wages. As leftists, we would question some elements of that policy. There was a no-strike policy that the CIO enforced against workers.

If we want an alternative to raising interest rates in response to too much wage growth, we need to start thinking about making price and profit the object of policy.

From 1945 to 1946, there was a big UAW strike against General Motors. The demand the UAW made of General Motors was a sizable increase in wages to the auto workers without raising prices. They said, “We want the raise, but we don’t want you to pass it on in an inflationary spiral.” GM said, “We can’t do this. If we’re going to pay you more, our profits are going to go down and we’ll have to raise prices.”

The UAW’s Walter Reuther said, “Open your books. Show us your profits, so we can actually see that this wage increase would be such a problem for you.” Of course, GM refused to do that. They took out full-page ads in newspapers around the country, saying that Reuther’s demand was a step on the way to socialism.

The UAW gave up the demand. They couldn’t win it. From then on out, there was a spiral where a wage increase for auto workers would lead to an increase in the price of the next model year car.

DD

But that’s protected by the black box of the corporation.

TB

Right. There’s an idea that collective bargaining can only focus on wages, hours, benefits, and working conditions, and that prices and profits are completely outside of the realm of collective bargaining. But if we want to think about the horizon of struggle that would point toward a better alternative, it’s that moment of the 1945-46 GM strike where the UAW says, “We make cars, and it’s part of our interest that the price of cars not be too high, especially if the profits are there to pay for it.”

This idea, which was fairly mainstream, if not successful, in the ’30s and ’40s — that prices and profits have to be an appropriate target for collective intervention, whether that’s through collective bargaining or through government policy — that’s the spirit we need to recover.

DD

What does having an Ayn Rand acolyte, Alan Greenspan, running the Fed from 1987 to 2006, for nearly twenty years with almost no dissent from either major party, fit in? He was known for keeping interest rates at rock-bottom levels, and so blamed for the housing crisis.

TB

Greenspan is a hugely important and somewhat mysterious figure. He’s a hardcore follower of Ayn Rand.

DD

Wasn’t Ayn Rand was at his nomination ceremony?

TB

Yes. Even a word like “protégé” would be putting the relationship too lightly. At least into the 1960s, Greenspan, like Rand, thought there shouldn’t be a Federal Reserve. You can see a difference between this idea and the Milton Friedman perspective that there should be a Federal Reserve that follows a fairly strict rule about the money supply. Greenspan and Rand think that there shouldn’t even be a Federal Reserve.

There’s some world-historical irony in the fact that Greenspan then came to inhabit the commanding heights. I think he would say that if someone had to be in charge of the central bank, it should be him. When I was in college at Columbia, they were talking about bringing back the ROTC, and the liberal militarist argument was, “If there have to be military officers, they should be people who’ve read the great books.” It’s the same kind of rationalization: “We have to do it so the worst people don’t do it.”

Where does Greenspan fit into the story we’ve been telling? Greenspan was Volcker’s successor. In 1987, he replaced Volcker at the Federal Reserve, and he was 100 percent supportive of what Volcker had done. He had a lot of praise for the Volcker shock. And that makes sense, because Greenspan’s deep commitment was to something like the gold standard.

If we can’t have that, Greenspan thought, Volcker offered a sort of surrogate for the gold standard, because he limited money in a way that was functionally analogous to limiting it based on the gold supply, even if it’s not literally tied to bullion somewhere in Fort Knox. So Greenspan was definitely a supporter of Volcker’s policy.

Throughout the first six years of his term, he also practiced fairly hawkish monetary policy — keeping interest rates high and slowing down economic activity — because Greenspan was not sure that inflation has been totally contained yet. We now look back and know that Volcker was the turning point, but at the time, people really thought that inflation could come roaring back at any minute. Greenspan’s policy from his first several years was very similar to Volcker’s.

