To The Moon

Paul Adolph Volcker Jr., a prominent American economist, served as the 12th Chairman of the Federal Reserve from 1979 to 1987. During his tenure, Volcker gained widespread acclaim for putting an end to the high inflation that plagued the US in the 1970s and early 1980s.

In 1981, the US experienced double-digit inflation for the second time in less than a decade. Gas prices skyrocketed, mortgage interest rates were high, making it difficult for many middle-class Americans to buy homes. The job market was also weak, with unemployment rates exceeding 7%. The country was in the midst of a full-blown crisis.

However, this crisis eventually came to an end, with most economists crediting Federal Reserve Chairman Paul Volcker for using "chemotherapy" to control inflation. He orchestrated two large but brief recessions to cut spending and force inflation to decline. By the late 1980s, inflation began to recede, and the economy began to flourish.

Before Volcker assumed the role of Federal Reserve Chairman on August 6, 1979, the Fed had attempted to curb inflation by raising interest rates slightly, but with little success. As Vice Chairman, Volcker was one of the hawks on the Federal Open Market Committee who advocated for taking significant action. When his predecessor, William Miller, was appointed by President Jimmy Carter as Secretary of the Treasury as part of a cabinet reshuffle, Carter appointed Volcker as Miller's successor.

After several minor rate hikes in his first month, Volcker called a sudden meeting on October 6, 1979, and put the Fed on a new, aggressive monetary policy path. The Fed allowed for a wider range of interest rates, effectively allowing rates to be higher than before, and announced it would regularly adjust policies to respond to changes in the money supply. If the money supply grew too quickly, the Fed would increase its efforts to combat it.

That month, the Fed's interest rate was set at 13.7%; by April, it had soared a full 4 percentage points to 17.6%. In 1981, it was sometimes closer to 20%. Higher interest rates usually reduce inflation by reducing spending, which in turn slows the economy and can lead to mass unemployment. When the Fed raises interest rates, rates on everything from credit card debt to mortgages to commercial loans rise. When it costs more to get a business loan, businesses will contract and hire less; when mortgages are more expensive, people buy fewer homes; when credit card rates are higher, people spend and charge less. The result is less spending and less inflation, but slower growth.

The method took two attempts to achieve the desired effect. Paul Volcker's austerity policies slowed economic activity so much that by January 1980, the U.S. was in recession. But in fact, Fed interest rates began to fall sharply after April, which limited the effectiveness of the Fed's anti-inflation efforts. Thereafter, the Fed tightened policy again and triggered another recession in July 1981. This time it was much more severe than the first; while the unemployment rate peaked at 7.8% during the 1980 recession, it peaked at 10.8% in the middle of the 16-month second Volcker recession in December 1982. This was higher than the peak of the Great Recession in 2009. Throughout the 1980s, this policy regime was known as the "Paul Volcker Shock.

When Paul Volcker left office in August 1987, inflation had fallen from a peak of 9.8% in 1981 to 3.4% after the first Volcker recession failed to depress prices. Since then, persistent low inflation has been the norm; from September 1983 to 2022, U.S. inflation has never exceeded 5 percent.

To his admirers, Paul Volcker is the most successful Fed chairman in history, a bold policy maker who managed to solve the inflation problem even when his actions were extremely unpopular.

One of the people who condemned Paul Volcker's actions was then Senate Majority Leader Robert Byrd, who claimed, after Volcker announced his new efforts in October 1979, that "trying to control inflation or protect the dollar by putting large numbers of people out of work and stopping shifts in our factories and mines is a hopeless policy." As the mortgage market had dried up, builders and carpenters sent two-by-fours and four-by-fours to Volcker's office that they could not use to construct homes. Farmers blockaded the Federal Reserve headquarters with tractors to protest.

Ben Bernanke, who served as Federal Reserve Chairman from 2006 to 2014, kept a two-by-four in his office, he told The New York Times, to represent independence. He personified the idea that Paul Volcker "was going to do some things that were economically necessary but politically unpopular."

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