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Opinion We owe much to Paul Volcker

Former Fed chair Paul Volcker in Washington in May 2014.
Former Fed chair Paul Volcker in Washington in May 2014. (Jonathan Ernst/Reuters)
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We have lost another giant. Paul A. Volcker, who died this week and was chairman of the Federal Reserve Board from 1979 to 1987, ranks as one of the most significant public figures in the last half of the 20th century for his decisive role in corralling double-digit inflation.

To appreciate the magnitude of his accomplishment, you have to recall the 1970s and early 1980s. Consumer price inflation seemed uncontrollable. Virtually nonexistent in 1960 at around 1 percent, it had increased to about 6 percent by 1969 and 13 percent by 1979 — and seemed destined to rise even higher. In seeking to attain and retain “full employment,” then usually defined as about 4 percent unemployment, the government seemed driven to raise both inflation and unemployment. The joblessness occurred when higher interest rates resulted from higher inflation.

No person or policy seemed capable of overcoming the dilemma. President Richard M. Nixon tried wage-price controls; they collapsed in a cloud of unpopularity and technical difficulties. It was hard to hold down some retail prices (say, for food) when the underlying costs of production (say, for feed grains) were rising and were set in world markets. Unions objected to limits on their wages. Frustrated, Nixon ordered a second wage-price squeeze. It, too, flopped.

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Despite this dismal record, President Jimmy Carter tried a variety of voluntary controls. They also failed. The resulting crisis transcended economics. Fearful that the wage-price spiral could never be subdued, Americans turned deeply pessimistic about the future — the dark mood then was not unlike today’s fatalism. Inflation repeatedly topped a list of the country’s most serious problems.

Enter Volcker, almost by accident. Preparing for the 1980 election, Carter shook up his Cabinet, including firing Treasury Secretary W. Michael Blumenthal. When Carter couldn’t convince any major corporate executive to take the job, he moved then-Fed Chairman G. William Miller to Treasury. This left the Fed spot vacant and, again lacking a business leader for the appointment, Carter turned to Volcker, then head of the Federal Reserve Bank of New York.

To make a long story short: Volcker sharply tightened credit and the money supply; banks’ prime interest rate — for their best customers — rose to 21.5 percent; the unemployment rate reached a monthly peak of 10.8 percent. Squeezed, companies had to cut wage and price increases or face bankruptcy. From 1979 to 1983, inflation fell from 13.3 percent to 3.8 percent.

Volcker’s success also owed much to President Ronald Reagan, who backed the Fed’s unpopular credit crunch. If Reagan had criticized the Fed, Volcker would almost certainly have had to retreat from his harsh policies before inflationary psychology had been quashed. But Reagan steadfastly supported Volcker.

In his recent memoir (“Keeping At It”), Volcker acknowledged this debt:

“There were times over the next few years when the president, preparing for press conferences or otherwise, was urged by his staff to take on the Fed. He never did so publicly. He once explained to me that a professor at a small college in Illinois had impressed upon him the dangers of inflation. He understood the importance of our mission.”

What bound Volcker and Reagan was a deep belief that the United States could not flourish with high and erratic inflation. There was too much uncertainty and insecurity. This is surely correct, and the success of their joint project represents one of the great triumphs of good government in the post-World War II era.

But there are other more ambiguous and ironic messages as well. The decline of inflation, followed by the fall of interest rates, played a major role in encouraging the speculation that culminated in the great financial boom of the early 2000s and the subsequent bust. We owe much gratitude to Volcker, even as we grapple with the new problems and issues that remain.

Read more from Robert Samuelson’s archive.

Read more:

Sebastian Mallaby: Paul Volcker was the savior our economy needed

Catherine Rampell: Paul Volcker’s greatest legacy: Fighting to restore trust in government

The Post’s View: In Volcker’s day, presidents supported Fed independence for the good of the country

Paul A. Volcker: An economy on thin ice

Robert J. Samuelson: Volcker, Reagan and history

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