On Paul Volcker

A dozen years after anyone in the United States last got worked up about inflation, it’s hard to remind people what it is that made Paul Volcker so important. The best I can do is repeat an anecdote reported by William Silber in his 2012 biography of Volcker. The Fed chairman was on a fly fishing trip in Montana in 1982 when he stopped at a restaurant off in the woods, the parking lot filled with motorcycles and pick-up trucks. Three large men stood up at nearby tables and approached Volcker. One pulled a ten-dollar bill from his pocket, extended it towards Volcker, and said, “Excuse me, sir, but I was wondering whether you could sign this…considering that it’s still worth something only because of you.”

That anecdote captures much about those times. Prices were rising at double-digit rates: consumer prices in the United States more than doubled during the 1970s, spreading panic as inflation destroyed the value of retirees’ savings, ate away at wage increases, and made car loans unaffordable. I recall a real estate agent telling me that houses would sell only if the seller provided financing — indeed, that’s how I bought my first home. And this wasn’t merely an economic matter. Serious people had serious concerns that inflation was destabilizing society. Talk of hyperinflation was not unusual.

As I relate in An Extraordinary Time, central bankers, not least Volcker’s predecessors as Federal Reserve chairman, believed there wasn’t much to be done about it. Arthur Burns, Fed chairman from 1970 to 1978, went so far as to say in 1978 that inflation had nothing to do with the central bank. Many economic experts of the day shared that view, losing sleep over whether the country faced “cost-push” inflation or “demand-pull” inflation or monetary inflation or some other variety. “Jawboning” — attempting to talk inflation down — was a favorite remedy, along with price controls, credit controls, and other measures premised on the hope that the government could simply order inflation to stop. The record of success was abysmal.

When Volcker was first suggested to Jimmy Carter as a potential Fed chairman in 1979, Carter’s response was, “Who’s Paul Volcker?” In their first meeting, Volcker made clear that if he took the job, he would act against inflation. Carter, alarmed at an inflation rate headed towards 13 percent, nominated him anyhow. Volcker was true to his word. Carefully navigating the politics, he pushed interest rates sky high. Businesses closed. Auto sales collapsed. The housing market died in the deepest recession since World War II, as millions of people lost their jobs.

The price was high, but inflation broke. Only once since 1982 have consumer prices increased more than 5 percent in a single year. Mortgage interest rates of four percent — unimaginable back then — seem normal. Prices don’t seem higher every time we go to the store. Americans plan their lives without assuming that rampant inflation will destroy their dreams. Those too young to have lived through the 1970s do not realize what a luxury that assumption is.

Paul Volcker did much else before he died on December 8. We owe him an enormous debt of gratitude.

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