Paul Volcker

Paul Volcker: The Man Who Broke Inflation's Back

At six foot seven, Paul Volcker towered over every room he entered, and for eight years in the late twentieth century he used that same immovable presence to force American inflation down by main force, wrecking two industries and a president's re-election bid in the process. He smoked cheap cigars, drove a Ford sedan with a broken driver's seat he never bothered to fix, and treated economic pain as a bill that had to be paid rather than a problem to be talked around. Few technocrats have ever been simultaneously so hated and so vindicated within a single decade.

A New Jersey Childhood Built for the Job

Volcker was born September 5, 1927, in Cape May, New Jersey, the youngest of four children of Paul Volcker Sr., a civil engineer and town manager, and Alma Louise Volcker. Every Volcker child grew past six feet, but Paul kept growing into a frame that colleagues joked was built to loom over central bankers who disagreed with him. He graduated at the top of his class at Teaneck High School in 1945, then took a B.A. with highest honors at Princeton in 1949, studying history, economics, and political science. He added a master's degree in political economy from Harvard's Graduate School of Public Administration in 1951 and spent a year at the London School of Economics on a Rotary fellowship — an unusually academic runway for a man who would spend most of his career inside government and banking rather than a university.

Climbing Through Treasury and the Fed

Volcker's early career alternated between public service and private finance, a pattern that would define his whole life. He started as a Federal Reserve Bank of New York economist earning roughly three thousand dollars a year in the 1950s, then moved to Chase Manhattan Bank — twice, both times chasing a better paycheck — and to the Treasury Department, where under the Kennedy administration he became director of the Office of Financial Analysis. In 1969, under Nixon, he was appointed Treasury undersecretary for monetary affairs. It was in that post that Volcker wrote the internal memo, roughly fifty pages long, that persuaded Nixon to suspend the dollar's convertibility into gold and impose wage and price controls — the policy Nixon announced on television in August 1971, ending the Bretton Woods system. Volcker was then sent to Europe as the administration's financial diplomat to explain the shock to allied governments, an apprenticeship in delivering unwelcome monetary news that would serve him again a decade later.

The Volcker Shock

Jimmy Carter appointed Volcker the twelfth chairman of the Federal Reserve in the summer of 1979, inheriting an economy with inflation running above 13 percent annually and a public that no longer believed Washington could contain it. Volcker's answer, announced in a policy shift on October 6, 1979, was to stop trying to manage interest rates directly and instead throttle the growth of bank reserves, letting interest rates go wherever tightening the money supply took them. They went to over 20 percent. The federal funds rate touched 20 percent by late 1980, inflation peaked near 11.6 percent in March of that year before beginning its collapse, and by 1983 it had fallen to roughly 3.7 percent. The price was two recessions, in 1980 and again in 1981–82, and unemployment that reached 10.8 percent — the worst since the Great Depression at the time. Farmers drove tractors to blockade the Fed's headquarters. Homebuilders mailed Volcker two-by-fours cut from unsold lumber. Wanted posters with his face circulated in construction towns. Members of Congress on both sides of the aisle demanded his removal, and the pain is widely credited with helping cost Carter the 1980 election to Ronald Reagan — the very president whose administration Volcker had angered. "I never thought that was realistic," Volcker said of the gradualist alternative colleagues had urged instead, a piece of stubbornness that historians now treat as the difference between decades more inflation and the "Great Moderation" that followed. Reagan, to his credit, backed Volcker through the recession despite pressure from his own Treasury to reverse course, and by 1983 the strategy had restored the Fed's credibility on inflation for a generation.

A Second Act as Regulator

Volcker left the Fed in 1987 and spent the next two decades in private finance, academic posts, and government commissions, chairing the National Commission on Public Service among other assignments. The 2008 financial crisis pulled him back into public life: he advised Barack Obama's presidential campaign and then chaired an outside economic advisory board to the new administration. His most durable second contribution bears his name. The Volcker Rule, part of the 2010 Dodd-Frank Act, restricts the proprietary trading and hedge-fund and private-equity ownership that commercial banks holding insured deposits may engage in — a direct descendant of the position Volcker had held decades earlier as Fed chairman, when he opposed letting commercial banks underwrite corporate securities or dabble in real estate. He kept working past ninety, chairing the nonpartisan Volcker Alliance from a Fifth Avenue office and publishing a memoir, "Keeping At It," in 2018, whose title was itself a kind of credo.

Character and Reputation

Colleagues who worked alongside Volcker consistently reached for the word patience rather than brilliance to describe him. Secretary of State George Shultz said simply that "Paul could think long and act on that basis" — a description of temperament as much as intellect. Jimmy Carter, the president whose political fortunes Volcker's policy helped end, nonetheless praised him after his death: "Paul was as stubborn as he was tall, and although some of his policies as Fed chairman were politically costly, they were the right thing to do." Federal Reserve Chairman Jerome Powell called his life exemplary of "integrity, courage, and a commitment to do what was best for all Americans."

Why Paul Is Called a Genius

Volcker is not remembered as a theoretical innovator; he did not invent monetarism, and the reserves-targeting framework the Fed adopted in October 1979 borrowed heavily from ideas that Milton Friedman and other monetarist economists had been pressing on central banks for years. What Volcker actually possessed was a rarer and less glamorous kind of genius: the political and psychological nerve to apply an unpopular, economically correct idea at full strength and hold the line through two recessions, a presidential defeat, tractor blockades, and death threats, when every incentive of electoral democracy pushed toward half-measures. That is closer to a genius of temperament and institutional judgment than one of pure intellect — a capacity, as Shultz put it, to think long and act on it regardless of the noise. The honest counter-case is substantial: Volcker inflicted a decade's worth of unemployment on a public that did not choose the pain, his monetary framework proved partly technical error even by his own account, and later economists argued the same disinflation could plausibly have been achieved with less collateral damage. Volcker himself never claimed intellectual originality; his admirers claim durability of will instead, and even that claim survives only because the inflation actually broke.

Legacy

By the time Volcker died at his New York home on December 8, 2019, at age 92, the "Volcker shock" had become the textbook case for central-bank credibility, the Volcker Rule remained federal law, and even his harshest contemporary critics conceded the inflation he broke never fully returned during his lifetime. He is remembered less as a man who theorized about money than as one who was willing to be despised in the short run for being right in the long one.

Achievements

• Daniel Patrick Moynihan Prize — 2012
• Educated at Princeton University and London School of Economics and Political Science