An important anniversary slipped by this week: the fortieth anniversary of Paul Volcker’s dramatic tightening of credit on Oct. 6, 1979, after the dollar went into free-fall on foreign exchange markets. Inflation had crossed into double digits after four years of mismanagement by the Carter administration. The gold price was rising (and about to hit an all-time record when the Soviet Union invaded Afghanistan the following Christmas). America’s international position had collapsed; the European elites believed that America would lose the Cold War; America was in deep recession even while inflation soar. Volcker had no choice but to raise the federal funds rate to 15%. The dollar stabilized but the US economy went into free fall.

Ben Bernanke’s warning that he might tighten credit some time, some day, when the economy recovers, combined with Larry Summers’ ringing defense of a strong dollar, are a comic-opera spoof of Volcker’s Wagnerian drama. The market’s reaction to this jaw-boning was slight; gold came off its all-time high and was trading last time I glanced at the screen at around $1,047. Talk is cheap. Bernanke monetized debt at a nearly $700 annual rate last quarter, $1.1 trillion if the banks’ accumulation of Treasuries is included. Is he really going to tighten rates, and back up the truck to run over the housing market again? Fat chance — until things get much more desperate then they are now.

The main difference between 1979 and the present is the Cold War. The dollar’s reserve role is a function of America’s standing in the world. The prospective defeat of the US in the Cold War caused the Europeans to consider distancing themselves from the dollar. As I wrote in a recent “Spengler” essay at Asia Times:

Strictly speaking, gold isn’t an investment but an insurance policy against a breakdown of the functioning of the world financial system. In particular, it represents insurance against the breakdown of the political understandings that make possible a world financial system. That is why gold reached its all-time peak (in inflation-adjusted) terms at the end of 1979, when the Soviet Union invaded Afghanistan.

The other difference is that inflation was out of control in the US, already in double digits, compared to the 2% expected by the TIPS market. Volcker had to wield a blunt instrument. The San Francisco Fed took note of the 25th anniversary of the Oct. 6 “Columbus Day Massacre” five years ago, noting that “in the first nine months of 1979, average annual inflation jumped to 10.75%. This dramatic rise was partially due to a new round of oil price increases. But even the core CPI, which excludes the volatile food and energy components, averaged a 9.4% annual rate.

Inflation at this high level during peacetime was unprecedented in American history. And it produced a variety of policies to tame it, including President Nixon’s wage and price controls, responsible for some of the temporary decline in inflation in 1971 and 1972, and President Ford’s WIN (for “Whip Inflation Now”) buttons, introduced in 1974.”

The San Francisco Fed reported, “Volcker returned from the annual IMF meetings in Belgrade in early October “with his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness on exchange markets. Volcker decided to call a special meeting of the FOMC, a meeting that was not publicly announced, to be held on Saturday, October 6.”

Are we due for a repeat of the Oct. 6 tightening? Not a chance for the time being. No-one wants it, least of all the Chinese — which is why they continue to buy US Treasury debt, albeit at a much reduced rate. But unless the Obama administration finds some way to stop monetizing debt, something like this has to happen.

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