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Larry Edelman

Inflation is no longer a scourge. Thank Paul Volcker

Former Federal Reserve chief Paul Volcker instituted a series of painful but ultimately successful moves that ushered in a long period of prosperity.James K. W. Atherton/Washington Post /File 1980

There was a time when inflation was a scourge that wreaked havoc on the economy and the finances of Americans — rich, poor, and middle class alike.

Prices spiraled upward, as did unemployment, and growth sputtered. Things were so bad that Gerald Ford, when he assumed the presidency in 1974, declared inflation “public enemy number one” and launched a much lampooned — and failed — campaign dubbed “Whip Inflation Now.”

These days, wealth-destroying inflation has gone the way of rotary telephones and Datsuns, and we have Paul Volcker to thank.

Volcker, who died Sunday at age 92, is credited with taming inflation after taking over as chairman of the Federal Reserve in August 1979 with a series of painful but ultimately successful moves that ushered in a long period of prosperity. Volcker’s steadfastness in the face of harsh criticism from politicians and the public set a new standard for Fed independence.

“He was absolutely the most amazing force in terms of public good, and doing tough things when they needed to be done,” said Cathy Minehan, who worked at the Federal Reserve Bank of New York when Volcker was its president, and went on to become president of the Boston Fed from 1994 to 2007. “We would not be where we are — with the economic progress we’ve enjoyed since the 80s — were it not for his courage.”


These days, the Fed is struggling to push inflation up to its 2 percent annual target. A little inflation is good because it can help spur consumer demand and spending, and business activity.

But when Volcker became Fed chairman, tapped by Jimmy Carter in a shakeup of his economic team, the country was a mess.

The 1970s had seen recessions, oil shocks, price controls, and a combination of surging prices and stagnant growth known as stagflation.


Consumer prices surged by more than 11 percent in 1979, up from 6.5 percent two years earlier.

With their purchasing power decreasing rapidly, Americans spent rather than saved, and investment dried up. The average rate on a 30-year fixed mortgage hit 12.9 percent that year.

“Before Volcker, there were always excuses why inflation was so high that let the Fed off the hook,” said Peter Ireland, an economics professor at Boston College. “There was intense political pressure on the Fed to help the economy through the rough times . . . So the Fed was too easy for too long.”

In October 1979, Volcker held a rare Saturday night news conference to announce drastic measures aimed at regaining control of the economy. The Fed raised interest rates sharply, changed bank requirements to slow the rate of lending, and said it would shrink the money supply.

Overnight the easy Fed became the tight Fed. It was economic shock therapy.

And it was painful. The jobless rate climbed to more than 10 percent and the country endured two recessions. But Volcker’s plan eventually stopped the cycle of rising prices. The consumer price index fell to 3.2 percent in 1983 from a peak of 13.5 percent in 1980.

“He broke the back of inflation forever,” Ireland said.

But Volcker’s war against inflation wasn’t applauded by everyone.

“He’s no hero to me,” John Spooner, a veteran Boston money manager and author, said in an e-mail. “The overkill of 20 percent interest rates in the 70s and early 80s . . . Try paying 20 percent on a mortgage.”


Standing 6 feet 7 inches and frequently smoking a cigar, Volcker was an imposing figure, but friends and colleagues knew him as a down-to-earth, even shy person who liked nothing better than to get away to go fly fishing. He never dismissed the economic pain he inflicted for the greater good.

“He knew he had to present this strong image,” said Richard Syron, who worked as Volcker’s assistant from 1980 to 1982 and went on to run the Boston Fed from 1989 to 1994. “But at the same time he was really bothered by how it affected people.”

Syron recalled attending an international meeting with Volcker in Switzerland where his boss spent long hours meeting with top finance officials from around the world. After running out of clean shirts, Volcker asked Syron to find out how much their hotel was charging for laundry.

When Syron told him it was $6 a shirt, Volcker said, “I am not going to spend $6 of the taxpayers’ money. I’ll wash it myself.”

The current Boston Fed president, Eric Rosengren, praised Volcker for his work on making the US banking system safer.

“He was also a vocal proponent of the importance of effective bank supervision and financial regulation, with the goal of avoiding financial excesses that could impede sustainable longer-term economic growth,” Rosengren said in a statement.

Indeed, Spooner, the money manager, gave Volcker credit for pushing the Obama administration to back what became known as the Volcker rule. The postfinancial crisis regulation barred big banks from using depositors’ money to make bets for the banks’ own accounts.


What has stuck with many of Volcker’s friends was his decency and humanity. At 89 and just back from a long overseas trip, he traveled to Boston to visit Gerald Corrigan, a former president of the New York Fed who also served as a special assistant to Volcker at the Fed in Washington.

Corrigan, suffering from Alzheimer’s, couldn’t really carry on a conversation, said Minehan, his wife, but Volcker came anyway. He had been Corrigan’s best man when he married Minehan in 1997.

“That was just how he was,” said Minehan. “The world has lost such a great man.”

You can reach me at larry.edelman@globe.com and follow me on Twitter @GlobeNewsEd.