How did this work out concretely? There was a recession in 1990, and as in 2008, there was a very drawn-out, weak expansion after that. That’s when the phrase “jobless recovery” started to be bandied about. In the 1992 presidential election, Bill Clinton benefited from the fact that the economy was bad. This was the moment when James Carville said, “It’s the economy, stupid.” That election was in 1992, after the recession had already ended. Largely because of Greenspan’s Volcker-like policies, unemployment was very slow to fall, even after the recession has ended.

Around the mid-’90s, there was a turning point in Greenspan’s approach. He became much more dovish, keeping interest rates low and encouraging further economic expansion — even when people like Yellen at the time were telling him that it was time to tighten money. Greenspan actually let money become looser, letting unemployment fall until, around the year 2000, unemployment was actually below 4 percent for the first time since the Vietnam War. He anticipated the new dovish turn in Fed policy; he was already experimenting with it.

But Greenspan was still a devotee of the idea of the natural rate of unemployment. He may have thought that the natural rate had changed for institutional reasons, and perhaps it was even allowed to be 4 percent, but there’s no question that if Greenspan saw any prospect of worker empowerment or a rise in the wage share, he and his colleagues would push back. That’s clear from the transcripts.

Through the end of Greenspan’s term, the transcripts show a close focus on union negotiations. At a time when practically everyone in the media had stopped paying attention to collective bargaining, around 2006, the Federal Reserve was still discussing: “What is the latest UAW contract? How good or bad is it? Is it a reason to be concerned?”

Greenspan was, in some ways, a direct ancestor of the of Powell model, in which we’re allowed to experiment with lower unemployment, but there’s still an assumption that if this were to lead to worker empowerment, then we would have to reconsider what we were doing.

DD

You just mentioned that Greenspan saw the Volcker Shock as a next-best substitute for a gold standard. Where does central bank independence play into this?

When there was a gold standard, the politics of money were heavily and publicly politicized, first by the populist movement, and later by William Jennings Bryan’s cross of gold. To what degree is it important for the left to re-politicize money? We see MMT advocates trying to do that. Where does that all fit in?

TB

Re-politicizing money — or to put it a different way, forcing people to recognize that money has always been politicized — is hugely important for the left, not just as an intellectual project, but as a practical one. We can think about that by going back to the gold standard. What led to the end of the gold standard, which, throughout the late nineteenth century and into the twenties, was a fairly effective way of fighting inflation, at the expense of workers? What brought that to an end?

According to the most mainstream account, which is Barry Eichengreen’s Golden Fetters, the gold standard ended because of political pressures, particularly the growth of labor unions and the mobilization for World War I between 1914 and 1918. This empowered workers by leading to a tight labor market in a lot of places, but also because workers had sacrificed so much in the war, so that it was harder for their governments to say, “We’re going to make you pay the cost of adjustments in the money supply.”

The years around World War I also saw the extension of universal suffrage for the first time in a lot of the capitalist world. There was a big extension of who could vote. An economic historian like Eichengreen is very clear that the expansion of democracy in the form of voting rights, but also in trade unions, made the gold standard untenable. The gold standard did not come to an end because of intellectual arguments, although those play a key role in the way the process works. It was ended because of political and social pressures.

Then it stands to reason that if we want to reshape the rules of money and the politics of money today, it will happen through similar kinds of movements and pressures, but those movements and pressures have to be guided by some vision of what the problem is and what the solution would be.

You and I have discussed that we both are somewhat outsiders to this world of monetary economics, and are by no means experts. It’s really important that people try to start to think about it. We have examples from history of times of extraordinary popular participation in this kind of discourse.

If you go back and look at populist newspapers from the 1880s and 1890s, you’ll see that there were millions of ordinary Americans — farmers, industrial workers, housewives — reading and debating about monetary policy. A very popular pamphlet on this topic, called Coin’s Financial School, countless numbers of copies.

We should not be fatalistic about the idea that this has to be an esoteric topic. There have been moments where it was a hugely popular initiative, and we should hope for and build a movement in which we have a mass, collective democratic discourse about monetary policy, instead of leaving it to the so-called experts.