Paul Volcker, 1927–2019

The Fed chair made his name battling inflation, and left his mark on post-crisis financial regulations
Paul Volcker

Paul Volcker, former Federal Reserve chair and scourge of inflation, has died aged 92.

Volcker was a central banker for much of his career, but it was as chair of the Federal Reserve Board from 1979–87 that he made history. It was a time of great monetary instability, as the world was still reeling from the collapse of the Bretton Woods system. In 1980, inflation in the US hit 11.6%. It would take bitter medicine to bring it back down, which Volcker delivered.

In a statement shared with Central Banking, Alan Greenspan, who succeeded Volcker as chair, said simply: “Paul Volcker was the most effective chairman in the history of the Federal Reserve.”

Born in Cape May, New Jersey, Volcker gained his bachelor’s degree from Princeton University. He followed it up – after a summer internship at the New York Fed – with a master’s degree in public administration from Harvard.

He served as a Fed economist from 1952 to 1957, before moving to Chase Manhattan Bank for a spell. In 1962, he took a job as director of the Treasury’s Office of Financial Analysis. In 1965, he returned to Chase Manhattan as vice-president, then in 1969 he went back to the Treasury as undersecretary for monetary affairs, just as Bretton Woods was teetering on the brink.

Volcker’s role put him at the heart of the effort to save the system. He was a believer in the value of fixed exchange rates, but he well understood the tension posed by US spending on the Vietnam war and the limited supply of gold. All the same, he rejected the option favoured by many Europeans of raising the price of gold. He argued it would reward speculators, and, besides, it required Congressional approval, which did not appear to be forthcoming.

Volcker came to the view that it was necessary to revalue other currencies against the dollar to save the overstretched peg. He pushed President Richard Nixon for a “cold-blooded suspension” of gold convertibility, designed as a temporary measure to force Europeans’ hands. But ultimately, the suspension in 1971 marked the end. Bretton Woods was never restored to health.

In 1974, Volcker left the Treasury to return to Princeton, and shortly after, he was named president of the New York Fed. The role gave him a direct say in monetary policy-making and control over the Fed’s market operations. He began to make a name for himself as an advocate of monetary restraint.

The Fed was rapidly losing control of inflation. Despite a recession in the early 1970s, inflation was spiralling, and hit 11.6% in December 1974. It slid to 5% in the subsequent years before surging once more.

President Jimmy Carter nominated Volcker as Fed chair in July 1979. He was confirmed in August. By then, inflation was once again heading for double digits.

Volcker prescribed a potent medicine. The Fed announced it would be allowing interest rates to fluctuate much more widely, and would instead focus on strict control of the money supply.

Paul Volcker was the most effective chairman in the history of the Federal Reserve

Alan Greenspan

At first, inflation continued rising. As the economy slid into recession, Volcker came under intense pressure to reverse course. Famously, the Fed was blockaded by tractors driven by irate farmers, and Volcker received planks of wood in the mail from construction workers who said they no longer had any need for them – there was no work to be had.

Inflation started to be cowed in March 1980, when it peaked at 11.6%. It took a further year to bring it below 10%, and another to push it to around 5%. The economy contracted throughout 1982, with growth reaching a low of –2.6% in the third quarter.

Speaking to Central Banking, Otmar Issing, the former European Central Bank chief economist, described Volcker’s inflation-fighting credentials as “legendary”. “He was the central banker with the highest reputation in the world which showed also respect for his honest personality.”

Even as the economy recovered, pressure remained. Still, the Fed’s independence to set monetary policy was “challenged only once” in Volcker’s direct experience, according to an account in his book, Keeping at it: the quest for sound money and good government. This was in 1984, when Volcker was summoned to a meeting with US President Ronald Reagan at the White House.

The meeting “strangely” did not take place in the Oval Office but in the “more informal library”, said Volcker. “As I arrived, the president, sitting there with chief of staff Jim Baker, seemed a bit uncomfortable. He didn’t say a word,” Volcker recounted. “Instead, Baker delivered a message: ‘The president is ordering you not to raise interest rates before the election’.”

Volcker said he was “stunned”. “Not only was the president clearly overstepping his authority by giving an order to the Fed, but also it was disconcerting because I wasn’t planning tighter monetary policy at the time,” he said.

Janet Yellen; Alan Greenspan; Ben S. Bernanke; Paul A. Volcker
From left: Janet Yellen, Alan Greenspan, Ben Bernanke and Paul Volcker

During his second term, under Reagan, Volcker made it a priority to support the recovery, allowing the money supply to expand without inflation returning. It worked: growth surged as high as 8.6% in 1984, even as inflation continued its downward trend. By August 1987, when he left the central bank, inflation was 3.6%.

More broadly, Volcker was known for his respect for, and ability to reach out to, policy-makers outside the US. Commenting on Volcker’s lifetime achievement award, YV Reddy, former governor of the Reserve Bank of India, recalls how Volcker spoke at length about his views on global development and his support for tight monetary policy measures to contain inflation and strict prudential norms for restraining excessive credit growth in India at a dinner in Mumbai.

“His articulation lent support to my efforts by strengthening public opinion in my favour – his credibility in the world of money, finance as well as the government in India also, was evident to me at that time,” says Reddy.

Speaking to Central Banking journal in 1999, Volcker defended central bank independence and set out a vision of the international economy that more or less came true: “In the future, we will have two big regional currencies – the US dollar and the euro. There are many inhibitions to the yen playing the same role. I would not be surprised if the Chinese renminbi were to become the dominant currency in Asia.”

In the US, Volcker has left an enduring legacy by helping to shape regulation post-2008. As adviser to President Obama, Volcker headed the Economic Recovery Advisory Board. Most famously, he gave his name to a key provision of the Dodd-Frank Act, the Volcker Rule, which separates banks’ proprietary trading from their retail operations. Volcker testified to politicians worldwide on the approach, and elements of the idea were adopted elsewhere.

Paul Volcker and Barack Obama
Paul Volcker (L) and Barack Obama

Volcker’s successors at the Fed remember him as key influence. “Paul Volcker was an inspiration to me and to everyone in the Federal Reserve,” said former chair Janet Yellen. “He embodied the values we hold most dear: devotion to public service, the courage to do the right thing, even when it’s immensely unpopular, a commitment to strong and effective regulation.”

Echoing Yellen, Thomas Hoenig, former vice-chair of the Federal Deposit Insurance Corporation, said Volcker demonstrated great “courage and conviction” throughout his career, adding he was “enormously respectful” to Fed staff. “He was a true role model for me, a dedicated public servant of the highest integrity.”

“He came to represent independence,” former chair Ben Bernanke told the New York Times. “He personified the idea of doing something politically unpopular, but economically necessary.”

In a statement, Fed chair Jerome Powell said: “He believed there was no higher calling than public service. His life exemplified the highest ideals – integrity, courage, and a commitment to do what was best for all Americans.”

Don Kohn, a former Fed vice-chair, said: “For me he was mentor, role model and friend. He rejected some of the technology of modern central banking – the explicit inflation target, the transparency, the ease with newish financial instruments. But he had the essential elements of courage, integrity, devotion to public service, and a laser-like focus on price and financial stability that made him a great central banker.”

Former Bank of England policy-maker Charles Goodhart described Volcker as “a great central banker and a man of thorough integrity”.

Volker married Barbara Bahnson in 1954. After her death, he married Anke Dening, who had been his longtime assistant. He is survived by Dening, as well as his son James and daughter Janice, and four grandchildren.

You can find a selection of articles and interviews involving Paul Volcker from our archive here.

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