Credit Where It's Due

After this article of mine ran in the April 7 issue of The American Conservative, I got a few reader comments about this part:

By the early 1980s, Ronald Reagan was dealing with the consequences of decisions made by Johnson and Nixon over a decade earlier. Part of Reagan’s legacy is the latitude he gave Paul Volcker, as risky and painful as that was, to deal with those problems.

In response, this blogger wrote: "We should note that President Carter appointed Paul Volcker to the Federal Reserve Chairmanship in 1979." One of his commenters followed that with this:

Finally, in the case of Volcker, Greenspan and inflation, you have to wonder why it took that success so long to even get a second father. For years, conservatives pretended that Carter-appointee Volcker never existed; now "The American Conservative" is crediting Reagan for giving him latitude -- that's really rich. Time Magazine 1984: Last week they were started anew by White House Press Spokesman Larry Speakes. Immediately after the banks raised the prime rate, he told reporters, "We have been asking the Federal Reserve Board to allow sufficient monetary expansion to assure noninflationary growth. Although the economy has been growing at a healthy pace and inflation remains at a low level, it appears that the money supply is not accommodating real economic growth." The following day the attack was picked up by Treasury Secretary Regan. In a speech to Massachusetts businessmen and community leaders, he warned that the Federal Reserve's stringent credit policies could begin to hurt. Said he: "If the Fed continues on its tight path now, it will have an effect on November and December. Does that have us worried? You bet your life it has us worried."

The commenter omits this part of the Time article that would seem to support his point:

President Reagan entered the interest-rate controversy later in the week, although he was careful not to blame the Federal Reserve. Appearing before the National Association of Realtors, he took credit for the earlier recovery in housing. But then he added: "Let me assure you we are not pleased with the recent increases in interest rates, and frankly there is no satisfactory reason for them."

These are good points and worth addressing. First, it's important to distinguish between "the early 1980's" I refer to in my TAC article and the mid-80's -- specifically May 1984, which is when that Time article ran. There was a world of difference between the two periods. In 1980, when Reagan was elected, the consumer price index rose 12.5 percent. In 1984 it was 3.9 percent. Monetary policy had already worked. The inflation genie was back in the bottle -- but with the prime rate having risen from 10.5 percent in 1983 to 13 percent in 1984, there was a widespread perception that the Fed was still fighting the last war and choking off the recovery from the severe recession of 1981-1982. And let's not forget that 1984 was an election year. After giving Volcker free rein to break inflation and then reappointing him in 1983, Reagan had good reason to view tighter monetary policy just before an election as a breach of etiquette.

As for the commenters' point about giving Carter credit for appointing Volcker, I've always interpreted that the same way Bruce Bartlett does here:

Under pressure from Wall Street, Carter reluctantly appointed Paul Volcker to be chairman of the Federal Reserve Board in 1979. Volcker had been under secretary of the Treasury for Richard Nixon and was then serving as president of the Federal Reserve Bank of New York. However, it is naïve to think that Volcker was given a free hand by Carter. His inability to fully implement a tight-money policy is why the inflation rate fell only to 12.5 percent in 1980, despite a sharp recession that year. It was only after the election, when Volcker knew that Carter had lost, that he really clamped down on the money supply. This illustrates an important point: Presidents get the Fed policy they want, no matter how "independent" the Fed may be. ... It is not now remembered how much pressure there was on Reagan to get rid of Volcker and have the Fed run a more accommodative monetary policy. Yet he not only supported Volcker publicly, he appointed like-minded people to the Fed whenever he had the chance. He reappointed Volcker to the chairmanship in 1983 and appointed Alan Greenspan to replace him in 1987. The result of the Fed’s tight-money policy was a far faster reduction in inflation than most economists thought feasible. From 12.5 percent in 1980, it fell to 8.9 percent in 1981, and 3.8 percent in 1982. It is hard to explain just how remarkable this achievement was. ...

Few have better perspective on this than Bartlett. I'd be curious to see if his interpretation of the friction between Volcker and the Reagan administration in 1984 jibes with mine, and whether he has anything to add.