Other People’s Blood

Those who praise Volcker like to say he “broke the back” of inflation. Nancy Teeters, the lone dissenter on the Fed Board of Governors, had a different metaphor: “I told them, ‘You are pulling the financial fabric of this country so tight that it’s going to rip. You should understand that once you tear a piece of fabric, it's very difficult, almost impossible, to put it back together again.” (Teeters, also the first woman on the Fed board, told journalist William Greider that “None of these guys has ever sewn anything in his life.”) Fabric or backbone: both images convey violence. In any case, a price index doesn’t have a spine or a seam; the broken bodies and rent garments of the early 1980s belonged to people. Reagan economic adviser Michael Mussa was nearer the truth when he said that “to establish its credibility, the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people’s blood.”

On Paul Volcker

Paul Volcker, 2012.

Paul Volcker with Christine Harper. Keeping At It: The Quest for Sound Money and Good Government. Public Affairs, October 2018.

If someone were to make a movie about neoliberalism, there would need to be a starring role for the character of Paul Volcker. As chair of the Federal Reserve from 1979 to 1987, Volcker was the most powerful central banker in the world. These were the years when the industrial workers movement was defeated in the United States and United Kingdom, and third world debt crises exploded. Both of these owe something to Volcker. On October 6, 1979, after an unscheduled meeting of the Fed’s Open Market Committee, Volcker announced that he would start limiting the growth of the nation’s money supply. This would be accomplished by limiting the growth of bank reserves, which the Fed influenced by buying and selling government securities to member banks. As money became more scarce, banks would raise interest rates, limiting the amount of liquidity available in the overall economy. Though the interest rates were a result of Fed policy, the money supply target let Volcker avoid the politically explosive appearance of directly raising rates himself. The experiment—known as the Volcker Shock—lasted until 1982, inducing what remains the worst unemployment since the Great Depression and finally ending the inflation that had troubled the world economy since the late 1960s. To catalog all the results of the Volcker Shock—shuttered factories, broken unions, dizzying financialization—is to describe the whirlwind we are still reaping in 2019.

At the height (or nadir) of the Volcker Shock, benchmark interest rates were over 20 percent—and worse if you had bad credit. The exorbitant cost of borrowing put tens of thousands of firms out of business, and led to twenty-two months of negative growth. In December 1982, unemployment was at 10.8 percent—closer to 20 percent if you include workers who wanted jobs but had stopped looking, and underemployed workers who could not find steady full-time work. In absolute terms, twelve million Americans were unemployed that month, plus another thirteen million “discouraged” and underemployed.

The nation’s industrial belt was the hardest hit. Ninety percent of job losses occurred in mining, construction, and manufacturing. It was costly for businesses to pay their debts and borrow money to invest, while a strong dollar made American exports even less competitive internationally. In places like Flint, Michigan and Youngstown, Ohio, more than one in five workers was unemployed. In Akron, the commercial blood bank reduced the prices it would pay by 20 percent due to the glut of laid-off tireworkers lining up to bleed. In the area around Pittsburgh, suicide rates and alcoholism soared, while residents competed for spots in homeless shelters. The unemployment rates for African-Americans were worse, peaking in early 1983 at 21.2 percent (up from around 12 percent—already a crisis—in 1979).

Those who praise Volcker like to say he “broke the back” of inflation. Nancy Teeters, the lone dissenter on the Fed Board of Governors, had a different metaphor: “I told them, ‘You are pulling the financial fabric of this country so tight that it’s going to rip. You should understand that once you tear a piece of fabric, it’s very difficult, almost impossible, to put it back together again.” (Teeters, also the first woman on the Fed board, told journalist William Greider that “None of these guys has ever sewn anything in his life.”) Fabric or backbone: both images convey violence. In any case, a price index doesn’t have a spine or a seam; the broken bodies and rent garments of the early 1980s belonged to people. Reagan economic adviser Michael Mussa was nearer the truth when he said that “to establish its credibility, the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people’s blood.”

