Michael Klein

economy, Americas

Paul Volcker was a courageous central banker. 

Paul Volcker, who died on Dec. 8, is the poster boy for central bank independence and why it matters.

One of his legacies, as you may have read in the many obituaries published since his death, is taming the runaway inflation that posed an existential threat to the U.S. economy in the late 1970s. Less discussed is just how important he was to establishing the principle of an independent Federal Reserve, which he led from 1979 to 1987.

As a graduate student in the early 1980s and as a researcher since then, I’ve conducted empirical research on how a firm, steady and independent hand at the helm of monetary policy has improved economic performance in the United States and elsewhere. Volcker’s chairmanship of the Fed provided me, and other economists, with a real-world example that backed up our theories.

At a time when the president is openly criticizing the central bank and demanding it lower interest rates ahead of his reelection bid, I believe remembering and reaffirming Volcker’s courageous legacy at the Fed is more important than ever.

Political pressure and runaway inflation

To understand the stakes and the sea change that Volcker brought about, it’s helpful to recall the soaring inflation of the 1970s and what caused it.

Arthur Burns, who ran the Fed from 1970 to 1978, helped ignite the inflationary spiral with his efforts to help President Richard Nixon win reelection in 1972 by keeping interest rates low to supercharge the economy.