Fed Chairman Volcker’s legacy: High inflation? What’s that?
Ever stop to contemplate how different life was before computers and smartphones? How inefficient and complicated those days seemed? Here’s another thankfully distant memory: high inflation.
Back in the 1970s that paycheck you earned began to dissolve in your fingers the moment you received it because prices constantly rose. Maybe you got a pay raise, but all it did was keep you from slipping backward. Anyone on a fixed income really suffered. For that reason, high inflation was called the cruelest tax.
Americans don’t worry about high inflation anymore, which is a wonderful aspect of the current strong economy. If you want a job, you probably can find one (unemployment is at a 50-year low). Wages are rising at about 3% a year — better yet, with inflation at just 1.6%, your buying power and standard of living are improving.
Much of the credit for breaking the U.S. cycle of high inflation goes to Paul Volcker, the former chairman of the Federal Reserve who died Sunday at age 92.
The workings of an economy are complex, but what Volcker did in the early 1980s was fairly straightforward and exceedingly brave: He took on inflation by squeezing hard on economic activity, causing two recessions and scaring the bejesus out of the White House, Congress and business interests, who pressured him to moderate his tactics. Angry auto dealers mailed Volcker sets of car keys. Farmers marched on Washington.
It was a weird time. The inflation rate when Volcker took the Fed chief job in mid-1979 was about 11%. Americans were obsessed with trying, largely in vain, to get ahead of inflation. Employees demanded raises, which employers granted and then raised prices to compensate — and on it went, a psychological game that increased neither productivity nor wealth.
Previous Fed chiefs understood bold action was required, but they lacked the nerve. Volcker didn’t. He was 6-foot-7, smoked cheap cigars and for some reason didn’t give a flying Fed. He was appointed by President Jimmy Carter and probably cost Carter reelection. President Ronald Reagan was frustrated with Volcker, too, but in the end could take credit for a stronger economy.
What Volcker did was clamp down hard on the money supply, causing interest rates to spike as investment dollars became scarce. His daring trick was to let rates rise as high as the market would bear, and oh boy, did rates skyrocket: The prime rate for bank loans peaked at 21.5% in late 1980. Imagine trying to buy a house with mortgage rates through the roof at 18%. One business executive demanded answers from Volcker: “Why are you doing this? Why do interest rates have to be so high? You’re killing the housing industry and you’re killing the auto industry. Nobody can buy anything on credit.” Volcker’s answer was he had to get people’s attention focused on the dangers of inflation. Volcker was blamed, not incorrectly, for causing thousands of Americans to lose their jobs. In service to the bigger mission, he was OK with wearing that jacket.
Volcker’s harsh medicine worked: It broke the fever of inflationary expectations and, better yet, recalibrated the economy to operate more efficiently, with greater productivity, for the long haul. By 1986, inflation was below 2%.
Looking back at that era’s Tribune editorials, we can see the Editorial Board’s early trepidation turn quickly to support: “The escape route from the pain of inflation to the pleasure of noninflationary growth runs through another valley of pain,” we wrote. By 1987 and the end of Volcker’s reign, we joined the country in praising “Paul the Lion-Hearted.”
Volcker earned that title, and the enduring thanks of Americans who no longer need obsess about high inflation.