Before being elevated to Governor, Volcker was an economist with the Federal Reserve from 1952-1957. (AP)
Paul Volcker, who passed away on Sunday (December 8) at age 92, was appointed Chairman of the Board of Governors of the United States Federal Reserve System on August 6, 1979, and given a second term in 1983. He remained in the position until 1987, having served under Presidents Jimmy Carter and Ronald Reagan as the head of the Fed.
He was the economist who helped shape US economic policy during the period of “The Great Inflation” that lasted for roughly two decades starting in the mid-1960s. Before being elevated to Governor, Volcker was an economist with the Federal Reserve from 1952-1957.
“The Great Inflation”
In order to curb inflation in the US economy, Volcker announced measures including restraining the growth of money supply, and pushing up federal funds rates.
During an unexpected press conference that he called on October 6, 1979, Volcker said: “I would emphasize that the broad thrust is to bring monetary expansion and credit expansion…In recent months the money supply has been running, and bank credit has been running, in excess of the amounts we would like to see, in excess of the ranges we have set."
The Great Inflation of 1965-82 was one of the defining macroeconomic events in the US, marked by the abandonment of the global monetary system used during World War II, multiple economic recessions, and wage and price controls.
At the time Volcker took office in 1979, inflation was at roughly 11 per cent, and unemployment at about 6 per cent. His central objective was to bring down inflation. According to Federal Reserve History, Volcker said in early 1980, “My basic philosophy is over time we have no choice but to deal with the inflationary situation because over time inflation and the unemployment rate go together.… Isn’t that the lesson of the 1970s?”.
What Volcker did differently
What Volcker did differently was to emphasis a tighter control on reserves and bring in credit control policies at a time when it was generally accepted that controlling inflation required greater control over the growth rate of reserves and broad money.
Even so, despite these measures, the US economy entered a phase of recession in 1981 and unemployment rose to about 11 percent, but inflation was coming down.
By the end of 1982, the economy entered “a period of sustained growth and stability”. Volcker and the Fed’s commitment to bring down the rates of inflation transformed macroeconomic theory for the future.
“The importance of time-consistent policy choices — policies that do not sacrifice longer-term prosperity for short-term gains — and policy credibility became widely appreciated as necessary for good macroeconomic results,” the Federal Reserve History notes.
Don't miss from Explained | 'Panipat' controversy: Why Maharaja Surajmal matters in Rajasthan