Paul Adolph Volcker
As chairman of the Federal Reserve Board during one of the most turbulent periods in U.S. monetary history, Paul Volcker (born 1927) helped lower double-digit inflation rates in the early 1980s and ushered in an era of financial deregulation and innovation.
Paul Adolf Volcker was born in Cape May, NJ, on September 5, 1927. His father was city manager of Teaneck, NJ, and turned the town from bankruptcy to solvency. After graduating summa cum laude from Princeton University in 1949, Volcker attended Harvard University's Graduate School of Public Administration, earning a masters degree in political economy and government in 1951. The following year he did postgraduate work at the London School of Economics as a Rotary fellow. During summers Volcker worked at the Federal Reserve Bank of New York, and in 1952 he joined the staff there as a full-time economist.
Volcker left the Federal Reserve Bank of New York in 1957 to become a financial economist with Chase Manhattan Bank. In 1962 he joined the U.S. Treasury Department as director of financial analysis, and in 1963 he became deputy under secretary for monetary affairs. Volcker returned to Chase Manhattan Bank as vice-president and director of planning in 1965. In 1969 he was appointed under secretary of the U.S. Treasury for monetary affairs and remained there until 1974, engaging in international negotiations on the introduction of floating exchange rates. The following year he became a senior fellow in the Woodrow Wilson School of Public and International Affairs at Princeton University. In 1975 Volcker became the president of the Federal Reserve Bank of New York, the most important bank in the Federal Reserve System.
During the more than 30 years Volcker worked in and out of the federal government he developed an expertise in monetary economics and served under three presidents. The cigar-chomping Volcker, admired for his dedication and commitment by friends and foes alike, appeared implacable and unflappable with his six-foot-seven inch frame. In 1979 he was nominated by President Jimmy Carter to fill the most powerful economic seat in government— chairman of the Federal Reserve Board (the Fed). An act of Congress in 1913 had established the independent Central Bank to create money, regulate its value, and maintain the stability of the financial system through 12 regional banks. When Volcker took over in August of 1979, inflation was running over 13 percent a year, the value of the dollar was falling, and financial markets were concerned about renewed inflation. Volcker's appointment to a four-year term as chairman calmed those fears and was greeted with acclaim in the financial community. As Volcker recalled in a 1989 Time magazine interview: "The [Carter] Administration had got deeply concerned. They said to me they were scared of this exploding inflation and were willing to stand still for stronger measures than would ordinarily be the case. And that is a great advantage. If you can walk into a situation that is felt to be so severely out of kilter, you have greater freedom of action."
The chairman of the Fed also oversees the 12-member Federal Open Market Committee (FOMC), which decides the conduct of U.S. monetary policy. During 1979 and 1980 the FOMC, under Volcker's leadership, sought to reign in double-digit inflation by setting strict money supply growth targets. This direction was in opposition to past policies that sought to control interest rates at the expense of higher money supply growth rates. The result of the switch in policy was a substantial rise in interest rates, with the prime rate peaking at 21.5 percent in December 1980. With higher interest rates, the economy fell into the worst recession in 40 years, causing unemployment to reach 10.7 percent in 1982. During this period, Volcker was widely criticized. The cover of a building trade publication carried a "WANTED" poster of Volcker and his Fed colleagues, accusing them of "premeditated and cold-blooded murder of millions of small businesses." The economic crisis led the FOMC to abandon strict adherence to monetary targets in 1982, but not before the rate of inflation had fallen to below four percent.
The hard-line actions of the FOMC drew criticism from those who felt the price exacted to cure inflation was too high. The crisis raised questions in Congress about whether the "independence" of the Fed should be rescinded. Nevertheless, Volcker was reappointed by President Reagan in August 1983 to a second four-year term as Federal Reserve chairman and was confirmed by the Senate in an 84-16 vote.
From Villain to Hero
Volcker studiously avoided taking rigid ideological positions with regard to monetary policy, preferring a more flexible and discretionary approach. In addition to fighting inflation, Volcker presided over the Central Bank in an era in which control of the money supply was greatly complicated due to the deregulation of the financial industry in 1980. This resulted in large-scale shifts in deposits between different types of accounts, causing unpredictable changes in the rate of growth of money.
Volcker also successfully defended the Fed's oversight powers in banking regulation that were threatened by proposals to streamline the regulatory process. He argued that in order to fulfill the Fed's role of "lender of last resort" to financially troubled banks, the Fed must maintain day-today regulation over those banks, along with the U.S. comptroller of the currency. At the end of his second term in 1987 Volcker became a consultant to various financial institutions, including the World Bank.
"For eight years, as chairman of the Federal Reserve Board, Paul Volcker was perhaps the second most powerful man in Washington," noted Lawrence Malkin in Time (January 23, 1989). "There were no doubt times, as he squeezed the money supply and cost people jobs in his battle against double-digit inflation, when he was also one of the most unpopular." Volcker's moves had tremendous impact on the nation's economy and were watched worldwide. "He is the most revered economic leader of his era," Stephen Koepp noted in Time on June 15, 1987. "He had profound impact on a $4.3 trillion economy but lived in a tiny $500-a-month apartment furnished with castoffs. He ran his agency in a notably serene and straightforward style, and still his mystique grew so potent that his every move sent global financial markets into spasmodic guessing games about what he was thinking." After he had tamed the inflation rate and turned the economy around in the mid-1980s, he became a sort of folk hero.
Volcker, who took a substantial cut in salary to head the Fed, received numerous awards, including One of Ten Outstanding Young Men in Federal Service (1969) and the Alexander Hamilton Award for his efforts at implementation of flexible exchange rates while at the Treasury Department during the early 1970s. He received honorary degrees from a number of institutions, including Notre Dame, Princeton, Dartmouth, New York University, Fairleigh Dickinson, Bryant College, Adelphi, and Lamar University.
Volcker's first job after leaving government in 1987 was as unpaid chairman of the National Commission on the Public Service, a private group working on behalf of the nation's civil servants. He soon became chairman of the New York investment banking firm James D. Wolfensohn, earning a large salary for the first time in his life, and continued to be a respected commentator on the nation's financial affairs in the 1990s.
Some of Volcker's lectures on the workings of the economy are found in Paul Volcker, The Rediscovery of the Business Cycle (1978). For further details on the operation of the Fed, see U.S. Board of Governors, The Federal Reserve System: Purposes and Functions (7th edition, 1984); Maxwell Newton, The Fed (1983); and Paul De Rosa and Gary H. Stern, In the Name of Money (1981). For a good historical look at the Fed's role in the fight against inflation in the early 1980s see Lawrence S. Ritter and William L. Silber, Principles of Money, Banking, and Financial Markets (5th edition, 1985) and William Melton, Inside the Fed Making Monetary Policy (1985). In 1992, Volcker and Toyoo Gyohten published Changing Fortunes: The World's Money and the Threat to American Leadership (1992), based on a series of lectures they gave at Princeton's Woodrow Wilson School. □