Paul Volcker was best known as the man who tamed inflation as Federal Reserve Bank chairman under Presidents Carter and Ronald Reagan. He was born in Cape May, New Jersey in 1927 and became undersecretary in the United States Treasury under Richard M. Nixon from 1969 to 1974. In 1975 he was appointed President of the Federal Reserve Bank of New York, and was made chairman of the Federal Reserve Board of Governors, after President Carter shook up his Cabinet in July, 1979, and Volcker was confirmed by Congress on August 2, 1979. Under the previous Fed chairman Miller, attempts to control inflation by a very gradual tightening of the money supply to avoid recession had failed miserably. Inflation outpaced interest rates, and both were spiraling out of control.

When Volcker took over the Fed , inflation was spiraling out of control, running over 13 percent, and the Producer Price Index spiked to over 17 percent two months after he took the reigns at the Fed. Faced with this news, he raised the discount rate to 12 percent, a full percentage point. Over the next year, the money supply was further tightened, and the Federal Funds Rate soared to 20 percent, throwing the economy into recession. The recession was the coup de grace for the Carter Administration. Incoming President Reagan planned to stimulate the economy through tax cuts, and through investment incentives, but he gave Volcker a free hand with monetary policy, understanding the importance of controlling inflation. The economy went into a free fall, which didn't start to turn around until 1983. In the wake of the worst recession since the end of World War 2, inflation had been tamed -- down to 3.8 percent for 1982. The cost to the economy was enormous: much of the smokestack manufacturing industry in the nation was dead or dying, unemployment was nearly 10 percent. Interest rates were still near historic highs, and the Dow was under 800, lower than it had been in the late 1960's. Over the next several years he kept the money supply tight, only gradually letting intrerest rates drop.

Volcker was a monetarist in the mold of Milton Friedman, which means that he held the view that the most effective means of regulating the economy was to regulate the growth of money. In reality, economics in the real world consists of many factors that can be manipulated, but at the same time many of those factors interact with each other, often in unanticipated ways and often take years for their full effects to be felt. For instance, deficit spending by the government will tend to stimulate the economy, but increased credit demands by the Federal Government will drive up interest rates, which tends to dampen the economy. Expectations play a major role in economic activity as well. The fragile recovery during the period from 1983 to 1986 could be threatened by any number of influences. Too little loosening of credit would stall economic growth, which would drive already high budget deficits higher because of falling tax revenues and rising needs to provide assistance, and increased cost to the federal goverment for borrowed money. Too much loosening of credit could reignite inflation fears, which would result in starting the whole cycle over again. The recovery was weak, at least at first and especially for the industrial sectors hardest hit by the recession of 1982. Through careful management of the money supply, economic growth picked up in many sectors and interest rates gradually came down, though not as fast as many would have liked for a number of reasons.

Paul Volcker was suceeded as chairman of the Fed by Alan Greenspan in 1987, who has held the job ever since. Alan Greenspan continued most of Volcker's policies, and until the 2001 recession has presided over years of mostly steady growth of the economy. Paul Volcker, since his retirement as chairman of the Fed has kept himself busy as as a highly sought after speaker and consultant, and is not afraid to speak out on important monetary policy issues. He is considered by many to be the elder statesman of the financial world.