As you recall, Daryl Jones’ posted on Volcker from 9/27 (Eye On Leadership: Volcker As Bailout Czar!) in which we laid our support behind “the 6’7, cigar chomping Princeton graduate” to lead financial policy under the new administration. While the Secretary of the Treasury went to Timothy Geithner, it is our hope that the experienced Volcker will be utilized, despite sitting outside Obama’s inner circle of advisors.
Volcker, who is credited for ending stagflation in the 1980s, played an integral role in turning around poor market conditions, recessionary growth, and rampant inflation. Volcker started his career in 1952 when he joined the Fed Bank of New York as a full-time economist. He left that position in 1957 to become a financial economist with the Chase Manhattan Bank, which he held until joining the US Treasury Department in 1962 as director of financial analysis. A year later he was promoted to deputy under-secretary of monetary affairs before returning to Chase Manhattan Bank as vice president and director of planning in 1965.
From 1969 to 1974 Volcker served as under-secretary of the Treasury for international monetary affairs. He played an integral role in 1971 repealing the 1944 Bretton Woods Agreements that pegged currency exchange rates to gold, crafting a new system in which the US dollar became the “reserve currency”.
A Democrat, Volcker was inaugurated by President Jimmy Carter on July 25, 1979 as the new Fed chairman. Known to be conservative, he fit the bill as the bright and able candidate from Wall Street, and made it his priority to end stagflation (a period of inflation with slow to zero growth). On October 4th September PPI showed a rise of 17% y-o-y, the largest increase in 5 years. Called to action, he inherited an expanding money supply that caused a weak dollar and a soaring trade deficit.
Taking charge in October Volcker cut the money supply by increasing the federal funds rate to a record 12% to clobber an inflation rate slightly lower than 9%. Into 1980, interest rates continued to rise and the economy sank into recession. Republican Ronald Reagan won the election in November 1980. By the middle of 1981 inflation topped 9.7% and dropped to 9% at year’s end. By 1983 Volcker’s constraint of the money supply showed positive signs. Despite unemployment of 9.7% in 1982, CPI for all of 1982 fell to 3.8%, from 13.3% in 1979 and the beast of inflation had been beaten.
We applaud President Elect Obama’s choice in Volcker. As we have outlined above, he is experienced, willing to make tough decisions against political winds, and respected far beyond partisan association.