NCPA - National Center for Policy Analysis

Anti-Inflationary Policies Helped Win Cold War

November 17, 1999

Herbert Meyer, a former Fortune editor and assistant to the late Central Intelligence Agency Director Bill Casey, recently made the point that Ronald Reagan's economic policy deserves as much of the credit for the defeat of Communism as his defense and foreign policies.

Reagan knew the Soviet Union had benefited enormously from the inflation of the 1970s. Hence, breaking the back of inflation was not only important for the U.S. economy, but as a weapon against the USSR as well.

The Soviet Union 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.
  • The Soviet Union exported oil 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.
  • The Soviet Union also benefited from the rise in the gold price 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.

Ronald Reagan strongly supported the Federal Reserve's tight money policy which led to falling commodity prices. By the mid-1980s, gold was off two-thirds from its high and oil was down to $10 per barrel. With the value of its hard currency down, the Soviet Union was forced increasingly to borrow from the West. An economic and political crisis was inevitable.

Although 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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