While jumping around between the Treasury Department, the private sector, academia, and the Federal Reserve Bank of New York, Volcker got a reputation for problem-solving, pragmatism, and being apolitical—all necessary ingredients of public service. Volcker also had a reputation for not buying into the latest academic fad or political expediency, and instead used history and evidence as his guides.
In a way, history picked Volcker. In the late 1970s, inflation was running at around 10 percent and rising. In 1977, during the Carter presidency, the U.S. Treasury had to issue bonds denominated in Swiss francs, because nobody wanted dollars at the rate the Treasury was able to pay. They were called Carter bonds. By the time Ronald Reagan was elected president, inflation was nearing 15 percent.
Inflation of 5 percent can hurt working people, as the prices of the things they buy go up faster than wages and the businesses that hire them are unable to plan. But inflation above this level becomes disastrous. The expectation of price rises begets even higher prices, and inflation risks spinning out of control. The result throughout the 1970s was Americans waiting in lines at gas stations, while their real wages fell sharply.
Volcker was the natural choice to fight this inflation. …
… Volcker was a monetary conservative, and consistently advocated sound fiscal and monetary policy. When Nixon decided to close the gold window in 1971, ending the dollar’s international convertibility into gold, Volcker was in the room at Camp David. The decision was meant to be “temporary,” but Volcker and others lobbied for the dollar to be re-pegged to gold at a lower value, to no avail.