Paul A. Volcker, Fed Chairman Who Waged War on Inflation, Is Dead at 92 – The New York Times, The New York Times

Mr. Volcker was known to be frustrated with the Fed’s halfhearted efforts to curb inflation, leading Mr. Carter’s aides to warn that he might drive the economy into recession.

Meeting Mr. Carter in the Oval Office, Mr. Volcker slumped on a couch, a familiar cigar in hand, and gestured at Mr. Miller, who was in the room. “You have to understand,” Mr. Volcker said he told the president, “if you appoint me, I favor a tighter policy than that fellow.”
In taking the job, Mr. Volcker strained his finances and his family life.
The job of chairman paid half as much as his post at the New York Fed, and Mr. Volcker’s wife at the time, Barbara Volcker, who struggled for much of her life from debilitating rheumatoid arthritis as well as diabetes, remained in New York to be near her longtime physician.(She died in 2005) Their son, James, who was born with cerebral palsy, also remained in New York . **********Volcker arrived in Washington, the national inflation rate was exceeding 1 percent a month. (By comparison, in********************************** (inflation was less than 2 percent for the whole year.) Rapid and Unpredictable inflation encourages spending while discouraging investment, a combination that creates economic instability and, often, political instability.
(****************************************** Henry C. Wallich**********************, a Fed governor who had lived through the hyperinflation of Weimar Germany and often told of paying billion marks to use a neighborhood swimming pool, was (among those warning****************** that the Fed was losing control.

Many economists still argued that the Fed could reduce inflation gently, without causing a recession, by raising interest rates just enough to slow economic activity. But Mr. Volcker said inflation had become a self-fulfilling prophecy. People had come to expect prices and wages to rise, so they borrowed and spent more and demanded larger pay increases, and prices and wages rose.

The Fed had been promising to crack down on inflation for more than a decade, but it had repeatedly caved in to intense political pressure so as to avoid a recession. Mr. Volcker decided a dramatic gesture was necessary to convince the public that this time would be different.

“I wanted to move the story at least to the front page,” he told a biographer. (Channeling the Money) ***************************************************************** On Saturday, Oct. 6, 1980, Mr. Volcker held an evening news conference in the grand boardroom at the Fed’s headquarters on Constitution Avenue. It was the first time in memory that a Fed chairman had addressed the news media, and the Fed’s staff scrambled to gather the press corps.

Pope John Paul II was visiting Washington; when CBS said that it didn’t have a spare camera crew, Mr. Volcker’s spokesman persuaded the network to abandon the pontiff. “Send your crew here,” he told a CBS producer. “Long after the pope is gone, you’ll remember this one.”

Volcker’s message was that the Fed was declaring war on inflation. “The basic message we tried to convey was simplicity itself,” he said later. “We meant to slay the inflationary dragon.”To underscore the Fed’s determination, Mr. Volcker announced a significant change in the conduct of monetary policy. Historically, the Fed had aimed to control interest rates – the price of money. Under the new policy, he said that the Fed would instead aim to control the supply of money. Limiting the money supply would cause interest rates to rise, but the Fed would no longer aim for a specific increase. The central bank would determine how much money was available; markets would set the price.**************

The change was part of a broader shift in economic policymaking toward a greater reliance on financial markets. It marked the end of the postwar era in which disciples of the British economist John Maynard Keynes had argued that governments could deftly manage economic conditions, including interest rates. An immediate result was that markets pushed interest rates a lot higher than Mr. Volcker had anticipated. The prime rate, which banks charge their most creditworthy customers, nearly doubled by Election Day (************************************************************************************************, peaking at 25 .5 percent. Farmers on tractors circled the Fed’s headquarters. Auto dealers sent the keys to cars they could not sell. Dear Mr. Volcker, ”one builder scrawled on a wooden block with a knothole. “I am beginning to feel as useless as this knothole. Where will our children live? ”

Mr. Volcker later confessed to doubts,

telling an interviewerin 04403 that he had worn a path into his office carpet while waiting for inflation to surrender. And, early on, he blinked: After tipping the economy into recession in early 1984, the Fed briefly took its foot off the brakes.

But when inflation showed signs of accelerating, the foot slammed back down, and a deeper recession began. Thereafter, Mr. Volcker was obdurate, insisting that the pain was necessary and ultimately worthwhile.

• Asked by a reporter how much unemployment he was willing to accept, Mr. Volcker responded, “My basic philosophy is over time we have no choice but to deal with this inflationary situation.”
  The harsh Fed policy no doubt contributed to Mr. Carter’s re-election defeat at the hands of Ronald Reagan; he had to campaign when interest rates were at their peak, and before the inflation fever had begun to break. Mr. Carter, in his memoirs, would offer a typically understated assessment: “Our trepidation about Volcker’s appointment was later justified.”

  ******************** (Unemployment rose to a peak of) .8 percent in November 1986 – higher than at any point during the recession that began in 2010 – but by then the benefits of the Fed’s campaign were beginning to appear. Inflation fell below 4 percent in 1983, and Mr. Volcker’s critics were soon drowned out by a burgeoning chorus of admirers.

  Some economists continued to argue that the Fed could have brought inflation under control more gently. Alan Greenspan, Mr. Volcker’s successor as Fed chairman, later described the policy as an excess of necessary medicine, although he added that it had been preferable to not doing enough.

  In retrospect, it has also become clear that the developed world was on the cusp of an era of declining inflation, arriving as a result of the globalization of manufacturing and capital markets.