Tag Archives: Paul Volcker

Paul Volcker – 1929-2019 – the slayer of inflation.

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.

Interest Rates under Volcker, Greenspan and Bernanke

Here is a chart from WSJ Graphics which shows the level of interest rates in the US from 1980 to today. With the stagflation of the 1970’s Paul Volcker was faced with some very tough decisions. Below is an extract from an interview with him on the PBS Commanding Heights documentary.

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.

If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived through it.

US Interest rates 1979-2014

US inflation and Unemployment under last 3 Fed Chairman

Below is a graphic from the WSJ which outlines inflation and unemployment under the last 3 Fed Chairmen – Paul Volcker, Alan Greenspan and Ben Bernanke. From the stagflation that was slain by Volker to the irrational exuberance of the Greenspan years and finally the financial contraction under Ben Bernanke. In the 1970’s Volcker tightened the money supply, the economy slowed and contracted – unemployment reached 10 percent. By August 1979 the prime interest rate got to 21.5% but by 1982 the inflation problem had been extinguished. However this was after 3 years of real hardship for the American people. Today we see that inflation isn’t the problem that it used to be and that stimulating growth and job creation is required.

Infl Unemp Fed Chairs