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How Former Fed Chairman Paul Volcker Tamed Inflation — Maybe For Good


It may finally happen this week. The Federal Reserve could raise interest rates for the first time in almost a decade. If that happens, the increase will probably be very small - from zero to just one quarter of 1 percentage point. The Fed has not always done things so gently. David Kestenbaum from our Planet Money podcast has this story of former Fed chair Paul Volcker. He pushed interest rates up so high it threw the country into a deep recession. And he did that on purpose.

DAVID KESTENBAUM, BYLINE: Bill Silber, an economist at NYU, has written a book about Volcker, and he remembers the first time he met him. It was at a conference in the 1970s.

BILL SILBER: And in walks this really big guy.

KESTENBAUM: Six feet seven inches, probably smoking a cheap cigar. Volcker sat down on a couch, put his feet up on a table. At the time, Volcker ran the New York branch of the Fed. But what Silber remembers is this tiny little detail - Volcker's socks. They were all scrunched down.

SILBER: And I remember, my mother said don't ever let your socks fall down below your ankles. And here was the president of the Federal Reserve Bank of New York who really didn't care.

KESTENBAUM: That attitude of not caring, it would serve him well. Soon after in 1979, Volcker got a big promotion. He became chairman of the Federal Reserve, a person with the power to fix or really mess up the entire economy. Volcker had one huge problem to tackle - inflation. Prices had been rising at 9 percent, 11 percent a year, which meant if you had saved a pile of money for retirement, that pile bought less and less.

SILBER: The inflation was really debilitating. You had to worry about buying things before they went up in price.

KESTENBAUM: Do you remember that happening with you? Did you buy anything for that reason?

SILBER: I think I bought a house.

KESTENBAUM: People buying houses because they think they will go up in price - that is not good. Volcker believed he had the key to stopping inflation. The Fed's job was to control how much money was in the economy. And Volcker thought it had simply printed too much. So shortly after he took office, he made a big announcement. The Fed was going to tightly restrict the amount of money in the economy. The result - not what he had hoped. The thing he was trying to fix, inflation, got worse. It went from 12 percent up to 14 percent. And meanwhile, the economy started to crash. When you restrict the amount of money in the economy, it gets harder for people and businesses to get loans. So now we had inflation and a recession. Millions of people lost their jobs. Back then, Robert Krulwich was NPR's business correspondent. Today, you may know him from the show "Radiolab." Krulwich decided the whole drama was worthy of an opera. Here is Robert on NPR in 1979 doing his fake announcer voice.


ROBERT KRULWICH: There aren't very many operas that deal exclusively with the subject of interest rates, but this one I think is the most magnificent of all.

KESTENBAUM: And then in the middle of the opera, Paul Volcker.


UNIDENTIFIED SINGER: (Singing) (Unintelligible).

PAUL VOLCKER: Ladies and gentlemen, we are face to face...

UNIDENTIFIED SINGER: (Singing) (Unintelligible).

VOLCKER: ...With economic difficulties really unique in our experience.

UNIDENTIFIED SINGER: (Singing) (Unintelligible).

KESTENBAUM: Normally, when a recession happens there is not one person you can be angry at. This time there was - Paul Volcker. Mortgage interest rates rose to 18 percent. Homebuilders, upset that demand for new homes had plunged, mailed pieces of wood, two-by-fours, to the Fed. A congressman called for Volcker's impeachment and reporters had questions.


UNIDENTIFIED MAN: How high an unemployment rate are you prepared to accept in order to break inflation?


VOLCKER: I (laughter) it kind of puts me in a position of I accept or unaccept or whatever. Let me - you know, my basic philosophy is over time we have no choice but to deal with this inflationary situation.

KESTENBAUM: In public, Volcker was confident, but in private, less confident. Volcker today is 88 years old. We went to talk to him.

Did you ever have doubts in there?

VOLCKER: I never had a doubt in my life (laughter). Of course - of course - of course you worry.

KESTENBAUM: He worried. Volcker mentioned those Robert Krulwich stories, said they brightened his day.

VOLCKER: This guy Robert Krulwich, yes, Robert Krulwich would cheer me up. (Laughter) It's true, no question about it.

KESTENBAUM: In the textbooks, once you stop printing so much money inflation should go away. But it was taking a long time. One reason it was taking so long - people did not believe inflation would go down. Part of the problem was in our heads. If people believe there's going to be inflation, then they go to their bosses and they say, you got to give me a raise to keep up with inflation. Employers say, OK, and to pay for those higher wages they raise prices for whatever they sell. There you go - inflation. It's a self-fulfilling prophecy. Volcker stuck to his guns, limited the amount of money in the economy. And by the end of 1981, inflation finally began to drop - 9 percent, then 6 percent, 4 percent. Bill Silber at NYU says most economists regard Volcker as a hero. But there are things people wonder about.

SILBER: There are people who say you didn't have to really put the screws to the economy the way you did. You could have done it more slowly.

KESTENBAUM: What do you say to that, that maybe it could have been done more gently, without as much pain?

SILBER: I think it's possible. The question is would it have gotten fixed as quickly and as permanently?

KESTENBAUM: We asked Volcker about this.

Do you have any regrets?

VOLCKER: Regrets about what? I got regrets every day I'm sitting here. I don't have any regret that we carried out a fight on inflation.

KESTENBAUM: That you carried out the fight against inflation.


KESTENBAUM: No regrets. Inflation went away, and it has stayed low for over three decades now. That is despite the fact that the Fed threw an extra $3 trillion into the economy after the financial crisis. Bill Silber says one reason there is no inflation - people believe there will not be inflation, thanks in part to Paul Volcker. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.

David Kestenbaum is a correspondent for NPR, covering science, energy issues and, most recently, the global economy for NPR's multimedia project Planet Money. David has been a science correspondent for NPR since 1999. He came to journalism the usual way — by getting a Ph.D. in physics first.