The point of all this misery was to halt the rise of inflation, which had become a problem during the Vietnam War and hit a monthly peak of almost 15 percent in April 1980. The cycle went like this: If prices were high today, people would expect them to be higher tomorrow. Businesses would raise their own prices to keep up, while workers would demand higher wages to preserve the real value of their income. People considering a purchase would tend to buy immediately, while their money was still worth something and before the shortages appeared. Volcker was convinced that altering expectations would take a demonstration of determination that no one could miss. Contracting the money supply—and hiking the interest rate—makes it harder to borrow for investment or consumption, harder to pay off existing debts, and more profitable to save money. All of this reduces aggregate demand and leads to a fall in price levels, as well as a rise in unemployment.

Did Volcker consciously see unemployment as the instrument of price stability? A Rhode Island representative asked him “Is it a necessary result to have a large increase in unemployment?” Volcker responded, “I don’t know what policies you would have to follow to avoid that result in the short run . . . We can’t undertake a policy now that will cure that problem [unemployment] in 1981.” Call this the necessary byproduct view: defeating inflation is the number one priority, and any action to put people back to work would raise inflationary expectations. Growth and full employment could be pursued once inflation was licked. But there was more to it than that. Even after prices stabilized, full employment would not mean what it once had. As late as 1986, unemployment was still 6.6 percent, the Reagan boom notwithstanding. This was the practical embodiment of Milton Friedman’s idea that there was a natural rate of unemployment, and attempts to go below it would always cause inflation (for this reason, the concept is known as NAIRU or non-accelerating inflation rate of unemployment). The logic here is plain: there need to be millions of unemployed workers for the economy to work as it should.

Central bankers like Volcker can decide how much employment is too much because they are insulated from domestic democratic politics. The world beyond the United States had even less say in the matter, but it suffered more. The interest rate shock was the trigger for a worldwide recession. It also touched off a debt crisis across Latin America, where governments found the cost of paying dollar-denominated loans soaring at the same time that the global contraction was lowering the prices they received for their primary source of foreign currency, commodity exports. Events like these helped deliver the coup de grâce to the ambitious third world politics of the 1970s, exemplified by the call for a New International Economic Order, which had been sustained by a global commodity boom. The tremolo of debt crises across Mexico, Brazil, Zambia, and other countries—and the lost decade that followed—was the overture for IMF structural adjustment, subsequently introduced across the Global South.


It is easy to imagine a world in which Volcker never became Fed chair. In some accounts, his appointment was an accident: Jimmy Carter’s Treasury Secretary resigned; the President responded by moving Fed Chair William Miller to Treasury; suddenly there was “a hole at the Fed,” in the words of Carter adviser Stuart Eizenstat. Volcker was not the first person offered the post; what if someone else had accepted? What if, as his wife would have preferred, Volcker had turned down the job?

On the other hand, the event lends itself to a powerful narrative of inevitability: inflation was a crisis, attempts to tame it had failed, and so something new had to be tried—something drastic. Volcker was less the demiurge of monetarism than the one selected to execute the plan that so many others wanted. His appointment was not an accident. One of Carter’s lead advisers admitted, “Volcker was selected because he was the candidate of Wall Street. This was their price, in effect.” Economist Gerald Friedman recalls:

I remember sitting in the lounge at the National Bureau of Economic Research that day when everyone, both economists friendly to and opposed to the Carter Administration, understood what happened. In replacing Federal Reserve Board Chairman G. William Miller with Paul Volcker, President Carter had finally caved to Wall Street’s demands for an aggressive attack on inflation without regard for the social costs.

Global forces also constrained American policy. In 1971, when Volcker worked in the Nixon Treasury, the United States had delinked the dollar from gold. Without the money supply anchored by a scarce metal, the only thing ensuring the soundness of the dollar (and, therefore, its role as the world’s reserve currency) was effective anti-inflation policy. Just weeks before announcing his shock, Volcker had gone to Europe; the New York Times reported murmurs that “the Europeans all but backed him up against the Berlin Wall to tell him squarely that, although America may take some perverse pleasure from its perpetual inflation, its chief trading partners and allies do not.”

