Paul Adolph Volcker, the Federal Reserve chair who served under Presidents Jimmy Carter and Ronald Reagan, has died at the age of 92. He passed away on Dec. 8 in his New York home, according to a statement from the Volcker Alliance, a non-profit, non-partisan organization he founded in 2013 to promote public service. Dubbed the Tall Man, he will be remembered for smoking cigars when he testified in Congress, fighting double-digit inflation in the 1970s and 1980s, and setting the table for a historic expansion in the 1990s. Considering the odious nature of the creature from Jekyll Island, Volcker helming the institution was not that bad, especially compared to what the United States has had since then.
The Inflation Buster
In the years following the Nixon Shock, a toxic concoction of wage and price controls, tariffs, and fiat hegemony, the U.S. economy reached a crisis point. Double-digit inflation rates, soaring unemployment levels, and volatile gross domestic product (GDP) quarterly growth rates were the new norms. When you factor in long lines at gasoline stations, shortages of consumer goods, and a White House in turmoil, it was a heck of a time to be living in the world’s largest economy.
Volcker told the National Press Club in his second year of his term at the central bank:
“We are dealing with an inflationary momentum, and patterns of thinking and behavior, that have developed over decades. Something like half the working population — those under age 35 — have never known price stability in their working experience …. We have become accustomed to living with inflation, adjusting to it — and anticipating more. And as we have done so, we unwittingly set in motion forces that have kept it going.”
According to Volcker, his aim was to alter the expectations that prices would continue to surge and to adjust the actions of the central bank.
When he was tapped to head the Eccles Building in 1979, he put the cigar in his mouth, grabbed a baseball bat, and broke the printing press. To combat price inflation that reached 15% in March 1980, he raised the federal funds rate – used by financial institutions for overnight loans to other banks – to an all-time high of 22.4% in July 1981 and jacked up the discount rate – the minimum interest established by the Fed for lending to other banks – by 0.5%. Most important of all, he hit the pause button on the money supply.
Was he successful? From the height of the Great Inflation period, the consumer price index (CPI) cratered to 2.5% in July 1983.
Not everyone was pleased with his methods. Millions of Americans thought they would never purchase a home because the 30-year fixed-rate mortgage neared 20%. Small businesses in construction and farming accused Volcker of cold-blooded, premeditated murder because of soaring debt levels thanks to skyrocketing rates. Reagan administration officials were irked because his monetary tightening conflicted with the White House’s expansive fiscal policy (tax cuts and higher spending) that led to ballooning federal deficits.
In the end, however, history has been a lot kinder to Volcker. Even libertarians, who have made abolishing the Fed a chief tenet of the philosophy, have uttered complimentary remarks. Former Rep. Ron Paul (R-TX) said that Volcker “was more personable and smarter than the others” and David Stockman, Reagan’s director of the Office of Management and Budget, wrote that he “did not … dream of levitating the economy through the ‘wealth effect’ or by coddling Wall Street speculators.”
Talk Softly and Carry a Big Cigar
The inflation bomb has yet to explode in America. With inflation below the Fed’s 2% target, the central bank has had some wiggle room to suppress interest rates to historic lows. It is easy to believe that we will have lower prices forever, which is opposite of 1970s thinking. However, with a soaring money supply, additional rounds of quantitative easing, and deficit-financed spending in Washington, inflation will eventually swallow the economy. The route of low rates (subzero soon?) is just a detour to the final destination of sky-high rates. Whether it is Fed chairman Jerome Powell or his successor, the Fed will eventually have its Volcker moment.
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