How Carter saved the economic system – however not his presidency: ALEX BRUMMER remembers the occasions of 1979

On A hot Saturday in 1979, while mowing the lawn at my family home in Washington, my wife Tricia called me to the landline.

The familiar Irish-tinged, booming voice of Joe Coyne, the then spokesman for the Federal Reserve, America’s central bank, was on the phone.

‘Alex, can you get down here to the Fed by 4pm? I might have something for you,’ he gruffly said.

The call was a shock. For several months, as a Guardian US correspondent focusing on the economy, I had routinely called the Fed to ask what it was proposing to do about the falling dollar on foreign exchange markets. The answer was always the same: ‘We never talk about the exchange rate.’

But after a strategy I had developed in London, during the 1976 sterling crisis, when I would daily ring the UK Treasury and the Bank of England in the hope of wisdom on the collapsing pound, it was the natural thing to call the Fed.

The Carter administration’s handling of the oil crisis and great inflation in the 1970s following the Yom Kippur war was disastrous.

Carter blamed a ‘malaise’ over energy use among the American people. He may have had a point.

But the fallout was alarming. Inflation soared to 7.6 per cent in 1978 and 11.3 per cent in 1979.

The dollar fell 40 per cent against the Japanese yen, 35 per cent against the Swiss franc and 13 per cent against the German mark. It declined 19 per cent against a basket of currencies in nine months.

Desperate measures were needed. The US Treasury arranged $22billion of swap lines with leading central banks.

It began a series of gold auctions, selling 750,000 ounces of its stockpile at Fort Knox.

And just like Britain in 1976, it even borrowed from the International Monetary Fund (IMF), making a drawing on US holdings of $3billion. 

It was the lowest ebb of Jimmy Carter’s stewardship of the economy. Confidence at home and overseas was shot and only dramatic action would suffice.

Carter, challenging the traditional independence of the Federal Reserve, decided to axe the struggling chairman, former industrialist and Democrat fundraiser and loyalist, G William Miller.

Into his place was parachuted Paul Volcker, an experienced figure who, as under-secretary of the treasury for monetary affairs in 1976, played a pivotal role in working with the IMF on the rescue of the pound three years earlier.

He was regarded as someone who could be trusted to resolve a financial mess.

The dramatic events of that summer vividly come to mind as America buries Jimmy Carter at a state funeral today.

The 39th president has been much eulogised as America’s most distinguished ‘after-President’. He pursued his campaigns for human rights and democracy around the world and better housing in the US almost until his death at the age of 100. 

I remember interviewing him, at his Atlanta-based Carter Center for peace, in 1989 as my decade in the US ended.

He was as passionate as ever about building on the Camp David accords between Israel and Egypt which he had brokered as president.

Yet it is extraordinarily hard to square Carter’s passion for peace and eradicating disease among the poor of Africa with the botched presidency which imploded.

Back in 1979, that call from Joe Coyne to the Federal Reserve, when I along with a Swiss correspondent and another writer were the only foreign journalists present, was a real moment of history.

It was a turning point for economic policy and, as it happened, US politics.

Volcker, tall and slightly bent, with a stentorian voice, sat at the end of the long mahogany table where traditionally members of the Fed’s interest rate-setting open markets committee deliberate.

To end Carter’s agony that afternoon, the unelected Volcker reshaped America’s approach to killing the inflation bogey and restoring the credibility of the greenback.

Out went the traditional Democrat wages and prices policy, which had failed in the Britain of James Callaghan and Denis Healey, and in came an early iteration of the Chicago school of monetarism guru Milton Friedman.

Volcker began raising official interest rates, first to 11 per cent and then 20 per cent by year-end. 

He decided to target the money circulating in the economy –and to impose a surcharge on credit card transactions in an economy where people were living beyond their means.

This was tantamount to slamming on the brakes.

The ‘Volcker moment’ proved to be seismic for the US economy, Jimmy Carter’s presidency and American politics.

On the eve of the 1980 campaign for the White House, it sealed Carter’s fate.

The surcharge and soaring interest rates saved the dollar and defeated inflation.

They also meant deep recession, which didn’t fully end until 1982, and paved the way for the arrival of Ronald Reagan whose rhetoric secured a Republican landslide.

Carter’s implosion taught the Democrats a lesson that was cleverly embraced by

Bill Clinton in 1992 after 12 years of Republican rule – his simple slogan ‘the economy stupid’ was to become the lodestone for all future White House incumbents.

• Alex Brummer, City Editor of the Daily Mail, was The Guardian’s Washington correspondent from 1979 to 1989