In his recent memoir, Volcker suggests there was no alternative. “Did I realize at the time how high interest rates might go before we could claim success? No. From today’s vantage point, was there a better path? Not to my knowledge—not then or now.” He likens himself to Odysseus, “lashed to the mast” and unable to respond to the siren call of unemployed workers and failing businessmen. What is surprising is that everyone else seems to share this view. Volcker’s successor, Alan Greenspan, praises his “gold-standard-like restraint,” as does anti-Fed icon Ron Paul. Those further to the left tend not to like Volcker, but they also deny that he had any alternative—at least not if he wanted to preserve private control of investment and employment decisions. Most versions of the Marxist story present the crisis of the 1970s as the result of a working class empowered by the postwar full employment regime.1 Difficult to fire, and able to find new jobs easily when they were, workers made demands that threatened the system. Their wage increases bit into profits (lowering the incentive to invest) and their militancy slowed productivity growth (shrinking the surplus out of which both wages and profits are paid). Even the oil price increases, widely blamed for the decade’s inflation, were the result of a third world movement emboldened by American defeat in Vietnam. (OPEC-style attempts to raise commodity prices were widely called “the trade unionism of the third world” at the time.) The Volcker shock altered this balance of class forces and restored the conditions of profitable accumulation—at home and abroad.

If conservatives and radicals agree about the necessity of Volcker, you might expect liberals to dissent. But they don’t. According to Paul Krugman, Volcker, “with bipartisan support, began fighting inflation the only reliable way we know how.” Rick Perlstein described Carter’s appointment of Volcker as “rather heroic and self-sacrificing,” and claimed the shock itself “saved the economy.” Even Lane Kirkland, who became head of the AFL-CIO the year of the Volcker shock, later told an interviewer that “he [Carter] had to do it that way in the face of inflation.” Christina Romer, the leading voice for stimulus in the Obama White House, has said “Like all good revolutions, the Volcker revolution was the triumph of better ideas over worse ones.” Among leading liberal economists only Joseph Stiglitz, to my knowledge, has expressed any real ambivalence: “We can describe the benefit of what he did, which is that he brought down inflation. And we can describe the costs. But we can’t know for sure what would have happened if he had tried another approach.”

Liberals at the time were sure there was another way. They cheered Ted Kennedy at the 1980 Democratic convention, when he said, “Let us pledge that we will never misuse unemployment, high interest rates, and human misery as false weapons against inflation.” That same year, Kenneth Arrow stated his disagreement “with those who suggest we use shock methods or a very severe economic slump to eliminate inflation. It could have permanently bad consequences. People don’t get over a depression easily.” And Paul Samuelson argued that to change the “present inflation-growth path quickly will take severe measures—which I’m not for. . . . My personal judgment is that this is too severe a price for less advantaged people to pay.”

Many instead looked for a solution in the political management of wage levels, then known as an “incomes policy.” The phrase has a foreign or archaic resonance now, but it was ubiquitous in the postwar years. The simplest way to think about it is this: since the Great Depression, though governments in capitalist societies haven’t controlled the commanding heights of the economy, they nonetheless made it their business to manage the performance of the economy as a whole. Their main tools are monetary policy (targeting the price and supply of money) and fiscal policy (targeting aggregate demand through taxes and government spending). But sometimes governments have gone beyond managing aggregates to target something more particular, namely wage and price decisions in particular industries. Enacted successfully, this would allow the government to fight inflation without forcing recession and unemployment—everyone would keep working, at lower or at least frozen wages, rather than some people working in fear of unemployment while the laid-off sat idle and got nothing. The US had compulsory wage and price controls during World War II and the Korean War, and informal guidelines during the Kennedy and Johnson years. From 1971 to 1974, Nixon imposed the first peacetime wage and price controls; even though they did not last the decade, it was easy to assume that the future belonged to political wage-setting (in 1979, 64 percent of Americans wanted to revive controls).

