(Original Caption) Washington, DC.: Close up of Paul A. Volcker, nominated to be Chairman of Federal Reserve System.
Bettmann Archive
Paul Volcker was seated as Fed Chair in August of 1979, and started raising the Fed’s artificial rate (the Fed funds rate) in October of the same year. The dollar subsequently plummeted.
About the dollar’s decline such that it hit a then all-time low in February of 1980 as measured in gold ($875), readers needn’t fear a piece claiming the Fed controls the value of the dollar. It doesn’t. As these opinion pieces routinely remind readers, the dollar’s exchange value is not part of the Fed’s policy portfolio, and never has been.
Just the same, the truth about the dollar’s collapse alongside Volcker’s would-be austerity is a corrective to the popular notion that Volcker was the antidote to inflation. Assuming what the Fed does affects the dollar (an odd assumption), Volcker’s actions in no way shored up its value. Quite the opposite.
On the other hand, presidents get the dollar they want. What the Volcker hagiographers ignore is that Ronald Reagan won the New Hampshire primary in February of 1980. Reagan was running on an economic platform that included reversing President Nixon’s nearly nine-year-old decision to sever the dollar’s link to gold. Markets anticipate.
The collapse of the dollar in the early days of Volcker (gold measured in dollars tripled) quickly and unsurprisingly came to mind in the commentary aftermath of Fed Chairman Kevin Warsh’s decision to raise the Fed funds rate a quarter point. And not just because gold rose on the news. Again, the dollar’s value is a President/Treasury prerogative, not the Fed’s despite what you hear from the Mises Institute and right-leaning media more broadly.
What brought Volcker to mind after Warsh’s hike was the inevitable commentary about Warsh as Volcker’s second coming. A Wall Street Journal editorial exulted that “Mr. Warsh is the most hawkish chairman since Paul Volcker.” Expect a lot of this in the coming months assuming Warsh continues to lean on the artificial rate the Fed fiddles with to somehow “break” inflation.
Of course, Warsh’s inflation aims unearth yet another Volcker myth. While the Journal editorial cheered Warsh’s apparent disdain for the Phillips Curve, it’s useful to remind readers (and Volcker hagiographers) that the Volcker inflation myth is rooted precisely in the discredited Phillips Curve. Supposedly Volcker’s “tightness” that market actors worked around crushed the economy, only for the slowdown allegedly engineered by Volcker to “sweat out” the inflation. Except that’s not what happened.
Again, the idea that growth causes inflation and that its opposite shrinks inflation is Phillips Curve mythology. After all, wasn’t the Carter economy kind of weak as is, thus voter interest in Reagan?
Back to Reagan, what ended the inflation was his election along with market expectations of his being elected. See the dollar, and in particular the dollar price of gold throughout 1980. Inflation is a weak dollar, and as evidenced by the dollar’s collapse amid Volcker’s rate hikes, the latter doesn’t fix the former. Reagan’s election was once again the fix as a falling gold price throughout much of 1980 revealed.
The editorial added yet another myth, that “Mr. Trump inherited stubborn inflation from Joe Biden, and the Powell Fed let it stay too for too long.” Actually, the dollar crushed foreign currencies and was largely flat versus gold under Biden, while quite the opposite under Trump. But inflation’s definition has a tendency to be a moving target in the commentariat.
Needless to say, Warsh has billed the so-called fight against inflation as some kind of monumental struggle. Again, more Volcker mythology.
That’s because breaking inflation is easy. It involves electing a president who believes in a dollar rendered strong by virtue of its stability. Alas, Donald Trump is not that president.
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