Paul Volcker’s Anti-Inflation Stance and the Phillips Curve Debate
The year 1976 was significant for the articulation and reassertion of a strong anti-inflationary monetary policy, largely championed by Paul Volcker, who had become president of the New York Federal Reserve Bank in August 1975. His consistent views on inflation and economic stability were clearly expressed in his public engagements that year.
February 17, 1976: Senate Testimony on Inflation and the Phillips Curve
On February 17, 1976, Paul Volcker testified in the Senate, making a clear and principled stand on the nature of inflation and the policies required to combat it. He acknowledged that inflation had “many causes”—including factors like “oil price increases” and “devaluation”—but critically, he also included “lax monetary policy” as a contributing factor. This was a nuanced, yet firm, position that emphasized the central bank’s responsibility even amidst external shocks.
Crucially, Volcker used this platform to argue against the prevailing “Phillips curve view”. This economic theory suggested a trade-off between low inflation and low unemployment, implying that policymakers could “buy” lower unemployment by tolerating a bit more inflation. Volcker, however, did “not accept” this view. He posited that “sustained, disinfl ationary monetary and fi scal policies could achieve both” low inflation and low unemployment. His consistent belief was that “over time infl ation and the unemployment go together,” and that the “lesson of the 1970s” was that attempts to exploit this perceived trade-off only led to worse outcomes. He articulated that inflation itself was “the greater threat to economic stability”. This stance marked him as a committed anti-inflationist, a reputation he carried throughout his career, often criticizing “a policy of shifting primary concern from infl ation to unemployment”.
September 16, 1976: Addressing the American Economic and American Finance Associations
Volcker continued to elaborate on his economic philosophy in his address to the American Economic and American Finance Associations on September 16, 1976. In this speech, he again recognized that “all price increases (called infl ation) were not monetary”. This acknowledged the complexities of inflation, including supply-side shocks, as noted in the source material related to oil price increases contributing to inflation in the 1970s.
However, he followed this crucial distinction with a clear statement on the primacy of monetary policy: “Excessive monetary expansion is a suffi cient condition for infl ation, and in the longer run, it is equally clear that no important infl ation can be sustained without money rising substantially faster than real income”. He stressed that “There is always some rate of monetary growth (perhaps zero) that will in principle achieve price stability”. This assertion underscored his core belief that while various factors could contribute to temporary price increases, sustained inflation ultimately required the backing of an expanding money supply. This principle would guide his future actions and set him apart from many of his contemporaries.
His views, though presented early in his impactful tenure at the New York Fed, were not universally embraced, as evident in the ongoing debates within the Federal Open Market Committee (FOMC) and the broader economic and political spheres. For instance, despite his warnings, the FOMC, in April 1976, voted unanimously for a small reduction in the federal funds rate, indicating a continued struggle within the institution to prioritize anti-inflationary measures. Even Chairman Arthur Burns, while acknowledging the need to control monetary emissions to lower inflation, frequently yielded to political pressures to prioritize low unemployment.
Beyond Volcker’s pivotal role, 1976 also saw a continuation of the economic recovery that began in April 1975. While consumer price inflation continued to recede from its March 1975 peak, money wage growth also declined before rising again by the 1976 election. Despite this, the budget deficit rose to $70 billion in 1976, a new record, which displeased Arthur Burns and shifted the burden of inflation control almost entirely to the Federal Reserve. This period also marked the anticipation of the nation’s bicentennial celebration, an effort seen by some as a way to restore American patriotism and unity after a period of protest, though public enthusiasm for official celebrations was mixed.
In sum, 1976 emerged as a critical year for understanding the shifts in American economic thought and policy, particularly through Paul Volcker’s consistent and clear articulation of a path toward inflation control, even as other aspects of the year’s social and political landscape await further historical illumination from additional sources.