The politics of how a permanent incomes policy might have been implemented is, of course, another question entirely. Capitalists naturally would be suspicious of political wage setting, especially if it required them to share information with the government which had been proprietary. In the US, organized labor under the leadership of George Meany was also an opponent of an incomes policy, partly out of an ideological commitment to “free collective bargaining” (that is, bargaining with specific firms rather than with a central government agency), and partly because Nixon’s controls had bound wages more tightly than prices. Writing in 1982, the radical economist Stephen Marglin had a proposal for overcoming labor opposition: growth of real wages did have to be limited, but he suggested that “the Left can at the same time demand something in return for wage restraint,” namely “a gradual extension of worker participation in the private preserve of management prerogative.” Neither then nor now have American labor leaders had time for such ideas.

James Tobin, who supported an incomes policy, admitted it was “a conveniently evasive term” including “everything from full-fledged wage and price controls to wage/price guideposts and ‘open mouth operations’ without legal sanction.” With advocates like this, it is not surprising that many people complained that an incomes policy was more of a phrase than a policy. Ultimately, what is interesting is not the details of proposed incomes policies or the coalitions that favored or opposed them. It’s that, before the Volcker shock ended the argument, very few people thought there was a market-based solution to the inflation crisis. Most thought the path out led through more extensive government controls and planning, deepening rather than constraining the power of democratic (or in the US, quasi-democratic) politics over private economic prerogatives. A generation of historians, following Alan Brinkley, have argued that American Keynesianism was powerful precisely because in promising to manage aggregate demand it foreswore any ambition of influencing the structure of production or distribution. But Keynesians like Tobin thought the 1970s demanded a microeconomic strategy, focused on industries and firms, to supplement the manipulation of aggregates. Labor’s qualms about wage and price controls remind us that the politicization of the economy and the extension of controls does not always or perhaps even often favor the popular classes. But the point is that the incomes policy reminds us of a surprisingly recent past in which the economy was still politicized. Shortly thereafter, Volcker helped usher in an era of central bank supremacy, a masterful exorcism of the political in political economy. But, as Springsteen sang on Nebraska (released in 1982, the trough of the recession) maybe everything that dies someday comes back.


Volcker has his attractive qualities, even for those unmoved by his crusade against inflation. For people shaped by the Obama rather than the Carter years, he is probably best known for the “Volcker rule,” which limits the kinds of speculative trading in which commercial banks may engage. The regulation, ultimately enacted as part of Dodd-Frank, bore some resemblance to the New Deal Glass–Steagall law, which separated commercial and investment banking (and which had been overturned during the Clinton Administration at the behest of then newly formed Citigroup, which otherwise would have been targeted by it). Even such a modest limit was enough to put Volcker at odds with the common sense of the Obama team. “I am sure Tim Geithner and Larry Summers would have been content if I disappeared,” he writes, adding that the proposal passed “with only tepid support from within the administration itself.”

Beyond his “rule,” Volcker has been a consistent critic of financialization. He once told an audience of bankers that the only financial innovation that had improved society was the ATM. More seriously, he believes we have done little to prevent another crisis on the scale of 2008. Despite his hostility to certain elements of activist government, Volcker (son of a New Jersey town manager) has always believed in public service: his cheap suits and ten-cent cigars advertised his indifference to the elite culture of the 1980s. He has an uncommon contempt for think tanks, policy institutes, and elite law schools, and he has lately taken to describing his country as a “plutocracy” and admitting that the concerns of industrial workers have been too easily dismissed with vague promises of “job retraining.”

