Spring 2024 Alumni Newsletter

An interpretation of events 1951-2019
From the Treasury-Fed accord in 1951 up to the early 1960s, federal government
deficits remained low and monetary policy remained relatively tight. Persistent peacetime
budget deficits first appeared during the Kennedy-Johnson administrations in the
early 1960 and proceeded unabated until the Clinton surpluses in late 1990s. A
relatively loose monetary-fiscal policy mix combined with two severe oil price shocks in
1973-74, 1979-80 conspired to produce secular inflation.
In response to high and persistent inflation, the Federal Reserve tightened monetary
policy which, together with an oil price shock associated with the Iran-Iraq war, produced
a severe recessionary episode from 1980-82. The recession along with President
Reagan’s famous 1981 tax cut produced ever larger fiscal deficits fueled, in part, by the
Fed’s high interest rate policy.
The following figure shows the rate of growth of the U.S. federal debt. Note how the
pace of issuance accelerates in the 1960s and then decelerates in the 1980s and
1990s. This pattern roughly tracks the secular rise and fall in the interest rate, displayed
in Figure 1.
Figure 2
8