Paul Volcker Pushed Interest Rates to 20% and Mailed-In Lumber Was the Polite Response

When Paul Volcker became the twelfth chair of the Federal Reserve on August 6, 1979, U.S. inflation had been above 7 percent for four years and was climbing. Mortgage rates were absurd. Wage and price controls had failed. Two oil shocks were still working their way through the economy. Carter's previous Fed chair, William Miller, had been visibly shy of tightening; Carter promoted him to Treasury secretary and reached for someone famously not.

Volcker's response was the most aggressive monetary tightening in modern American history. The federal funds rate, which averaged 11.2 percent in 1979, was driven up to a peak of 20 percent in June 1981. The prime rate at major banks reached 21.5 percent. The cost of a mortgage went from punishing to almost unobtainable. The result, as intended, was a recession — two of them, actually, between 1980 and 1982 — and an unemployment rate that pushed past 10 percent in late 1982.

The political response was the most intense ever directed at the Federal Reserve. Indebted farmers drove tractors to Washington and ringed the Eccles Building. Heavily levered homebuilders mailed sawn lumber pieces to Volcker's office to make the same point in a different medium. Senate Banking Committee hearings turned hostile. Volcker held the line. By 1983, inflation had fallen below 3 percent. The cost was real, and was disproportionately borne by people who didn't make the policy. The lesson the Fed took, fairly or not, was that breaking inflation works.