How Paul Volcker Saved our Country

When I had the pleasure of introducing Paul Volcker at a conference, I referred to him as “the man who saved the country.” This was not hyperbole. It is hard to remember the deep trouble we were in, more than 40 years ago, when inflation reached 13% in 1979.

Times were terrible. A generation’s life savings, invested mostly in bonds, had disappeared. In real (inflation-adjusted) terms, the Ibbotson total return index of long-term Treasury bonds, initialized at $100 in 1940, had fallen to $47. That’s total return, with all interest reinvested! On a price-only basis, ignoring interest, $100 fell to $8.57 in real terms.1

You expect losses like those in countries like Argentina, where monetary folly tipped into hyperinflation and caused growth to come to a halt or go negative for long periods. But a slow-motion version happened in the United States, and it was not obvious we were going to avoid the Argentinian disease.

But we did avoid it, and Volcker deserves the credit.

The basic human will to overcome obstacles and prosper is so strong that even economies badly broken by monetary madness sometimes struggle forward. France, Italy, and Japan all had very high inflation rates either before or during their postwar economic miracles. Having the right individual at the right time in the right institution makes all the difference.

In 1979, in addition to prices spiraling up, trend productivity growth had fallen to 1% (one-half the postwar rate), labor markets were a mess, product quality was low, and you could buy America’s best companies for eight-times earnings. The part of the economy that could pass price increases along to consumers was doing well; the part that couldn’t was collapsing. Consumers...well, they were waiting in gas lines. President Carter gave his famous “malaise” speech, which didn’t contain the word “malaise” but should have.