Richard L. Silber has written a detailed new biography of Paul Volcker, the former chairman of the Federal Reserve who successfully eliminated the stagflation of the late 1970′s in the United States. Appropriately, his biography is entitled, Volcker: The Triumph of Persistence.
In response to questions posed by Neil Irwin of The Washington Post (September 30, 2012), Silber draws important insights for current Fed policy from his in-depth analysis of Paul Volcker’s lasting contribution to price stability in the United States.
“Bernanke gets an A for what he did in 2008. He did exactly what a central banker, knowing the history of the Great Depression, should have done when confronted with the potential for panic. Open up the floodgates and lend. But now he should worry about the fallout from remaining too easy for too long, which Volcker maintains is the reason we lost the battle against inflation before.” Neil Irwin, ‘Volcker biographer: Bernanke needs to embrace lessons of ’70s’, The Washington Post, September 30, 2012
In his response to Irwin’s questions, Silber identifies two major lessons that must be learned from the 1970s:
“The 1970s delivered two important messages. First, we can’t get a permanent reduction in unemployment by inflating. It doesn’t work. And second, we’ve got to worry about inflation, even with unemployed resources. Waiting until we see a clear and present danger is too late.” ibid.
Why is inflation such a serious problem?
“He (Volcker) believes that the main problem with inflation is that it undermines trust in government. We, as citizens, give the government the right to print money, not to abuse that right by inflating. When the government inflates, it breaks its pledge and undermines our trust. Right now, we need trust in government more than anything else.” ibid.
Is inflation currently a realistic impending problem?
“The big difference today versus the problem Volcker confronted in 1979 is that inflationary expectations were already out of hand back then. Today, they are still under control, but no one knows how fragile they are. More importantly, it will be difficult for Ben Bernanke, or whoever follows him, to maintain low expectations of inflation by raising real interest rates – the way Volcker did – when that’s needed. We have had five years of unemployment, and the American public may not tolerate a central bank that acts preemptively, as it must, to prevent inflation. The Fed is independent, but it cannot do whatever it wants.” ibid.
I offer these words of distilled wisdom for your consideration. Unusually, they arrive as a useful warning before, and not after, the impending crisis has emerged. As such they are to be treasured.