Opinion Editorial | |
| Wednesday, November 17, 1999 | |
Anti-Inflationary Policies Helped Win Cold War |
On November 5, the Heritage Foundation hosted a conference celebrating the 10th anniversary of the fall of the Berlin Wall and the end of Communism. Among the speakers was Herbert Meyer, a former editor of Fortune Magazine who served as an assistant to Central Intelligence Agency Director Bill Casey during the Reagan Administration. Meyer made the point that Reagan's economic policy deserves as much of the credit for the defeat of Communism as his defense and foreign policies.
According to Meyer, Reagan had a clear understanding of the linkages between his economic, foreign and defense policies. He knew that the Soviet Union had benefitted enormously from the inflation of the 1970s. Hence, breaking the back of inflation was not only important for the health of the U.S. economy, but as a weapon against the USSR as well.
The Soviet Union benefitted from inflation because it was a major producer of commodities that rose sharply in price during the 1970s. The most important of these was petroleum, of which the Soviet Union was the world's largest producer in 1980. That year, it produced 11.7 million barrels of crude oil per day, compared with Saudi Arabia's 9.9 million.
Much of the Soviet Union's oil production was exported for hard currency. According to the CIA, its hard currency earnings from oil exports rose from just $387 million in 1970 to more than $12 billion by 1980. Much of this increase in export earnings came from the steep rise in oil prices resulting from the two OPEC oil embargoes of the 1970s. A barrel of oil that sold for $4.15 in 1973 rose to more than $35 by 1981.
Another commodity whose price rise benefitted the Soviet Union was gold, which rose from $35 per ounce in 1971 to $875 on January 21, 1980. In 1980, the Soviet Union was the world's second largest gold producer, producing 9.4 million ounces per year. Gold sales provided $1.6 billion in hard currency that year.
Ronald Reagan understood that rising commodity prices were not the cause of inflation, but a consequence. The root cause of inflation was the Federal Reserve's monetary policy. Thus the key to stopping inflation -- and bringing down commodity prices -- was tight money.
Reagan strongly supported the Federal Reserve's tight money policy even though a sharp recession in 1981 and 1982 was the inevitable result. The political pressure to reverse course was intense as unemployment skyrocketed. But Reagan knew that stopping inflation would eventually lower commodity prices, thereby benefitting consumers while crippling the Soviet Union's ability to raise hard currency at the same time.
By the mid-1980s, gold was off two-thirds from its high and oil was down to $10 per barrel. This led to a decline in the Soviet Union's oil export earnings of 22 percent by 1989. With its hard currency imports up more than 40 percent, the Soviet Union was forced increasingly to borrow from the West. Its hard currency debt rose from $20.5 billion in 1980 to more than $50 billion in 1989, which required $9.7 billion in hard currency exports annually just to carry.
The Soviet Union's hard currency earnings were crucial for buying and stealing technology in the West critical to sustaining the its economy and war machine. There is no question that the decline in oil, gold and other commodity prices in the 1980s, resulting from Reagan's anti-inflation policy, crippled the Soviet Union in many ways.
As long as commodity prices were rising, the Soviet economy could just get along. Once they began to fall, an economic and political crisis was inevitable. Although Ronald Reagan's defense and foreign policies justifiably get most of the credit for the collapse of Communism, clearly his economic policies played a critical role as well.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 17, 1999.
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