Paul Volcker, chairman of the Federal Reserve from 1979 to 1987, has died at the age of 92.

Volcker was nominated as Fed chair in the late 1970s by Jimmy Carter at a time when price inflation was roaring in the double digits.  It is by far the highest price inflation the U.S. has ever seen in our modern day.  Although it started while the war in Vietnam was still going on, the worst of it was during a relatively peaceful period.

It is probably no coincidence that the worst of the inflation happened not long after Nixon closed the last remnants of the international gold standard in 1971. The dollar was no longer redeemable in gold by foreign governments.  This meant that the Fed was free to create money out of thin air, or so they thought.

The problem is that the price inflation was due to the Fed running the printing press (or its digital equivalent).  The powers-that-be can blame high oil prices or corporate greed or whatever they want, but the price inflation will stop if you stop creating money out of thin air.

The tables were briefly turned on the establishment.  The roaring inflation of the 1970s put the U.S. dollar at major risk.  If the inflation continued, then it would eventually cease to be the world’s reserve currency.  The U.S. establishment would lose much of its power and the empire with it.  Even the Fed members would lose power to control things.  They would also be looking at pensions that aren’t worth much.

I have no idea how much, if any, say that Jimmy Carter had in bringing Volcker to the Fed. But I believe he was put there to do exactly what he did.  He allowed interest rates set by the Fed to rise, and he slammed on the monetary brakes.  The monetary inflation stopped, at least for a while, and the drop in price inflation followed.

This created back-to-back recessions in the early 1980s.  It helped get Reagan the presidency.  It deflated some asset bubbles, especially in gold and silver. The high yields on bonds finally started to come down.  If you invested in bonds in 1980 and held for a while, you did well.

This was probably the last time that the U.S. economy had a good cleansing.  Every recession since then has been met with more monetary inflation.  The corrections are not allowed to fully correct.  The resources that were misallocated instantly start to get misallocated again.  If anything set the stage for prosperity in the 1980s, it wasn’t deregulation or income tax cuts. The primary factor was the Fed allowing a correction to take place.

Paul Volcker, the Man

Some libertarians could argue that we would have been better off if the U.S. dollar had been destroyed.  There are certainly arguments to be made, as the U.S. empire would not be as possible if that had happened.

On net, I think the monetary tightening was positive.  No society wants to go through hyperinflation, which destroys the economy and the culture.  Does anyone think Venezuela is better off for having hyperinflation?

And hyperinflation is ultimately what Americans faced in the late 1970s if nothing was done about it. When I say “nothing”, I mean allowing the status quo of having the Fed creating new money like crazy.

Volcker was the right man at the right time.  I don’t know if he was told what to do by others, but he basically did the right thing.  Sure, I wish he had put the dollar back on a gold standard.  Better yet, I wish he had ended the Fed and allowed the market to decide on the form of money.  But aside from libertarian arguments, Volcker did the right thing when he stepped in as Fed chair.

Volcker was a slice of sanity during a time of mostly insanity.  Most Americans today can’t fathom getting a home mortgage with an interest rate over 10%.  Aside from health insurance premiums, education, and some real estate, it is hard to imagine prices going up over 10% per year.  This would be a doubling of prices in just over 7 years.

Paul Volcker was a tall man of 6 feet, 7 inches.  He smoked cigars and was a presence.  From what I have heard, he was a decent man.  Ron Paul has said favorable things about Volcker, at least from a personal standpoint.  He has said that Volcker was friendly and willing to talk.

It’s hard for me to praise a central banker too much.  Perhaps it is a matter of comparison.  Although Greenspan seemed favorable towards gold and liberty in the 1960s, I am a bigger fan of Volcker.  I consider Greenspan to be a sellout.  Or maybe he was a social climber as Ayn Rand said, and he just said whatever advanced him the most at the time.  Either way, Greenspan knew better, so I am not forgiving for his horrible time as Fed chair.

If we ever get another time that is like the 1970s, it will be interesting if someone like Volcker (the right person at the right time) will show up and be nominated.  I would rather that than end up like Venezuela.