The View From 1776

In an April 9th editorial, the Wall Street Journal opines:

‘You don’t have to predict it. We’re in it.” Thus did [former Federal Reserve chairman] Paul Volcker respond to a question Tuesday about whether he still predicted a “dollar crisis” in the coming years…

The world has been staging a run on the greenback, with damaging results if it continues. Mr. Volcker noted that when “concerns about recession are rife,” the central bank will be tempted to “subordinate the fundamental need to maintain a reliable currency” to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation.

The present climate, Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s. Then as now, certain commodity prices were rising fast – he cited oil and soybeans as two examples. Then as now too, these were explained away as speculative price run-ups and not as a harbinger of a broader inflationary trend…

But the Fed has a particular duty to defend the integrity of the “fiat currency” in its charge. And exchanging dollars for “mortgage-backed securities of questionable pedigree” both raises the specter of moral hazard and potentially undermines the world’s faith in the integrity of the Fed’s balance sheet.

In a key respect, however, the Journal’s account is not factual.  The editorial states that Chairman Volcker broke the back of our nation’s worst inflation in the 1980s by raising interest rates.

Mr. Volcker himself said that he decided to let interest rates seek whatever level they might and, instead of tinkering with rates, to curtail the money supply.  That, he said, is the only way to control inflation.