Rumours continue to circulate that former Fed Chairman Paul Volcker will be Obama’s Treasury or Fed chief. Volcker’s hardline anti-inflation stance makes him an exciting prospect for Greenspan/Bernanke critics. But Andrew Carpenter says we should also remember the painful recessions that Volckers’ interest rate hikes induced…

This from Investor’s Daily Edge

Some people – even fellow IDE contributors - think Paul Volcker should be the next Secretary of the Treasury… even Chairman of the Federal Reserve.

A non-scientific survey leads me to believe the majority of these Volcker fans were not adults between 1979 and 1987… heck, I suspect most were in diapers or not even here yet… you know, that gleam in daddy’s eye stuff.

Because, as you’ll remember, those were the years when, as Chairman of the Federal Reserve, Volcker twice purposely sent the country into deep recessions.

The other thing I suspect is that many of today’s Volcker-ists are young goldbugs… people who really don’t care what happens to anyone or anything as long as their precious metal goes up.

Volcker is a legend to these people.

You see, back in the 1970’s when he chaired the Fed, Volcker’s attempts to use interest-rate increases to slay inflation backfired. It was met with a great deal more inflation. But, in February 1980, with the Fed funds rate at 14%, gold hit a then all-time high of $875 an ounce.

Goldbugs dined out for 25 years on that.

But, while he made a few people happy, it was Volcker’s three-year experiment with Milton Freidman’s theories on monetarism that left a real mark (scar) on the US.

Instead of targeting the Fed funds rate, Volcker tried to fight inflation by strangling the dollar’s availability.  The results were disastrous.

The problem was that even though inflation is a monetary phenomenon, as Friedman noted, in the late 1970s the majority of physical dollars resided outside the 50 states (they still do), so attempts to control the quantity of dollars within the US were bound to fail.

Worse, given the Fed’s efforts to control money rather than rates, the Fed funds rate bounced wildly on a daily basis. That meant businesses and farmers faced an impossible task of trying to raise capital without knowing how much they would actually owe.

Credit became impossible… either to compute or afford.

In the end, however, Volcker’s policy ultimately did slay inflation. You see, double-digit interest rates led so many businesses to fail that millions of people lost their jobs…thousands of family farms went under.

People without money don’t spend – inflation solved.

Had you lived through this, Paul Volcker would be the very last man you’d want President-elect Obama to name to a cabinet position.

Oh, and by the way, gold was back down to about $300 an ounce by mid-1982… talk about whipping inflation!

Source: Hold On There Volcker Fans, Don’t Forget The Past