Originally posted on Thursday, April 11th, 2013
“In December 1981 a frantic man armed with a sawed-off shotgun, revolver, and knife burst into the Fed and was stopped by guards just outside the boardroom of convened Fed governors, whom he intended to take hostage to publicize the agony they were inflicting on the country.”
The double-digit inflation of the late 1970s portended a potentially ruinous hyperinflation if confidence in, and demand for, the dollar were to collapse. The threat was real and the potential outcome catastrophic.
Reversing the threatened collapse of the dollar elicited moments of drama worthy of a Robert Ludlum thriller. While semi-forgotten by many, journalist Steven Solomon’s The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995) recounts some of the fervor of the agon that Volcker precipitated (p. 152):
“One thing telling Fed Reserve Bank presidents and board governors not to be tight was the outcry from small-business people, home builders, auto dealers, retailers, farmers, manufacturing exporters, and unions. Businesses failed at a record pace. Farmers were doubly hurt: the strong dollar priced them out of many of their large export markets, while high real interest rates caused foreclosures on the land they had bought with inflation-cheapened debt in the 1970s. Home builders printed “Wanted” posters of the Fed’s seven governors. Nasty and threatening letters arrived at the Fed. In December 1981 a frantic man armed with a sawed-off shotgun, revolver, and knife burst into the Fed and was stopped by guards just outside the boardroom of convened Fed governors, whom he intended to take hostage to publicize the agony they were inflicting on the country. Volcker reluctantly accepted Secret Service protection.”
Volcker’s strong measures succeeded in slaying the “inflation dragon.” Disaster was averted and a generation of reasonably equitable prosperity ensued. That prosperity eventually decayed, under Volcker’s successors, into a series of booms and busts culminating in the panic of 2008, the ensuing Great Recession and chronic joblessness still plaguing America and the world. This does not warrant calumny on Volcker or his successors.
A dollar policy not governed by a rule will fail. The empirical data are decisive that the gold standard is the “gold standard” of monetary rules, tending toward a climate of opportunity equitable prosperity, financial stability, and security. The dollar defined as a fixed weight of gold provides the most consistently beneficial tonic to the economy while avoiding the agony that a fiduciary monetary policy, ungovernable by its very nature, will, inevitably, cause.
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