Reagan kept as chairman of the Federal Reserve Board the man Carter had appointed: Paul Volcker. And Volcker continued his policy of high interest rates to squeeze inflation out of the economy.
The high interest rates slowed the economy -- viewed by Volcker and Reagan (and Thatcher in Britain) as temporary medicine that had to be endured. By the summer of 1981, people had difficulty borrowing money for homes and cars, and many business people could not borrow money to invest in growth. Automobile sales declined. The economy went into recession. In 1982 business failures were triple what they were in 1979, and unemployment by the end of 1982 was at 10.8 percent, its highest since the 1930s. In 1982 the economy declined by 2.2 percent growth. The prime interest rate reached 21.5 percent in June. And the cover of a publication for builders had an image of a "wanted" poster of Volcker and accused him of having murdered millions of small businesses. Congressmen moved to impeach Volcker or to appoint members of the Federal Reserve Board who would be sympathetic to farmers, workers, consumers and small businesses. Jack Kemp, a Republican congressman from New York, called for Volcker's resignation. In August 1982, Senator Robert C. Byrd of West Virginia introduced the Balanced Monetary Policy Act of 1982, which would have forced a reduction in interest rates.
Reagan was portrayed as leading an economic assault against ordinary Americans. He supported Volcker through 1982, and in January 1983 his approval rating was down to 35 percent, with 56 percent disapproving -- as the economy was beginning to recover. Interest rates fell from over 20 percent down to 10 percent, and in the first three months of 1983 the economy had a rate of growth equivalent to 2.6 percent per year. In the second three months (quarter) of the year the economy grew as a 10.9 percent rate (annualized). In 1983, inflation was 3.2 percent -- down from 10.3 percent in 1981. And for last half of 1983 and into 1984 the economy's growth rate hovered between 7.4 and 5 percent.
The medicine that so many had disliked had worked. The economy was booming. Joy had spread to Wall Street. The Dow Jones Industrial Average (DJIA) had bottomed at 784 in March, 1982. Anticipating recovery it had reached 1,000 in October, 1983, and had climbed to a new high of 1,200 in April, 1983 -- where it was at re-election time in 1984.
