Paul Volckers Long Shadow
former Fed Chairman Paul Volcker
Paul Volcker. (Third Way Think Tank / CC BY-NC-ND 2.0)
Former Federal Reserve Chairman Alan Greenspan called Paul Volcker the most
effective chairman in the history of the Federal Reserve. But while
Volcker, who passed away Dec. 8 at age 92, probably did have the greatest
historical impact of any Fed chairman, his legacy is, at best,
controversial.
He restored credibility to the Federal Reserve at a time it had been
greatly diminished, wrote his biographer, William Silber. Volckers
policies led to what was called the New Keynesian revolution, putting the
Fed in charge of controlling the amount of money available to consumers and
businesses by manipulating the federal funds rate (the interest rate at
which banks borrow from each other). All this was because Volckers shock
therapy of the early 1980s raising the federal funds rate to an unheard
of 20% was credited with reversing the stagflation of the 1970s. But did
it? Or was something else going on?
Less discussed was Volckers role at the behest of President Richard Nixon
in taking the dollar off the gold standard, which he called the single most
important event of his career. He evidently intended for another form of
stable exchange system to replace the Bretton Woods system it destroyed, but
that did not happen. Instead, freeing the dollar from gold unleashed an
unaccountable central banking system that went wild printing money for the
benefit of private Wall Street and London financial interests.
The power to create money can be a good and necessary tool in the hands of
benevolent leaders working on behalf of the people and the economy. But like
with the Sorcerers Apprentice in Disneys Fantasia, if it falls in the
wrong hands, it can wreak havoc on the world. Unfortunately for Volckers
legacy and the well-being of the rest of us, his signature policies led to
the devastation of the American working class in the 1980s and ultimately
set the stage for the 2008 global financial crisis.
The Official Story and Where It Breaks Down
According to a Dec. 9 obituary in The Washington Post:
Mr. Volckers greatest historical mark was in eight years as Fed chairman.
When he took the reins of the central bank, the nation was mired in a
decade-long period of rapidly rising prices and weak economic growth. Mr.
Volcker, overcoming the objections of many of his colleagues, raised
interest rates to an unprecedented 20%, drastically reducing the supply of
money and credit.
The Post acknowledges that the effect on the economy was devastating,
triggering what was then the deepest economic downturn since the Depression
of the 1930s, driving thousands of businesses and farms to bankruptcy and
propelling the unemployment rate past 10%:
Mr. Volcker was pilloried by industry, labor unions and lawmakers of all
ideological stripes. He took the abuse, convinced that this shock therapy
would finally break Americans expectations that prices would forever rise
rapidly and that the result would be a stronger economy over the longer run.
On this he was right, contends the author:
Soon after Mr. Volcker took his foot off the brake of the U.S. economy in
1981, and the Fed began lowering interest rates, the nation began a quarter
century of low inflation, steady growth, and rare and mild recessions.
Economists attribute that period, one of the sunniest in economic history,
at least in part to the newfound credibility as an inflation-fighter that
Mr. Volcker earned for the Fed.
That is the conventional version, but the stagflation of the 1970s and its
sharp reversal in the early 1980s appears more likely to have been due to a
correspondingly sharp rise and fall in the price of oil. There is evidence
this oil shortage was intentionally engineered for the purpose of restoring
the global dominance of the U.S. dollar, which had dropped precipitously in
international markets after it was taken off the gold standard in 1971.
The Other Side of the Story
How the inflation rate directly followed the price of oil was tracked by
Benjamin Studebaker in a 2012 article titled Stagflation: What Really
Happened in the 70s:
We see that the problem begins in 1973 with the 73-75 recession thats
when growth first dives. In October of 1973, the Organisation of Petroleum
Exporting Countries declared an oil embargo upon the supporters of Israel
western nations. The 73-75 recession begins in November of 1973,
immediately after. During normal recessions, inflation does not rise it
shrinks, as people spend less and prices fall. So why does inflation rise
from 73-75? Because this recession is not a normal recession it is
sparked by an oil shortage. The price of oil more than doubles in the space
of a mere few months from 73-74. Oil is involved in the manufacturing of
plastics, in gasoline, in sneakers, its everywhere. When the price of oil
goes up, the price of most things go up. The spike in the oil price is so
large that it drives up the costs of consumer goods throughout the rest of
the economy so fast that wages fail to keep up with it. As a result, you get
both inflation and a recession at once.
Terrified by the double-digit inflation rate in 1974, the Federal Reserve
switches gears and jacks the interest rate up to near 14%.
The economy
slips back into the throws of the recession for another year or so, and the
unemployment rate takes off, rising to around 9% by 1975.
Then, in 1979, the economy gets another oil price shock (this time caused by
the Revolution in Iran in January of that year) in which the price of oil
again more than doubles. The result is a fall in growth and inflation
knocked all the way up into the teens. The Federal Reserve tries to fight
the oil-driven inflation by raising interest rates high into the teens,
peaking out at 20% in 1980.
[B]y 1983, the unemployment rate has peaked at nearly 11%. To fight this,
the Federal Reserve knocks the interest rate back below 10%, and meanwhile,
alongside all of this, Ronald Reagan spends lots of money and expands the
state in 82/83.
Why does inflation not respond by returning? Because oil
prices are falling throughout this period, and by 1985 have collapsed
utterly.
The federal funds rate was just below 10% in 1975 at the height of the early
stagflation crisis. How could the same rate that was responsible for
inflation in the 1970s drop the consumer price index to acceptable levels
after 1983? And if the federal funds rate has that much effect on inflation,
why is the extremely low 1.55% rate today not causing hyperinflation? What
Fed Chairman Jerome Powell is now fighting instead is deflation, a lack of
consumer demand causing stagnant growth in the real, producing economy.