The irony is that Volcker played a significant role in bringing about the situation he laments. “There is no force on earth,” he writes today, “that can stand up effectively, year after year, against the thousands of individuals and hundreds of millions of dollars in the Washington swamp aimed at influencing the legislative and electoral process.” If there was ever such a force, it was the labor movement which Volcker helped destroy. “In the economy as a whole,” Volcker said in 1981, “labor accounts for the bulk of all costs, and those rising costs in turn maintain the momentum of the inflationary process.” The high-interest-rate, high-unemployment environment would moderate new wage demands and push unions to agree to concessions, both because workers would fear unemployment but also because they would no longer seek raises to compensate for the inflation they expected. But there was also a more direct path to breaking the unions. Volcker says “the most important single action of the [Reagan] administration in helping the anti-inflation fight” was defeating the air traffic controllers’ (PATCO) strike in 1981, when Reagan fired and permanently replaced ten thousand government workers and arrested their leaders. The show of force had “a psychological effect on the strength of the union bargaining position on other issues—whatever the issues were.” He was right: in 1979, twenty-one million Americans belonged to a union; in 2003, despite substantial growth in the workforce, the number was down to just under sixteen million. After the crushing of PATCO, those unions became less restive: in the 1970s, there were on average about 289 major work stoppages per year; for 1983–2017, the annual average is thirty.

Volcker also helped to bring about the orgy of financialization that has driven the American economy since the early 1980s. As sociologist Greta Krippner shows in her invaluable Capitalizing on Crisis, the high interest rates of the 1980s “created punishing conditions for productive investment and drew economic activity inexorably toward finance.” Followed the removal of capital controls around the world after 1971 and the deregulation of domestic finance that had begun in the late 1970s, the result of high US interest rates was to attract an unprecedented flood of foreign money into US financial markets. Savings from other countries (above all, Japan) funded Reagan’s government deficits as well as the ballooning balance sheets of Wall Street banks along with a vast expansion in consumer credit. While the high cost of borrowing kept real investment low, and caused hundreds of thousands of businesses to fail, all this liquidity flowed into financial markets.

In his memoir, Volcker writes, “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets.” Statements like this make clear the connection between the scourge of the unions and the critic of the bankers, between the Volcker Shock and the Volcker Rule. Both inflation and bubbles create fictitious money claims in excess of the wealth a society actually possesses, leading to spurious GDP gains that must give way—whether in an inflationary spiral or financial panic. In both cases, temporizing economists, the enemies of practical bankers like Volcker, claim that things can be finely measured and controlled—through fiscal policy and price indexes, hedges and efficient markets—and in both cases pride brings a fall.

From one vantage, these sentiments sound like a fussy obsession with sound money and real value. But critical scholars have also linked consumer price inflation and asset bubbles. According to Greta Krippner, “The result [of the Volcker regime] was to transfer inflation from the nonfinancial to the financial economy—where it was not visible (or conceptualized) as such.” A growing money supply (understood to include not just dollars but new credit instruments, which banks as well as governments can create) still causes prices to rise. But instead of causing a general inflation of all prices (including the price of labor), the new spiral affects only assets (from bonds to houses to Picassos), enriching the rentier class but also creating instability (as, for example, when the notional value of derivatives swells to several times the value of world GDP). If this is the case, the troubles of the 1970s simply mutated, like so many other maladies of capitalism, into new forms.


For most of 1980, Jimmy Carter remained curiously serene regarding the fact that one of his appointees had induced a recession in an election year. He publicly questioned Fed policy exactly once, calling a recent interest rate hike “ill-advised” in a speech that also went out of its way to call Volcker “an outstanding chairman.” “The President’s criticism of the Federal Reserve is regrettable,” said Arthur Burns, former Fed chair under Nixon. William McChesney Martin, another former Fed chair, called it “deplorable.”

