Paul Adolph Volcker was born on September 5, 1927, in Cape May, New Jersey, U.S. He is an American economist and banker. He headed the board of governors of the U.S. Federal Reserve System between 1979-1987(Feldstein 105). In the 1980s, Paul Volcker played a crucial part in steadying the American economy. A BA graduate from Princeton University in 1949, Volcker proceeded to receive an M.A. from Harvard University two years later. He began his career as an economist at the Federal Reserve Bank of New York, where he worked from 1953 to 1957. He then moved to Chase Manhattan Bank and served between 1957 to 1961. Volcker was appointed the Department of the Treasury as a deputy undersecretary in the Department of the Treasury between 1963-1965). At Chase Manhattan Bank, he served as vice president between 1965 and 1968. While serving as the Treasury Department's monetary affairs undersecretary from 1969 to 1974, he spearheaded the abandonment of the gold standard and U.S. dollar depreciation in 1971 and 1973.
School of Thought
Paul Volcker pushed for and used the concept of monetarism to drive various economic agendas during the financial crisis in the U.S. Monetarism stresses nominal government interference in business. It also elaborates on the relevance of the currency supply in elucidating economic fluxes (Feldstein 106). Contemporary monetarism promoted in the late 1940s and 1950s offered a hypothetical task to the Keynesian model used after the Great Depression and World War II. Keynesians regarded the Great Depression as a sign that the dominant, orthodox school of thought misled the global economy. The unemployment rate reached a 25 percent peak in the United States during the Great Depression; thus, the realization of the issues around declining demand and involuntary unemployment that needed the attention of policy-makers. The Roosevelt administration started a dangerous expansionary fiscal procedure to effect the provisions of the New Deal aimed at enhancing spending based on the recommendation by John Maynard Keynes, an English economist.
Opinions on the cause of the Great Depression differed between Keynesians and Friedmans. The former blamed the drop in consumption and investment while the latter argued on the inability of the Federal Reserve to offer adequate liquidity. Economic deflation required an increase in cash instead of initiating restrictive measures on the same (Rivot 2013). However, monetarism reinvented the reputation of the quantity theory - a perception that lies on numerous essential suggestions based on the role of money and the economy.
First, the money supply influences nominal income. Fluctuations in money supply result in shifts in nominal income; thus, the influence of the Central Bank in determining the quantity of money. Second, long-term changes in the money supply affect price amounts and nominal variables. On the other hand, labor, technological know-how, and capital influence real variables (Rivot 2013). Thirdly, divergent from the prolonged influence of money supply, variations in money supply have a short-term impact on real variables. Finally, monetarists consider government policies to destabilize the economy instead of harmonizing different areas. The pragmatic backing for the monetarist position presents a mixed case. Attempts to regulate the rising rates of inflation in the 1970s prompted the Federal Reserve to explore the monetarist experiment aimed at enhancing financial growth from 1979 to 1982. Paul Volcker led the Federal Reserve initiative.
The 1980s and 1990s saw a rise in the velocity of money instability. The situation wounded money supply-nominal income relationship. Analysts blamed the situation on banking industry deregulation and the increase in financial innovations; thus, uncertainty in economic demand. The stability of velocity supported monetarism's dependence on quantity theory - shifts in money supply determine short-term movement in nominal output movement and long-run movement in price levels (Le et al. 94-96). Monetarism continues to experience discredit from scholars. However, its provision on the importance of money supply in analyzing economic fluctuations still prevails in financial discussions. Fast money growth results in price unsteadiness and inflation. For example, the hyperinflation occurrences in numerous European states in the 1920s and the clash with inflation in some Latin American nations indicates that the problems still prevail.
Volcker served as the Federal Reserve Bank of New York president from 1975 to 1979 before appointment in 1979 by the U.S. Pres. Jimmy Carter to guide the Federal Reserve System. During his appointment, inflation in the U.S. reached about 13 percent. As the Federal Reserve Bank of New York president, Volcker actively participated in monetary policy decision-making processes (Goodhart 283-285). He advocated for fiscal restraint. Inflation between 1978 and 1979 resulted in a reshuffle of the Carter economic policy team and the nomination of Paul Volcker to head the Board of Governors. Volcker prioritized the reduction of inflation in his first term. He endeavored to communicate the impact of market pressure on interest rates and tp demystify the assumption that the board had influenced the same. He elevated the discount rate by 0.5 percent and scrutinized the debt predicament in developing nations. Volcker reinforced the extension of the reserve fund of the International Monetary Fund.
During his second tenure, Volcker prioritized growing the money supply without increasing inflation. He also focused on the organizational restructuring of the Board of Governors; thus, he defended the Federal Reserve's monitoring authority and limited risky endeavors by the commercial banks such as allowing commercial banks to endorse corporate securities and participate in the development of the real estate. He aimed to end continuing high inflation, a fete he achieved when the Federal Reserve slackened the fast growth of money supply and permitted the rise in interest rates (Goodhart 286-289). However, the policies resulted in a severe recession between 1982 and 1983 since the Great Depression. His plans brought inflation under firm control. Reappointment to a second four-year term allowed him to push his ideas and agendas forward. He performed the roles of managing the money supply and controlling inflation.
