Volcker Didn't Beat Inflation — Here’s Who Did
Paul Volcker. Double-digit rates. Inflation crushed. But what if the real story behind the Fed’s “victory” has been misunderstood for decades?
By Rebel Capitalist News Desk
Today, many people still believe that Paul Volcker, the famous head of the Federal Reserve in the early 1980s, beat inflation by boldly raising interest rates.
But what if that story is only half true?
What if, in reality, Volcker didn’t actually beat inflation, but instead got out of the way and let the free market do the hard work?
That’s exactly what happened, according to a careful look at the real data, the Fed’s own meeting transcripts, and how the plumbing of the monetary system works.
In this article, we’ll explain what really happened during the Volcker era, why the Fed’s plan to control money supply failed, and how the free market, not the Fed, crushed inflation by pushing interest rates to painful but necessary levels.
The Myth: Volcker Heroically Raised Rates to Kill Inflation
The common story goes like this:
In the late 1970s, inflation was out of control. Prices were rising over 13% per year.
Paul Volcker took over the Federal Reserve in 1979 and slammed the brakes on the economy by raising interest rates to over 20%, crushing inflation and saving the economy.
That’s the version many people hear in textbooks and the media.
But that’s not quite how it happened.
But if the legend of Volcker the rate slayer is just that…a legend…then what actually happened behind the curtain of central banking?
The truth begins with a failed experiment in controlling the money supply…
The Truth: Volcker Tried to Control Money Supply, But Failed
When Volcker took over, he didn’t actually target interest rates directly. Instead, he tried something new: he told the Fed to focus on controlling the amount of money in the system, especially M1 (cash and demand deposits).
To do this, the Fed targeted non-borrowed reserves, which meant they limited the amount of reserves banks could access from the Fed.
The idea was that by making reserves scarce, banks would have less room to create loans and deposits, slowing down the growth of M1.
But here’s the kicker:
M1 growth didn’t slow down as planned.
In fact, M1 grew faster between 1979 and 1983 than it had from 1973 to 1978.
Here’s the data to prove it:
That’s right. The very thing the Fed tried to control…M1…did not cooperate.
Why?
Because banks don't need reserves to lend. Also, global investors poured money into the U.S. because rates were rising, adding more dollars into the banking system.
Even the Fed’s own staff admitted in 1982 that the connection between reserves, M1, and inflation had broken down.
FOMC transcript, October 1982:
"Just because we hold to a 5 percent M1 target doesn’t mean we are going to get it.... We don’t know what is going to happen—let’s face it."
That’s from Charles Partee, one of the Fed governors.
In short: Volcker’s main plan to beat inflation by controlling M1 didn’t work.
The Fed thought it was pulling the levers of M1. In reality, the machine was running on autopilot, fueled by capital flows and lending behavior the Fed couldn’t touch.
And what came next wasn’t policy…it was panic...
What Actually Happened? The Market Took Over and Imposed Discipline
If Volcker wasn’t in control, how did inflation finally fall?
The answer is simple:
Volcker allowed the free market to set rates as high as needed to crush inflation expectations.
Interest rates soared to over 18%.
But…and this is key…Volcker wasn’t targeting rates directly. He let the market figure it out.
This meant that the economy experienced wild rate swings, credit creation collapsed, and inflation expectations finally broke.
In a way, Volcker didn’t “heroically” raise rates. He stepped back and let the market do the dirty work by making reserves scarce and tolerating the pain.
When central planners lose control, the market doesn’t politely take over…it imposes discipline like a sledgehammer.
And as we’ll see next, even the Fed knew they were no longer in the driver’s seat…
The Fed’s Own Words: Admitting They Lost Control of M1
The Fed knew their plan wasn’t working as intended.
Here’s more from the FOMC transcripts (1982):
Governor Lyle Gramley:
“Our attempting to control the money supply month-by-month, which can’t be done, has led to fluctuations in short-term rates because of the way the money supply behaves.”
Paul Volcker himself admitted:
“The relationships that we look at all the time between liquid asset totals and money narrowly or broadly defined do not seem to bear the same relationship to economic activity that we might have anticipated. I find it difficult or impossible to explain that.”
Translation: They couldn’t predict or control how M1 behaved anymore.
By late 1982, the Fed quietly gave up on targeting M1 and shifted back toward managing interest rates (borrowed reserves targeting), even though they didn’t openly admit it until later.
Behind closed doors, the Fed was panicking. In public, they kept up the facade.
But meanwhile, a silent contradiction was brewing: the money supply kept growing, yet inflation was falling. How could that be?
Why Did M1 and M2 Keep Growing While Inflation Fell?
This is the puzzle that breaks the mainstream narrative.
If M1 and M2 kept growing, why did inflation fall?
Because:
Credit creation slowed sharply as interest rates became unaffordable for borrowers.
People parked more money in liquid deposits, boosting M1 and M2, but they weren’t borrowing or spending—it was hoarding behavior, not lending behavior.
Offshore dollars flowed into the U.S. as investors chased high returns, inflating M1 and M2 but not fueling domestic spending or credit creation.
In other words:
M1 and M2 grew for reasons that didn’t translate into more inflation.
Credit creation collapsed. Asset prices fell. Demand weakened. Inflation broke.
It was the crushing of credit, not M1 growth suppression, that killed inflation.
When money sits idle, it doesn’t drive prices…it collects dust. What really matters is velocity, lending, and credit creation.
Which brings us to the final and most uncomfortable truth for the monetary priesthood…
The Plumbing Truth: The Market Beat Inflation, Not the Fed
Here’s the Rebel Capitalist plumbing version:
Myth vs. Reality
Myth: Volcker heroically raised rates to 20%.
Reality: Volcker let the market push rates high via reserve scarcity.
Myth: Fed beat inflation by controlling M1.
Reality: Fed failed to control M1 — credit collapsed because real rates soared.
Myth: The Fed ran a scientific, precise policy.
Reality: The Fed stumbled into success by tolerating pain and letting the market find the rate.
In simple terms: Volcker didn’t beat inflation…the free market did, once the Fed got out of the way.
Volcker’s legacy was never one of mastery…it was tolerance for pain. The market did the heavy lifting.
And as we stare down today’s inflation regime, the same mistake looms: pretending central banks are in control.
Final Thoughts: Lessons for Today
This story isn’t just history. It teaches us critical lessons about how the real-world monetary system works:
At times credit creation, not M1 or M2, drives inflation in a modern, credit-based system.
Bank reserves don't control money aggregates
Free Market > Central Banks
In today’s world of balance sheet-focused monetary plumbing, these lessons are more important than ever.
So the next time someone says, “Volcker beat inflation by raising rates,” you can smile and say:
“Actually, Volcker failed to control money supply—but inflation broke when the free market was finally allowed to set rates high enough to crush credit and demand. The market did it, not the Fed.”
Want More Market Truth? Don’t Wait for the Fed to Tell It
If there’s one lesson that echoes across every crisis…it’s this:
The free market always wins.
And yet, the mainstream narrative still gives central banks credit for outcomes they neither predicted nor controlled.
Here at the Rebel Capitalist News Desk, we follow the data, the plumbing, and the real incentives…not the PR campaigns of unelected bureaucrats.
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Reporting by Rebel Capitalist News Desk