Systems Thinking Through: The Volcker Shock

It’s been a while since I posted something, I’ve been procrastinating because I knew I wanted to cover the Volcker Shock. It’s far-reaching effects make it a good candidate for a systems map, maybe even too good in a way. Its causes and effects are so multifaceted it’s hard to know what to include/exclude.

Paul Volcker was the Fed Chairman during the Carter, and Reagan administration. The Volcker Shock was his attempt to defeat inflation that the US economy had been unable to shake in the previous decade. It was successful in its objective but it took quite a sacrifice. This sacrifice mostly fell on the backs of workers across the US and in the global south. Despite the costs, many of which are permanent, the Volcker Shock is rarely if ever seriously interrogated in the mainstream. Hot take: It should be.

The most comprehensive resource I found was an article called Other People’s Blood by Tim Barker. I like it. It’s good. I’d recommend a full read, but I’ll be quoting it copiously. Seriously read it though.

So here’s the map I got. To explain it I’ll quote the article, and then briefly summarize how it fits in the system.

(Dotted lines indicate negative relationship.)

“Volcker announced that he would start limiting the growth of the nation’s money supply. This would be accomplished by limiting the growth of bank reserves, which the Fed influenced by buying and selling government securities to member banks. As money became more scarce, banks would raise interest rates, limiting the amount of liquidity available in the overall economy.”

So starting on the left in green: Money supply goes down, interest rates go up, liquidity goes down.

“The exorbitant cost of borrowing put tens of thousands of firms out of business and led overall to twenty-two months of negative growth. In December 1982, unemployment was at 10.8 percent — closer to 20 percent if you include workers who wanted jobs but had stopped looking and underemployed workers who could not find steady full-time work… The nation’s industrial belt was the hardest hit. Ninety percent of job losses occurred in mining, construction, and manufacturing. It was costly for businesses to pay their debts and borrow money to invest, while a strong dollar made…