I first came across Paul Volcker in the ‘Commanding Heights’ series produced by PBS. Appointed to the position of Chairman of the US Federal Reserve in 1979 by the then President Jimmy Carter, Paul Volcker understood the problems of the Great Inflation in the US economy which was at around 11.5%. Up to this point Carter had attempted to follow Keynes’s formula to spend his way out of trouble by dropping taxes and increasing government spending. However this was not working. Below is an extract from the PBS series.
It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon. Paul Volcker
Volcker’s policy to tighten the money supply with increasing interest rates, which peaked at 21.5% but was not popular with Jimmy Carter who lost the election to Ronald Reagan. But in order to get prices down the economy had to experience a recession and the longer the inflation was out of control the worse the recession would be. Unemployment did hit 10% but could have been much worse. As Ronald Reagan said referring to a recession – ‘if not now when? If not us who?’
He saw the primary focus of central banker was to control inflation and preserve the value of money whether is be keeping prices stable or ensuring that there is not easy access to credit. Below is a tribute from Paul Solman of PBS.