The death of the former chairman of the Federal Reserve comes as that independence is under populist attackby Paul Wallace / December 12, 2019 / Leave a comment
The reputation of central bankers is a fickle thing. Mervyn King’s stock fell when the financial crisis revealed the former Bank of England governor’s blind spot about the risks building up in British banks in the early years of this century. Alan Greenspan bowed out as head of the US Federal Reserve shortly before that crisis erupted, but his standing took a tumble as the once-feted maestro was criticised for monetary and supervisory misjudgments that contributed to the near-death experience of Wall Street and the City in the autumn of 2008. But if anything the reputation of his predecessor, Paul Volcker, who died on Sunday at the age of 92, has risen since his stint at America’s central bank ended in 1987.
Volcker remained in the public eye long after then, not least for his advocacy of a tough approach to regulating banks in the wake of the financial crisis. But it was his time as America’s top central banker that secured his place in history. Even though he was in charge of the Fed for a much shorter time—eight years in all—than Greenspan, who was there for almost two decades, his impact was immense, both in America and globally. When this literally towering figure (he was six foot seven inches tall) took over in August 1979, inflation appeared to be out of control, not just in America but in other advanced economies. Volcker’s decisive actions tamed the scourge of the post-war world. The monetarist methods that he used did not last. But his legacy endured because he had proved that a genuinely independent central bank could contain inflation.
Volcker took over the reins at the Fed when monetarism was in its heyday, as the post-war Keynesian consensus that had played down the role of monetary policy crumbled and inflation was blamed on excessive growth of money. The new dictum was that of the economist Milton Friedman, who said in 1970 that inflation was “always and everywhere a monetary phenomenon.” In Britain, where he had made that celebrated remark, inflation subsequently reached 27 per cent in August 1975, prompting the Labour government to adopt monetary targeting, a policy pursued with greater zeal after Margaret Thatcher’s Conservatives won power in 1979.
Volcker was thus following a trend when he adopted a narrower…