This concern for the sanctity of central banking has echoes today. When Volcker’s memoir was published last fall, newspapers questioned Trump’s escalating conflict with Fed chairman Jerome Powell, whom Trump resents for continuing Janet Yellen’s policy of gradual tightening after the long post-2008 era of quantitative easing and other loose monetary policies. In the memoir, Volcker recalls being told by James Baker, Reagan’s chief of staff, that he was under strict orders not to raise interest rates before the election. Luckily, according to Volcker, he had not been not planning to tighten. Inspired by the anecdote, interviewers asked if he had any advice for Powell; Volcker obliged by saying that his “message to Chairman Powell is be strong and follow your instincts.”

Obsession with central bank independence has roots, like most things in America, in the class war. To raise interest rates in response to low unemployment rates, even when inflation is low, is to make sure that the ratio of surplus going to workers does not change. That the vigilant central bank, whatever else it may be, is an instrument of class rule should not surprise anyone familiar with 19th century politics over currency and inflation. The original gold standard, historians have concluded, became untenable around the time of World War I. Once universal suffrage was granted across Europe, the strategy of maintaining price stability through recurrent bouts of deep unemployment became politically impossible. Volcker wrote in 1978 that the Fed’s control of the money supply (and the resulting high interest rates) could provide the same discipline that “was once a function of the gold standard.” The next year he brought back the form of wage discipline—that is, recession—which had been considered politically impossible. It makes sense that it wouldn’t remain politically possible forever.   

Given the darkening economic outlook, Trump will likely continue to clash with the Fed, and we can expect central bankers to take their place alongside FBI agents and laundered neoconservatives in the surreal new liberal pantheon. But there have also been signs of new thinking, with Vox’s Matthew Yglesias writing that “there is a decent-size body of economists, mostly though by no means exclusively on the left, who argue that at the end of the day, Trump is right—the Fed has been raising rates too quickly, not just this year but for decades, and in doing so has hurt workers and laid the groundwork for political dysfunction.” For one thing, economists may be mistaken about where the natural rate of unemployment lies, or they may neglect the fact that higher wages can increase the labor force, thus expanding employment without risking overheating. Or, in a more daring rendition, it might be that we could live with a slightly higher rate of inflation as the price of a high-pressure economy. 

But what happens if inflation does come back, and at a level that everyone agrees is a problem? What would we expect a Democratic (or democratic socialist) President to do? In 2019, the immediate problem is stimulating demand, not stopping inflation. But the question will come back one day, and perhaps sooner than we think. Take the jobs guarantee, an increasingly prominent demand of the new left. The idea is simple enough: the government would act as an employer of last resort, ensuring that anyone who wanted a job can find one. The left-leaning economist Dean Baker has warned that this would unleash a “serious wage-price spiral, unless we introduce other measures.” His logic is that affluent earners will have to pay more for services, leading them to seek raises of their own to offset their losses. Not everyone agrees with him about the effects of the jobs guarantee. But it can never be too early to start about those “other measures.”

Debates about job guarantees, Green New Deals, and co-determination make clear a dominant question of our time: the renewal of political economy after decades of depoliticization. Trump made headlines last May by threatening to use emergency powers to keep unprofitable coal plants running (“an unprecedented intervention into US energy markets,” per Bloomberg). It was reminiscent of the late 1940s, when Harry Truman threatened that, if the steel companies refused to expand as much as government economists thought was necessary for national prosperity, the government would build and run new plants by itself. This wasn’t mere bluster: Democrats in Congress talked about nationalizing steel and treating it like a public utility, while Truman’s chief economic advisor, Leon Keyserling, believed interest rates should be permanently kept close to zero (as indeed they were from 1940–1951). After the crisis of the Depression and the planned economy of World War II, ideas like this were familiar, if never quite mainstream. The intervening years saw the ebbing of such proposals, and the triumph of a vision of the economy as a discrete sphere managed by technical experts—above all, by central bankers. It is now clearer this state of affairs, never completely hegemonic anyway, was an exception in the longer history of political economy. The best way to discover what was possible in the 1970s would be to test the limits of what is possible today.

  1. Benjamin Kunkel wrote about Marxist theories of full employment, including Robert Brenner’s alternative to the theory discussed here, in issue 9. 

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