Paul A. Volcker, who recently passed away, was a giant figure in modern economics.
As head of the Federal Reserve, he took bold and unpopular steps to solve major economic problems, setting the stage for the prosperity we enjoy today, including the two longest expansions in US history.
Paul was a Federal Reserve economist in the 1950s and also served in the Treasury Department, including several years as Undersecretary for Monetary Affairs, where he instigated reforms to the international monetary system. He also taught university courses and worked in private-sector banking. In August 1975, he was named president of the Federal Reserve Bank of New York, where he became a proponent of monetary restraint. As inflation soared in the late 1970s, President Jimmy Carter nominated Paul Volcker to become chairman of the Board of Governors, where he served from August 1979 to August 1987.
In the late 1970s, double-digit inflation was contributing to slowing business investment, falling productivity, and worsening trade imbalances. Unemployment was in the 6% range and trending upward. Earlier attempts to control inflation without generating higher unemployment (including wage and price controls) had only temporarily slowed the rise in prices and caused major shortages.
The Federal Reserve’s dual goals of maximizing employment while keeping inflation moderate were clearly at odds, and Paul was faced with a “lose-lose” situation. Dealing with high unemployment would almost certainly increase inflation but fighting inflation would accelerate unemployment.
He determined that there was no choice but to focus on inflation even at the cost of worsening economic performance. Tighter reserve management and credit controls brought a recession in 1980, and higher interest rates and even slower reserve growth caused a worse one during 1981 and 1982. Unemployment reached nearly 11 percent. While excruciating, it worked. Inflation peaked at over 13.5 percent in 1980 (leading candidate Ronald Reagan to invoke the “Misery Index”) yet plummeted to 3.2 percent in 1983.
I was a young economist at this critical time, publishing numerous papers on monetary policy in the late 1970s and early 1980s and a significant book in 1983. As a result, I had extensive interactions with Paul – some intense, many humorous, and all respectful. His courage was palpable.
Reducing inflation was only one of Paul’s accomplishments. During the Great Recession, he chaired President Obama’s Economic Recovery Advisory Board and contributed to the Dodd-Frank Act by introducing the “Volcker Rule,” which prohibits banking entities from certain investments.
With inflation remaining in the 2-3 percent range for the past 25 years, the memory of spiraling prices has become distant. Getting to this point, however, required a man of unwavering conviction. His singular strength under extreme adversity is both his greatest legacy and a lesson for our times.