20%

If Paul Volker was destined to give the Federal Reserve a good dusting, he showed early form. As you might expect from a man who went on to crunch professional life in the manner of Giant Haystacks, he stretched the hamstrings off at Princetown. In his senior thesis, appropriately titled, ‘The problems of Federal Reserve Policy since World War II’ he charged the cannon and lit the fuse. He basically let them have it. The ‘swollen money supply’, he wrote, posed a ‘grave inflationary threat to the economy’. If the money supply was not brought under control, prices would rise, and it would be an almighty ‘zut alors’. Disaster. It is no wonder then, when President Carter was on the back foot and the ball whizzing past his chops, that Volcker got the call.

His name, though, was well known. As you might imagine. He had worked for the NY Fed in 1952 as an economist before sliding into the soup and stew of corporate life at what was then Chase Manhattan Bank. By the late 1960s his talent had been spotted by those in the Nixon administration who thought they needed some intellectual heft, and Volker came on board playing a key role in the decision to suspend the convertibility of the US dollar into gold, which ultimately saw the collapse of the Bretton Woods system.

As context, for those still searching eBay for Gary Mabbutt stickers, Bretton Woods was a post WWII pow-wow held at, umm, Bretton Woods, deep in the White Mountain National Forest. The idea was to create a new international monetary system that would help steady the ship, straighten out ties, and promote global economic growth. Trade was settled in dollars, which could be converted into gold at $35/ oz. Basically, the US government said they were good for it, and would back every overseas dollar with gold. Currencies were pegged. Happy days. Initially it worked well, given the catastrophic damage of WWII and everyone from the US to Europe to Japan was in rebuilding mode. And those doing the rebuilding wanted stuff made in America. As a result, they needed dollars to pay for all the stuff.

It all started to pop at the seams in the 1950s as the economies of the likes of Germany and Japan came roaring back. Debt in the US ballooned. In France, there was more mutterings than usual, with finger pointing and whistling, and accusations of ‘America’s exorbitant privilege’ as the rest of the world funded the lavish lifestyles of popcorn and fizz, and subsidised profit hungry all-conquering American corporations. The economic historian Barry Eichengreen summed it up nicely, “it only costs a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one.” Money supply went up. More printing. Germany left. Then other countries started queuing up wanting to swap their dollars for gold. Switzerland, France, the queue started to snake out into the car park. Switzerland then upped and left too. Pressure grew and by the long hot summer of 1971 Nixon had a BBQ at Camp David and invited a who’s-who of officials and advisers, including our man Volker. Sometime over the pork ribs and beer Nixon whispered to the Treasury Secretary John Connally to pull the rug. To suspend the convertibility of the dollar into gold. Down came the shutters. No more Bretton Woods.

As with many moves in stock markets, the first move was misleading. The Dow rallied. Politically it was seen as a success but in time when the stagflation of the 70s was in full go-mode, the reality bit. The dollar plunged a third and volatility across foreign exchange markets required regular intervention. Much like today, with the Japanese 10 year yield going vertical, the authorities are forced to step in before something breaks. Which it will, inevitably. Even our man Volker would later regret the collapse of Bretton Woods: “Nobody’s in charge” he muttered one evening, staring into the fire.

Anyway, back to Volker. He took office in August 1979 when, as even the Panini readers will now know, inflation was raging. The short version is that once he had settled in, found his coffee run and peg in the locker room, he took interest rates to 20%. Not in a straight line, but by June 1981, interest rates were 20% giving anyone who whistles through the teeth at today’s mortgage rates something to think about. As you might imagine with 20% interest rates, a recession followed, and unemployment pushed through 10% providing a boon to snooker halls and arcades. The mood among the electorate, though, was not good. Seething, even. Farmers drove their tractors down C Street in Wahington DC and surrounded the Eccles Building in scenes that are, today, being played out in countries like The Netherlands. Eventually people have enough. They take to the streets. In tractors. That said, by 1982 Volker had given the nod to let the sails out and a period of economic growth followed.

By the time Ronald Reagan was in the yoke of high office though, the mood was very different. The administration cut taxes and started to spend. Spend, spend, spend. Sweaty deficits followed. Indeed by 1987 Volker was out, fired; fired for not being on the same page as the fiscally up for it Administration.

The Congressman Ron Paul who whizzed about in the right circles reckoned Volker was “the most personable” of all the Fed Chairs he met. He was also “smarter than all the others”. And he met them all, Greenspan and Bernanke included. Volker was also taller, tipping the tape at something like 6ft 7 inches. By way of reference, our man Milton Friedman, was just 5ft in his slippers.

So, there you go.

Volcker died in 2019 at the ripe old age of 92.

Some wish he was running the Federal Reserve today.