Paul Volcker Slays the Inflationary Dragon

The Slayer's Past

Paul Volcker was born in Cape May, New Jersey in 1927. He received his undergraduate studies at Princeton University and later attended Harvard University and the London School of Economics for his graduate studies. His career started in 1952 with the Federal Reserve Bank of New York. He left after five years where he became a financial economist at Chase Manhattan Bank. He spent five years with Chase Manhattan Bank to later return for the vice-president and director of planning.

GANGSTER

Inflation Slayed

With the inflationary dragon finally slayed, in 1982 the Fed returned to a policy of smoothing out interest rate. It did this by placing less emphasis on monetary aggregate targets and shifting to borrowed reserve targets as a monetary tool. A borrowed reserve target smoothes interest rate because because as output rises, interest rates will also rise. This causes bank to borrow more money from the Fed and therefore the amount of borrowed reserves will increase. In an effort to prevent the level of borrowed reserves from exceeding its target, the Fed will lower interest rates through open market purchases to increase the price of bonds. The result of using a borrowed reserve target is that the Fed is able to prevent a rise in interest rates. Although, by using this tool, the open market purchases by the Fed will increase the monetary base, which will then lead to an increase in the money supply.