2-By-4s A Lasting Legacy Of Volcker’s Bold Interest Rate Tinkering

When Paul Volcker took charge of the Federal Reserve in August 1979, when the U.S. economy was in the grip of runaway inflation. Consumer prices skyrocketed 13% in 1979 and then by the same pace again in 1980.

Working relentlessly to bring prices under control, Volcker raised the Fed's benchmark interest rate from 11% to a record 20% by late 1980 to try to slow the economy's growth and thereby shrink inflation.

Those high interest rates made it so expensive for people and companies to borrow that the economy weakened steadily. By January 1980, a recession had begun. It lasted six months. A deeper and more painful downturn took hold in July 1981. It endured for 18 months and sent unemployment up to 10.8% in November and December 1982, the highest level since the Great Depression.

Volcker died Monday, his office said. He was 92.

In a statement Monday, former President Jimmy Carter, who had chosen Volcker to be Fed chairman, called him a "giant of public service."

"Paul was as stubborn as he was tall, and although some of his policies as Fed chairman were politically costly, they were the right thing to do," Carter said.

In the early 1980s, Volcker was vilified by the public for having triggered a severe recession in order to curb runaway price increases.

Home builders put postage stamps on bricks and on 2-by-4 wooden planks and mailed them to the Fed to protest how super-high interest rates had wrecked their businesses.

Auto dealers, stuck with lots full of unsold cars, did the same with car keys. Angry farmers, str uggling with high debts, drove their tractors to Washington and blockaded the Fed's headquarters.

One of the mailed 2-by-4s ended up with an enduring legacy at the Fed: David Wilcox, a young staf fer under Volcker who later rose to direct the Fed's research and statistics division, said he received one of the 2-by-4s from Larry Slifman, a former senior economist in the division, and kept it on his desk until his retirement last year.

Wilcox said he held onto it "as a constant reminder of how vitally important it is that no major central bank ever lose control of inflation again, creating the need for someone like Volcker to do the incredibly courageous things he did."

David Jones, an economist and author of several books on the Fed, ranks Volcker above all other chairmen since World War II.

"Volcker was trans-formative in terms of Fed policy," Jones said. "We are still enjoying the benefits of his success."