Double-digit inflation is a terrible thing - and it got up to 14 or 15 percent on a monthly basis for a while, shortly after I became chairman of the Fed.
Paul Volcker, also known as Tall Paul (for his height above 2 meters actually, as one can see below, there is a curious correlation between the height of the Fed chair and the level of the federal funds rate), was born in 1927 in Cape May, New Jersey. He earned his M.A. in political economy from Harvard University in 1951. One year later, he started his professional career at the Federal Reserve Bank of New York as a full-time economist. He resigned in 1957 to join the Chase Manhattan Bank as a financial economist. He also worked for the Treasury Department for several years during the 1960-1970. In mid-1970s, Volcker served as president of the Federal Reserve Bank of New York. In 1979, President Jimmy Carter appointed him to head the Federal Reserve System. He took office on August 6th, 1979. In 1983, President Ronald Reagan re-nominated him to a second term. Volcker rejected the reappointment for a third term, so he was replaced by Alan Greenspan in August 1987.
After leaving the Board of Governors, Volcker worked as an investment banker and continued his public service. For example, he worked for the United Nations or chaired Obama’s Economic Recovery Advisory Board.
Volcker and Gold
What was Volcker’s impact on gold? Well, it was technically positive, as gold gained about 50 percent under his tenures, as one can see in the chart below.
Chart 1: Gold prices (London P.M. Fix, in $, monthly averages) under Volcker’s Fed tenures.
However, Volcker became the Fed Chair at a time when inflation in the United States was in double-digits. As he described it: “It was the biggest inflation and the most sustained inflation that the United States had ever had.” He is widely credited with curbing that high inflation, slowing the rapid growth of the money supply and allowing interest rates to rise. Indeed, thanks to Volcker’s determination to fight inflation, the CPI annual rate plunged from 14.6 in March 1980 to 2.36 in July 1986. Hence, although the gold prices in August 1987 were higher than in August 1979, the 1980s and 1990s are generally considered to be bearish for gold, partially due to the Volcker’s actions.
Last but not least, Volcker served as undersecretary for international monetary affair in the Treasury Department from 1969 to 1974. We mention this little-known fact, because Volcker was one of the major architects of the United States’ closure of the gold window on August 15th, 1971, which resulted in the collapse of the Bretton Woods system and the final abandonment of the gold standard. So, Greenspan favored the gold standard as young libertarian, just to become the Fed Chair and conduct easy monetary policy, while Volcker helped the U.S. to abandon the gold standard, which released the genie of inflation, just to put it later again into the bottle. Quite funny, don’t you think?