By Kenneth G. Pringle

As tributes pour in for former President Jimmy Carter, who died Sunday at age 100, most have focused on the oil and Iranian hostage crises, which undermined his presidency, or the Camp David Accords, which brought peace between Israel and Egypt.

Though Carter's post-presidency charitable work has been widely lauded, few tributes have lingered on what may be his most lasting achievement: appointing Paul Volcker to serve as Federal Reserve chairman. Carter tapped Volker, a man he didn't know, to solve a problem he couldn't figure out: stagflation.

When Carter assumed the presidency in 1977, he inherited an economy that was already hemorrhaging. Prices had been rising since the late 1960s, when the oil crisis of 1973 threw a wrench into the economy. Consumers and economists grappled with stagflation -- stagnant growth combined with inflation.

While Carter was busy giving away the Panama Canal (the focus of a few targeted obituaries), Americans waited in gas lines and his presidency crumbled. His popularity plummeted as calls for economic relief grew.

Carter named Paul Volcker -- a 6-foot-7, cigar-chomping policy wonk -- as Fed chair in August 1979. By doing so, he found someone who could finally bring an end to stagflation, which had baffled politicians and economists for years.

Volcker's strategy was ruthlessly simple: restrict the growth of money and credit until it hurts, until both inflation and inflation expectations are beaten into the ground -- and only then can growth resume. This is now the accepted playbook for all central bankers, including current Fed Chair Jerome Powell.

"Paul Volcker's victory over inflation in the 1980s established the primacy of monetary policy for controlling inflation, restored the Fed's credibility, and demonstrated the benefits of Fed policy independence," Ben Bernanke, another of Volcker's successors, wrote in 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19.

Not everyone loves an independent central bank, of course, including president-elect Donald Trump. But for now, because of Carter, we all live in Volcker's world.

The nation was at a low point on July 15, 1979, when Carter took to the airwaves to address the energy crisis. He was out of ideas, and the nation was out of faith in him.

"You see paralysis and stagnation and drift. You don't like it, and neither do I. What can we do?," Carter asked in what's become known as the "malaise" speech.

For his part, Carter cleaned house, firing five cabinet members and shuffling then-Fed Chairman William Miller to Treasury. That left an opening at the central bank, for which Carter didn't have a candidate. Preferred choices demurred.

"Two or three days later, Bill Miller called," Volcker, then head of the New York Fed, later wrote in Keeping At It: The Quest for Sound Money and Good Government. "Would I be willing to come to Washington to meet the president?"

Volcker sat down with Carter and Miller. He said he'd advocate tighter policies than Miller, "even pointing a [friendly] finger" at him. The meeting was short; Volcker was pessimistic.

Carter, though, was impressed with this self-possessed newcomer.

"I didn't really know whether Paul Volcker was a Democrat or Republican. I didn't care," he later recalled, as quoted in W. Carl Biven's Jimmy Carter's Economy: Policy in an Age of Limits. Carter said that Volcker "made it plain, and it was mutual, that if he took the job...I wouldn't try to put pressure on him or interfere in his best judgment in that important role."

The president "felt that he just had to do something," said Lyle Gramley, an economic advisor to Carter, as quoted in Biven's book. "I don't think he had any conception what this would mean, in terms of the course Volcker would take. Neither did anybody else, as far as that goes."

At 7:30 a.m. the next morning, Volcker was awakened by a call from the president. Yes, he would accept the job -- even if it meant a pay cut.

Volcker immediately set about communicating his intentions to an expectant nation.

"[M]y basic philosophy is, over time, we have no choice but to deal with the inflationary situation, because over time inflation and the unemployment rate go together," he told the press on Jan, 2, 1980. "Isn't that the lesson of the 1970s?"

Since the Lyndon B. Johnson administration, Fed chairmen had failed to contain rising inflation. They'd tighten monetary policy, only to loosen it again -- often under presidential pressure -- when joblessness rose. The result was what economists call the Great Inflation, a 15-year period from 1968 to 1983 during which the consumer price index surged 186%, or 7.3% annually, reaching a peak of 13.5% in 1980.

Volcker was determined not to repeat his predecessors' mistakes -- and single-mindedly attacked inflation during this span. Ten days after his appointment, he raised the effective fed-funds rate above 10%. It hit a record 13.77% in October 1979 and peaked near 20% in 1981. At the same time, the unemployment rate soared over 10% and the nation fell into recession after recession.

Americans took their anger out on Volcker.

"My speeches were occasionally interrupted by screaming protesters, once by rats let loose in the audience," Volcker wrote in his memoir.

Frustration continued after Carter failed to win reelection and Ronald Reagan took office in 1981. In December, a man "distraught over high interest rates and the economy" broke into Fed headquarters with a sawed-off shotgun before being overpowered, The Wall Street Journal reported.

Congress grew hostile. "It is time for you to pay more attention to the needs of the small-business man, the farmer, the small banker," Rep. George Hanson, R-Idaho, scolded Volcker on Feb. 27, 1981, as part of a bipartisan revolt against high rates.

As the 1984 election approached, the Reagan administration had had enough of Volcker's high-rate regime. "I'm concerned" about the economy, Treasury Secretary Donald Regan told reporters. Chief of staff James Baker was more direct, passing on a presidential "order" to Volcker to stop raising rates.

Volcker held firm. Heading into the election, the inflation rate was steadying around 5%, unemployment was falling, growth was returning, and a Reagan commercial declared, " It's morning again in America."

This began a 40-year period of tame inflation, known as the Great Moderation. When prices spiked in 2022, Powell turned to the Volcker playbook with his "higher for longer" policy on rates.

"We certainly have every intention and expectation that we'll get inflation back sustainably to 2%," he said earlier this month, not dismissing a return to rate increases in 2025. "You don't rule things completely in or out in this world."

Volckerism, courtesy of Jimmy Carter, remains the order of the day.

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December 31, 2024 14:57 ET (19:57 GMT)

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