Thus it looks as if oil, not the federal funds rate, was the critical factor
in the rise and fall of consumer prices in the 1970s and 1980s.
Stagflation was just a predictable result of the shortage of this
essential commodity at a time when the country was not energy-independent.
The following chart from Business Insider Australia shows the historical
correlations:
a chart about the price of crude oil
The Plot Thickens
But theres more. The subplot is detailed by William Engdahl in The Gods of
Money(2009). To counter the falling dollar after it was taken off the gold
standard, U.S. Secretary of State Henry Kissinger and President Nixon held a
clandestine meeting in 1972 with the Shah of Iran. Then, in 1973, a group of
powerful financiers and politicians met secretly in Sweden to discuss how
the dollar might effectively be backed by oil. An arrangement was
finalized in which the oil-producing countries of OPEC would sell their oil
only in U.S. dollars, and the dollars would wind up in Wall Street and
London banks, where they would fund the burgeoning U.S. debt.
For the OPEC countries, the quid pro quo was military protection, along with
windfall profits from a dramatic boost in oil prices. In 1974, according to
plan, an oil embargo caused the price of oil to quadruple, forcing countries
without sufficient dollar reserves to borrow from Wall Street and London
banks to buy the oil they needed. Increased costs then drove up prices
worldwide.
The story is continued by Matthieu Auzanneau in Oil, Power, and War: A Dark
History:
The panic caused by the Iranian Revolution raised a new tsunami of inflation
that was violently unleashed on the world economy, whose consequences were
even greater than what took place in 1973. Once again, the sharp, unexpected
increase in the price of crude oil instantly affected transportation,
construction, and agriculture confirming oils ubiquity.
The time of
draconian monetarist policies advocated by economist Milton Friedman, David
Rockefellers protégé, had arrived. The Bank of Englands interest rate was
around 16% in 1980. The impact on the economy was brutal.
Appointed by President Carter in August 1979, Paul Volcker, the new chief of
the Federal Reserve, administered the same shock treatment [drastically
raising interest rates] to the American economy. Carter had initially
offered the position to David Rockefeller; Chase Manhattans president
politely declined the offer and strongly recommended that Carter appeal to
Volcker (who had been a Chase vice president in the 1960s). To stop the
spiral of inflation that endangered the profitability and stability of all
banks, the Federal Reserve increased its benchmark rate to 20% in 1980 and
1981. The following year, 1982, the American economy experienced a 2%
recession, much more severe than the recession of 1974.
In an article in American Opinion in 19179, Gary Allen, author of None Dare
Call It Conspiracy: The Rockefeller Files (1971), observed that both
Volcker and Henry Kissinger were David Rockefeller protégés. Volcker had
worked for Rockefeller at Chase Manhattan Bank and was a member of the
Trilateral Commission and the Council on Foreign Relations. In 1971, when he
was Treasury undersecretary for monetary affairs, Volcker played an
instrumental role in the top-secret Camp David meeting at which the
president approved taking the dollar off the gold standard. Allen wrote that
it was Volcker who led the effort to demonetize gold in favor of
bookkeeping entries as part of another international banking grab. His
appointment now threatens an economic bust.
Volckers Real Legacy
Allen went on:
How important is the post to which Paul Volcker has been appointed? The New
York Times tells us: As the nations central bank, the Federal Reserve
System, which by law is independent of the Administration and Congress, has
exclusive authority to control the amount of money available to consumers
and businesses.
This means that the Federal Reserve Board has
life-and-death power over the economy.
And that is Paul Volckers true legacy. At a time when the Feds credibility
was greatly diminished, he restored to it the life-and-death power over
the economy that it continues to exercise today. His shock therapy of the
early 1980s broke the backs of labor and the unions, bankrupted the savings
and loans, and laid the groundwork for the liberalization of the banking
laws that allowed securitization, derivatives, and the repo market to take
center stage. As noted by Jeff Spross in The Week, Volckers chosen strategy
essentially loaded all the pain onto the working class, an approach to
monetary policy that has shaped Fed policy ever since.
In 2008-09, the Fed was an opaque accessory to the bank heist in which
massive fraud was covered up and the banks were made whole despite their
criminality. Taking the dollar off the gold standard allowed the Fed to
engage in the quantitative easing that underwrote this heist. Bolstered by
OPEC oil backing, uncoupling the dollar from gold also allowed it to
maintain and expand its status as global reserve currency.
What was Volckers role in all this? He is described by those who knew him
as a personable man who lived modestly and didnt capitalize on his powerful
position to accumulate personal wealth. He held a lifelong skepticism of
financial elites and financial innovation. He proposed a key restriction
on speculative activity by banks that would become known as the Volcker
Rule. In the late 1960s, he opposed allowing global exchange rates to float
freely, which he said would allow speculators to pounce on a depreciating
currency, pushing it even lower. And he evidently regretted the calamity
caused by his 1980s shock treatment, saying if he could do it over again, he
would do it differently.
It could be said that Volcker was a good man, who spent his life trying to
rectify that defining moment when he helped free the dollar from gold.
Ultimately, eliminating the gold standard was a necessary step in allowing
the money supply to expand to meet the needs of trade. The power to create
money can be a useful tool in the right hands. It just needs to be
recaptured and wielded in the public interest, following the lead of the
American colonial governments that first demonstrated its very productive
potential.
Ellen Brown
Ellen Brown is an attorney, chairman of the Public Banking Institute, and
author of thirteen books including her latest, "Banking on the People:
Democratizing Money in the Digital Age."
Ellen Brown
