Ray Dalio & Paul Volcker on How Volcker Broke the Back of Inflation in the 1980’s
Volcker’s response to high inflation
- In March of 1980, inflation was a major issue.
- Volcker tightened monetary policy as a response to high inflation.
- He set an M1 target of 5.5.
“Tighten monetary policy like that, drove the unemployment rate up to 10 percent.”
Volcker’s determination to combat inflation
- Volcker faced protests and anger for his tight monetary policy.
- Despite the backlash, he held firm in his approach.
“You held tight in that and you followed it through.”
Breaking the back of inflation
- Volcker’s actions ultimately broke the back of inflation.
- By 1983, the inflation rate dropped to three percent.
- This led to a decade of prosperity with strong growth and low inflation.
“You broke the back of inflation.”
The environment preceding Volcker’s actions
- The inflation rate had been rising for over a decade.
- Previous attempts to deal with inflation were ineffective.
- There was a conflict between the fear of inflation and tightening monetary policy.
“There were kind of feeble efforts to deal with it during the Ford administration.”
Volcker’s appointment as Chairman of the Federal Reserve
- President Carter appointed Volcker as Chairman of the Federal Reserve.
- Existing policies were not working, and Volcker believed a change in approach was necessary.
- Volcker focused on combating inflation rather than worrying about increasing unemployment.
“I decided we had to change an approach.”
Persistence in combating inflation
- Volcker persevered despite challenges during the process.
- It took time for the unemployment rate and inflation rate to respond to the tight monetary policy.
- Volcker remained determined and did not back off.
“I saw no other way to approach this other than kind of a bulldog biting at it.”
The final push
- Volcker’s persistence paid off in the end.
- By the summer of 1982, the money supply and inflation rate began to decrease.
- The recession also ended swiftly.
“It took that last year of sticking with it that I think was necessary to do the job.”