The application of the Volcker Shock in 1980 resulted in the highest amounts of fed funds raised; thus, the end of the double-digit inflation. In 2015, the Volcker Rule barred banks from applying client deposits in trade for personal yield. Again, in the same year, Volcker asked for a new Bretton Woods Agreement to create rules to direct global financial policy. Volcker battled the 10% yearly inflation rates with counteractive fiscal policy. In March 1980, he audaciously doubled the percentage of the fed funds from 10.45% to 22% (Goodhart 290-293). He, however, temporarily decreased it in June. Return of inflation in December saw Volcker increase the rates back to 20%. He maintained the values at over 16% until May 1981. The thrilling and protracted rise in the interest rates became known as the Volcker Shock. The Volcker Shock did not terminate inflation. Regrettably, it fashioned the recession of 1981.
Volcker and Gold
Volcker's economic strategies created a positive impact on gold. During his tenure, gold added about 50 percent in trade and exchange. Still, Volcker assumed the Fed Chair position when the United States experienced double-digit inflation rates. He remarked about the period in his speech, stating that: "It was the greatest inflation and the most sustained inflation that the United States had ever had" (Goodhart 293). Paul Volcker's reverence lies in his pivotal role in reducing high inflation (Goodhart 293-295). He also slackened the fast growth of the money supply and permitted a rise in the interest rates. Volcker's resolve to battle inflation led to a drop in the CPI annual rate from 14.5 in March 1980 to 2.46 in July 1986. While the gold values in August 1987 remained higher than in August 1979, the 1980s and 1990s enjoyed a bearish gold period partially because of the intervention measures by Volcker.
Finally, while serving in the Treasury Department from 1969 to 1974 as an undersecretary for the international monetary affair, Volcker contributed to the structuring of economic policies that led to August 15, 1971, United States' shutting of the gold window (Goodhart 300-303). The situation led to the flop of the Bretton Woods structure and the ultimate relinquishment of the gold standard. Succession politics reveals that Greenspan preferred the gold standard as a young libertarian because it enhanced his desire to become the Fed Chair and execute an easy financial strategy. Volcker facilitated the abandonment of the gold standard by the U.S. to dispel the genie of inflation.
Impacts of Paul Volcker's Contribution in the 21st Century Economy
During the mid-1980s Mexican debt predicament, Volcker became pivotal in crafting the organizational change plans formulated by the IMF and World Bank for global application. Ostensibly nonchalant with the monetarist's consequences at the Fed on state sovereign debt servicing ability in the Global South, Volcker, with the help of his colleagues, took advantage of the monetary distress in Mexico and Latin America to enforce an austerity program leading to aggravated regional disparity (Meza 2018). The Latin American left rose in reply to the shock handling as "a sad culmination of hard-fought, constructive efforts to deal with a debt crisis that ... grew out of a chronic absence of suitably disciplined economic policies." The narrative summarises his nonpolitical perception.
The world of Volcker Shock's creation gave us President Donald J. Trump. The Federal Reserve eliminated inflation by the mid-1980s. However, inflation had characterized the economic situation in the United States over a long period. The period also saw the elimination of the significant issue around inflation - dominant organized working class. The looming spread of unemployment created tensin among the workers; thus, triggered the attention of the employers who deliberated proper measures to intervene in the situation (Meza 2018). The condition deteriorated because of President Reagan's anti-labor and deregulatory program. It created an enabling environment for inequality to rise, a condition that persists in the current economy with an active connection up to 2008. Families started relying on more significant amounts of borrowings to uphold decent living standards. Volatile financial sector development in a small fraction of the economy occurred because of Federal Reserve operations led by Alan Greenspan, Volcker's successor. The activities brought a new episode of historic inflation based on asset prices. The U.S. and the global economy still feel political consequences because of the collapse in the post-Volcker economy.
Feldstein, Martin. "An Interview with Paul Volcker." Journal of Economic Perspectives 27.4 (2013): 105-20.
Goodhart, Lucy M. "Brave new world? Macro-prudential policy and the new political economy of the federal reserve." Review of international political economy 22.2 (2015): 280-310.
Le, Vo Phuong Mai, David Meenagh, and Patrick Minford. "Monetarism rides again? U.S. monetary policy in a world of Quantitative Easing." Journal of International Financial Markets, Institutions, and Money 44 (2016): 85-102.
Meza, Felipe. "Mexico from the 1960s to the 21st Century: From Fiscal Dominance to Debt Crisis to Low Inflation." (2018).
Rivot, Sylvie. Keynes and Friedman on Laissez-Faire and Planning:'Where to draw the line?'. Routledge, 2013.
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