June 2, 2010
Recessions: What can we learn from the severe recession of the early 80s?
By Perry Willis

Statist economists and politicians tell us that two things are needed to stimulate a down economy into recovery:

  • The Federal Reserve must expand the money supply and lower interest rates to stimulate production and job creation.
  • The federal government must make up for shrinking consumption by spending more money than it normally would.

But, as William L. Anderson points out, if these two things were truly helpful then the severe recession of the early 1980s would not have ended as soon as it did.

Remember . . .

  • Interest rates were very high during this period
  • Government spending did not grow as fast during the early Reagan years as it had previously

The prescription was the exact opposite of what the Statists suggest. Money was tightened and government spending was slowed, and yet the economy recovered quickly and robustly. Perhaps the Statists are wrong?

These thoughts led me to write the following letter to my elected representatives in support of the Free Competition in Currency Act. If you also want to send a letter on this issue please feel free to borrow from or copy mine.

The U.S. economy recovered from a severe recession in the early 80s in spite of the fact that the Fed restricted the availability of credit during that recession. This suggests that the Fed's current policy of trying to expand credit is not needed to stimulate a recovery. This further suggests that we do not need the Fed at all. They do not need to be constantly expanding and contracting the supply of money and credit. At the very least, there is no need for them to have a monopoly control over our currency. This is one reason why I want you to support the Free Competition in Currency Act. And while I have your attention . . .

I also want to point out that government spending was growing at a slower rate during the recovery from the recession of the early 80s, than it had been before the recession. This is the exact opposite of the policy currently being pursued. The experience of the early 1980s suggests that the current spending binge isn't needed to stimulate recovery. Please cut spending.

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