Paul Volcker left us this week, bringing to a close one of the most remarkable careers of public service in modern American history. Volcker reshaped the politics of economic management in the United States and the world.
Following early stints in the New York Fed and President John F. Kennedy’s Treasury Department, Volcker first came to public prominence as undersecretary of the treasury for international monetary affairs from 1969 to 1974, a busy and tumultuous time that required years of globe-trotting diplomacy in the wake of the “Nixon Shocks” that followed when President Richard Nixon abruptly severed the dollar’s final links with gold.
In 1975, Volcker became president of the Federal Reserve Bank of New York. He was then was reluctantly appointed by a wary-but-desperate President Jimmy Carter to chair the Federal Reserve Board in 1979, a position he held for two terms through 1987.
In the decades that followed, he remained an active voice and participant in the great issues of the day, directing numerous commissions tasked with investigating sensitive issues of profound corruption (such as the whereabouts of financial assets seized from victims of the Holocaust). In his ninth decade, President-elect Barack Obama tapped Volcker to head his Economic Recovery Advisory Board.
Volcker broke the cycle of inflation
Volcker is most famous (and infamous) for more or less single-handedly breaking the back of the persistent, spiraling, inflationary cycle that bedeviled the U.S. economy throughout the 1970s. This achievement came at considerable cost: Under his leadership, Volcker allowed the prime interest rate, point by point, to climb from an already record high 11.75 percent to an unimaginable 21.5 percent. The inevitable consequence was that the economy was thrown into a deep recession — the worst downturn since the Great Depression — and Jimmy Carter was thrown out of office.
Volcker’s success in taming American inflation was praised for getting a necessary job done, but it was also criticized by those who argued that he was tougher than he needed to be. (Volcker’s horror of inflation can be seen across 70 years, from his 1949 senior thesis at Princeton University through his 2018 memoir, “Keeping At It: The Quest for Sound Money and Good Government.”) The economic trauma of the Volcker disinflation also contributed to a new (and empirically unsupported) conventional wisdom that even modest levels of inflation were costly to the real economy, and thus macroeconomic policy, above all other concerns, had to vigilantly guard against its potential emergence.
Volcker was committed to good government
There is much more to Volcker’s legacy than his role in fighting inflation. The title of his memoir reflects the twin touchstones of his career: sound money and good government. Volcker was widely regarded as a true public servant, unyielding to politics, unmotivated by material gain, with a hard-earned reputation for personal integrity. Not surprisingly, the unbending disposition that contributed to Carter being chased from office led to clashes with the Reagan administration, which wanted (as most governments do) a softer monetary policy.
The Republicans lost 26 seats in the 1982 midterm elections, and Volcker clashed with the president’s men — his memoir recounts a particularly chilling encounter with Reagan and James Baker — who planned to get rid of him. By that time, however, Volcker’s reputation was such that confronting him would come at a political cost, and so in 1983 Reagan become the second president to reluctantly embrace the Fed chair, reappointing him to a second term.
In that second term, however, Volcker would lose his great battle, this time fighting, unsuccessfully, for financial supervision, regulation and oversight — the consequences of which we live with to this day. The financial industry and the Republican Party wanted financial deregulation, and Volcker did not. As administration working groups and Reagan appointees to the Federal Reserve pushed for the weakening of the Glass Steagall Act, the chairman fought to keep it whole before congressional committees as the tide turned against him. “Bank Curb Eased in Volker Defeat,” the New York Times reported in 1987, shortly before his second term came to an end.
Reagan’s decision not to reappoint him for a third term was widely expected. What people did not anticipate at the time was that the transition from the cautious, old-school Volcker to the libertarian Alan Greenspan, a former follower of Ayn Rand, was one of the most significant transfers of American political power in the second half of the 20th century.
Volcker — unlike those excited by the new financial opportunities from deregulation and exotic instruments — retained the view that the financial sector was prone to instabilities that could threaten the public welfare. He argued that the stock market crash of 1987 was caused by volatility-inducing financial innovations, pointedly sharing this observation in an interview at the time: “I don’t think these techniques add much to the sum of human endeavor.” Volcker was the last chairman of the Fed whom the banks regarded as a cop on the beat. Greenspan, in contrast, believed in efficient markets and saw little need for government oversight and regulation. The magic of the market was such that it would even prevent, left entirely to its own devices, financial fraud.
The financialization of the American economy — accelerated by the widespread belief that systemic risk to the economy was a thing of the past — was cemented by the arrival of President Bill Clinton and the New Democrats to office. Seeking restoration after years of political exile, they embraced both Greenspan and Wall Street. Clinton’s Treasury appointees, Lawrence Summers and Robert Rubin, spearheaded the drives that led to the repeal of Glass Steagall and the legislation that shielded markets for financial derivatives from federal supervision.
Volcker, now on the sidelines, was once again unimpressed by the proliferation of new, complex financial instruments, and worried instead that the system might fail. In 1995, he observed, “If you had a large investment bank aligned with a large [commercial] bank, the possibility of a systemic risk arising is evident.” In an interview in 2000, he described “financial deregulation [as] another big strand of what I’ve been concerned about.”
On the eve of the global financial crisis, he warned of a financial system that “looks confused and even dangerous, susceptible to excesses and breakdowns.” Flatly rejecting the widely held view that financial markets “can reliably be self-stabilizing,” he reaffirmed his view that central bankers have the essential responsibility of enforcing the regulations necessary “to protect the core of the financial system from the recurrent bouts of speculative excesses and frightful contractions that have marked financial markets from time immemorial.”
When the Obama administration had to deal with the consequences of the 2008 financial crisis, it briefly seemed possible that Volcker might play a key role. However, ultimately the new president reached for those with Clinton-era pedigrees as his most influential economic advisers. “They considered me an old man,” Volcker told his biographer, untutored in the virtues of modern finance. He did manage to contribute the “Volcker Rule” to the larger Dodd-Frank financial reforms, a rule designed to prohibit banks from using customer deposits for some speculative adventures. However, his three-page memo became hundreds of pages of qualified legislation — which is now in the process of being unraveled by the Trump administration.
Like many in his generation, who witnessed the challenges of the Great Depression and the existential threat of cult-of-personality fascism, Volcker saw civil service as a dedication to the public good, even if that might come at personal discomfort. Late in life, Volcker revealed that he had voted for Carter in both 1976 and 1980.
He recognized at the time that his interest-rate hikes during the latter campaign likely contributed to the president’s defeat, and he recalled later that “it was among the most difficult things I’ve done in my professional life.” While many disagree with his policies, his unshakable integrity and dedication to the general good could not be questioned.
Jonathan Kirshner is a professor of political science and international studies at Boston College.