Paul Volker’s accidental success

A short article in the December 20th edition of THEWEEK magazine shows how Paul Volker accidentally succeeded in curing “nearly a decade of runaway inflation and weak growth.”

The central banker who whipped inflation
Appointed chairman of the Federal Reserve by President Carter in 1979 after nearly a decade of runaway inflation and weak growth, Paul Volcker set out to cure the nation’s malaise through a program of economic “shock therapy.”

Volcker slashed the supply of money flowing into the economy, sending interest rates soaring to just over 20 percent at their peak.

The U.S. tumbled into a deep recession, with unemployment peaking at 10.8 percent. Homebuilders mailed Volcker unused two-by-fours and protesting farmers circled the Federal Reserve building with tractors.

But by 1983, inflation had fallen from 12 percent to below 4 percent, allowing Volcker to take his foot off the brakes.

“I’m not sorry about it,” he said last year. “I don’t know any other course of action that would’ve been politically feasible or economically feasible.”

What Volcker did not understand is that economic growth requires money supply growth so his cut of the money supply caused the recession and did nothing to cure the inflation.

Recessions (vertical bars) are introduced by decreases in federal deficit spending growth (black line) and are cured by increases in deficit spending growth.
Raising interest rates (red line) makes money more valuable by increasing the demand for money (This is called “strengthening the dollar.”) By definition, more valuable money is anti-inflationary (blue line).
Contrary to popular wisdom, lowered interest rates (orange line) do not increase economic growth (purple line). In fact, the opposite seems to be true. Higher interest rates are economically stimulative because they require the federal government to pump more interest (growth) money into the economy.

Volcker believed the economy was caught in a vicious cycle, with Americans borrowing, spending, and demanding ever higher wages to keep ahead of inflation, which in turn caused prices to rise.

The blue line shows the Consumer Price Index for all Items. The red line shows the Consumer Price Index just for food and energy.  Shortages of food and/or energy, not excess money supply, are what cause inflations.

Contrary to popular wisdom, inflations are caused by shortages, usually shortages of food and/or energy, not by excess money creation or by the so-called “vicious cycle.”

Volcker worked under the false belief that inflation is the opposite of recession, so to stop inflation one must cause a recession. But the opposite of inflation is deflation.

Commodity prices rise not because of too much demand, but rather because of insufficient supply. Curing an inflation requires curing the shortages of food and/or energy, which generally requires more government spending, not less.

Rather than constricting the money supply, Volker and Congress financially should have helped farmers to grow more and helped oil drillers to drill more. Increasing the food and energy supply would have ended the inflation without causing a recession. Rathers, this approach would have stimulated economic growth.

His success tackling inflation “laid the foundations for governments around the world to give greater independence to their central banks.”

“For a man who understood the mysteries of money more deeply than almost anyone, Volcker had little use for the trappings of wealth,” said The Washington Post.

Unfortunately, the “foundations for governments around the world” are misleading examples, which like austerity, debt reduction, and the euro, demonstrate ignorance of Monetary Sovereignty.

Reappointed Fed chair by President Reagan, he declined a third term amid tensions with the administration over financial deregulation, which he adamantly opposed.

Serving on President Obama’s Economic Recovery Advisory Board in the wake of the 2008 financial crash, “he was highly critical of banks’ risk-taking,” said The Times (U.K.).

The former Fed boss lent his name to the Dodd-Frank financial reform bill’s “Volcker Rule,” which banned taxpayer-protected banks from engaging in speculative trading with their customers’ deposits.

But in a 2018 interview, Volcker said he doubted whether a Washington that had lost public trust and was now stuffed with lobbyists and lawyers would be up to tackling the next crisis. “We’re in a hell of a mess in every direction.”

In this, Volcker was correct. Banks and lobbyists do not operate in the best interests of America. They operate with the profit motive in the best interests of themselves.

That is why all banks should be federally owned, to remove the profit motive and to regain federal control over the money supply. (See Ten Steps to Prosperity, Step #9, below.)

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell


The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.


2 thoughts on “Paul Volker’s accidental success

  1. Indeed, in terms of inflation control, taxes are a blunt instrument, while interest rates are a razor-sharp, double-edged sword. In the short run, higher interest rates do indeed prevent and cure “demand-pull” inflation, while in the longer run, leaving interest rates too high for too long increases “cost-push” inflation, as Canada apparently learned the hard way in the 1980s. In the short run the former effect outweighs the latter, in the longer run the reverse is true.


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