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1979 Paul Volcker Appointed Chairman of the Federal Reserve

SUMMARY:

During Paul Volcker's tenure as its Chairman (1979-1987) the U.S. Federal Reserve limited the rate of growth in the U.S. money supply and increased short-term interest rates. These policies are widely credited with bringing down inflation and, after a recession in the early 1980s, leading to a prolonged period of economic growth.

DESCRIPTION:

During the 1970s inflation became a regular feature of American life, with yearly increases in the consumer price index (CPI) regularly exceeding 10%. As the economist J. Bradford Delong has pointed out, this marked the most sustained period of peacetime inflation in U.S. history. Scholars disagree about the precise causes of the inflation of the 1970s, but most conclude that external supply shocks such as the 1973-74 oil crisis and large levels of government spending during the 1960s and 1970s were instrumental in driving up wages and prices.

American policymakers were slow to grasp the nature of the inflation of the 1970s, and most steps taken to maintain price stability during the decade, such as Richard Nixon's imposition of wage and price controls in 1971, proved ineffective. Although inflation came down slightly in the mid 1970s, prices soon began to accelerate to the point that, by the end of the decade, curbing inflation replaced reducing unemployment as the Carter administration's primary economic priority.

To this effect, in July 1979 Jimmy Carter appointed Paul Volcker to succeed G. William Miller as Chairman of the U.S. Federal Reserve. Although there remains some debate about why Carter decided on Volcker, who was then serving as President of the Federal Reserve Bank of New York, the move signaled Carter's sanctioning of a disinflationary monetary policy.

Volcker's initial strategy in this regard was to seek to reduce the supply of money in the American economy. Soon after taking office in August 1979 he instituted a policy of monetary targeting in which the Federal Reserve focused on directly limiting the amount of money in circulation through tighter control over private bank reserves. This marked an important shift in Fed strategy, which to that point had largely concentrated on raising or lowering interest rates through its open market operations. However, it was not until 1981, when the Fed refused to loosen monetary policy even through the economy was mired in a recession, that inflation began to come down.

FURTHER INFORMATION:

W. Carl Biven, Jimmy Carterís Economy: Policy in an Age of Limits (University of North Carolina Press, 2002).

J. Bradford DeLong, "Americaís Peacetime Inflation: The 1970s," in Christina D. Romer and David H. Romer, eds., Reducing Inflation: Motivation and Strategy (NBER and University of Chicago Press, 1997).

Marvin Goodfriend and Robert G. King, "The Incredible Volcker Disinflation," Journal of Monetary Economics 52 (2005): 981-1015.

William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (Simon & Schuster, 1987).

Joseph P. Treaster, Paul Volcker: The Making of a Financial Legend (John Wiley & Sons, 2004).

PBS, "Commanding Heights," interview with Paul Volcker, September 26, 2000: http://www.pbs.org/wgbh/commandingheights/shared/minitext/int_paulvolcker.html

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