The recession of the early 80s was partially caused on purpose. The reason interest rates were high was because inflation was very high (15% at times). To fight this, the Federal Government kept raising rates until inflation was kept at bay. This caused economic activity to sputter, but in the end, high inflation was finally stamped out and it paved the way for 20 years of high economic growth.

 

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U.S. economic performance in the 1970s was marked by rising unemployment, declining productivity, stagnant output and income growth, and accelerating inflation. U.S. economic policymakers agreed that this inflationary trend could not be allowed to continue. By the end of the 1970s, people had come to expect double-digit inflation rates. To reduce inflation, policymakers would need to reshape this inflationary psychology.

President Jimmy Carter appointed Paul Volcker to serve as Chairman of the Federal Reserve Board in August 1979. Volcker was highly respected by central bankers and economic policymakers around the world. The new chairman understood that the only way to tame inflation was for the Federal Reserve (Fed) to adopt new monetary procedures that tightened up on the growth of money and credit. Volcker also knew that there is a close historical relationship between inflation and interest rates. To reduce interest rates, the Fed would have to reduce inflation. Because credit would no longer be as plentiful as it had been in the recent past, interest rates would necessarily increase in the short run. The economy would have to get worse before it got better!