By Sudeep Reddy 

Paul Volcker, who defeated runaway inflation as Federal Reserve chairman in the 1980s, establishing the importance to the economy of an independent central bank, and whose "Volcker Rule" became a controversial element of postcrisis banking regulation in the Obama administration, has died at 92 years old.

Mr. Volcker died Sunday at his home following a long illness, his family confirmed.

Mr. Volcker served in government across Democratic and Republican administrations for almost three decades in roles guiding monetary policy and overseeing the nation's financial system.

Mr. Volcker was president of the Federal Reserve Bank of New York when U.S. President Jimmy Carter tapped him as Fed chairman in August 1979, following the brief and unsuccessful tenure of G. William Miller.

He became one of the most unpopular Fed chairmen in history for pushing interest rates as high as 20% to break the soaring inflation that consumed the U.S. economy in the 1970s. But his actions succeeded, bringing inflation down and making Mr. Volcker one of the most successful central bankers in history.

Mr. Volcker, the son of a town manager, was born in New Jersey in 1927. After studying at Princeton University, Harvard University and the London School of Economics, he joined the New York Fed as an economist in 1952 and moved to Chase Manhattan Bank five years later.

He spent several years in the Treasury Department in the early 1960s and then returned to Chase until he was named a Treasury undersecretary for international monetary affairs at the start of the Nixon administration. In that position, he played a key role in ending the U.S. dollar's convertibility to gold in 1971.

Mr. Volcker became Fed chairman in August 1979 after four years at the New York Fed.

He took office with the economy suffering from the most sustained high inflation the nation had ever experienced. Annualized inflation peaked at 14.7% in the 12 months that ended in both March 1980 and April 1980. The Arab oil embargo of the early 1970s exacerbated other inflationary forces, while loose monetary policy designed to spur growth pushed prices even higher.

At the same time, economic growth stagnated, creating a disastrous combination labeled stagflation.

Mr. Volcker believed that getting inflation under control was a precondition to prosperity. "We were on a track where inflation was feeding on itself, and the longer it went on the harder it would be to deal with," he recalled in an interview with The Wall Street Journal in October 2018. "You can't imagine the United States running a 20%, a 25% inflation rate. That's what people were scared of."

The Fed under Mr. Volcker constricted the nation's money supply, sending interest rates soaring. The U.S. economy experienced two recessions during his first term with unemployment peaking at 10.8% in 1983.

Farmers protested, driving tractors to the Fed's headquarters and blockading a building. Construction workers mailed two-by-fours to Mr. Volcker, begging him to lower interest rates to boost housing starts. "Reduce interest rates / Save jobs / Interest much too high," read one piece of wood.

"But I'm not sorry about it," he said in the Journal interview. "I don't know any other course of action that would've been politically feasible or economically feasible."

The task of corralling inflationary pressures proved "a lot tougher than I would've imagined," Mr. Volcker recalled.

"It took longer," he said. "I was a bit taken aback. The first actions that were taken, nobody stood up and saluted. They all said, this is more bullshit from the Federal Reserve."

It wasn't until the summer of 1982 that he felt confident that he had broken the back of inflation, Mr. Volcker said. The inflation rate dropped to around 3% by the end of his first four-year term as Fed chairman.

President Ronald Reagan nominated Mr. Volcker to a second term in 1983, but also added board members who clashed with the chairman and briefly outvoted him on one occasion to support a rate cut -- a rare rebuke.

In his 2018 memoir, "Keeping At It," Mr. Volcker described how White House Chief of Staff James A. Baker III, with President Reagan watching silently, ordered the Fed chairman not to raise interest rates before the 1984 election.

Mr. Volcker, who wasn't planning to lift rates anyway, didn't tell colleagues or lawmakers about the episode. Mr. Baker has said he didn't recall that.

In 1987 Mr. Reagan tapped Alan Greenspan to succeed Mr. Volcker.

After his Fed career, Mr. Volcker became chairman of Wolfensohn & Co., a New York investment bank, retiring after its merger with Bankers Trust.

In retirement he was tapped repeatedly for high-profile international positions. In the late 1990s he headed a committee investigating dormant accounts and other assets in Swiss banks that belonged to Holocaust victims. From 2000 to 2005 he chaired the International Accounting Standards Committee, developing global accounting practices. In 2004, United Nations Secretary General Kofi Annan tapped him to chair an independent panel investigating corruption allegations in the U.N.'s Iraqi oil-for-food program.

In his early 80s, he regained influence at the White House. President Barack Obama courted Mr. Volcker early in his 2008 presidential campaign. Mr. Volcker offered occasional advice and then a key endorsement in January 2008 ahead of the Democratic primaries, providing credibility for Mr. Obama. After the election, Mr. Obama named Mr. Volcker chairman of the President's Economic Recovery Advisory Board, a panel of executives.

Mr. Volcker was seen as a little-used adviser -- but the avid fly-fisherman indicated he wasn't bothered.

"How they use me is up to them," Mr. Volcker told the Journal in 2009. "I'm conflicted about wanting to go fishing and being responsive...I might get busier than I want to be."

But his role became clearer over time. After the fall 2008 financial crisis, Mr. Volcker became a leading proponent of breaking up large banks and banning commercial banks from higher-risk activities, such as proprietary trading.

His ideas became the foundation of Mr. Obama's plan -- called the Volcker Rule -- to bar big banks from hedge-fund-like speculative trading activities. The rule remains crucial in the eyes of Mr. Volcker.

Unshackling the banks to allow them to have proprietary trading accounts would ultimately "screw the customers," Mr. Volcker told the Journal. "Banks are not supposed to do that crap."

The strongest bulwark against the risk of any future crisis continues to be maintaining prudent regulations, he said.

"It's very hard to mind the store," Mr. Volcker said. "And my answer to the great concern about another financial crisis is you'd better have good, tough regulation. Of course, as soon as things are going better, people try to tear down the regulation."

Mr. Volcker's first wife died in 1998. He married his assistant, Anke Dening, in November 2009..

--Daniel Kruger contributed to this article.

(END) Dow Jones Newswires

December 09, 2019 09:56 ET (14:56 GMT)