By Jon Hilsenrath and Kate Davidson
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 in New York following a long
illness, his family said.
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 President 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 in bringing down inflation, making Mr. Volcker
one of the most successful central bankers in history.
"He believed there was no higher calling than public service,"
Jerome Powell, the current Fed chairman, said in a statement
Monday. "His life exemplified the highest ideals--integrity,
courage, and a commitment to do what was best for all Americans.
His contributions to the nation left a lasting legacy."
Mr. Volcker, the son of a city 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.
Read a 1984 profile.
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. Rates on conventional 30-year mortgages rose as high as
18.45%, and rates on 3-month certificates of deposit topped out at
18.65% in 1980.
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.
Mr. Carter, who lost his re-election bid amid the 1980
recession, praised Mr. Volcker's actions in a statement Monday.
"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, " he said of the six-foot, seven-inch Mr.
Volcker. "His strong and intelligent guidance helped to curb
petroleum-driven inflation, easing a strain on all Americans'
budgets."
Mr. Volcker presided over an entirely different era of central
banking. In the 1980s, the Fed's actions were shrouded in mystery,
and it typically didn't formally make its decisions public until
well after the fact.
Central bankers like Mr. Volcker and his successor, Alan
Greenspan, tended to speak publicly in obscure riddles about the
economic outlook and interest rate plans. Mr. Volcker's cigar smoke
at congressional hearings became a metaphor for the shroud he hung
over economic policy. The mystique, some reasoned, gave the Fed
more power over markets and kept bond traders on their toes.
Mr. Volcker trained the sights of traders on growth in the
nation's money supply. Milton Friedman, the free-market University
of Chicago economist whose ideas ruled the day, had declared that
inflation was "always and everywhere a monetary phenomenon,"
meaning it could only happen when too much money chased too few
goods being made and sold.
A severe oversupply meant money lost its value as prices rose
for cars, gasoline and other consumer goods. Fast-growing money
supply, Mr. Volcker reasoned, needed to be managed and restrained
to control inflation properly.
That is why every Thursday afternoon, bond traders eagerly
awaited the New York Fed's release of money supply aggregates --
tabulations of the levels of cash, bank deposits, money-market
funds and other liquid assets sloshing through the banking system.
Rapid money growth indicated the Fed would pull funds out of the
market, resulting in higher interest rates.
The intense focus on money supply was part academic and part
political. By focusing on money supply, the Fed hoped it could
engineer an increase in borrowing costs without taking extra heat
for targeting the rates themselves, which in the early 1980s had
crushed mortgage borrowers, home builders, businesses and farmers.
In that, it failed.
The central bank has become much more transparent over the
years, and its focus has changed. Today, the Fed publicly declares
its plans for interest rates shortly after its meetings adjourn,
and Fed leaders care more about being plain-spoken, so the public
and investors can understand their actions. Rather than targeting
weekly shifts in money supply, it now targets the inflation rate
itself, with the goal of keeping it stable at about 2% in the long
run.
President 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 Mr. 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 Mr. Greenspan to succeed Mr.
Volcker.
"The greatness of Volcker is that he was the exact right guy at
the exact right time, when the country desperately needed the right
guy to end the crippling inflation," said Lawrence Kudlow, the
director of the White House National Economic Council, in an
interview Monday. "He was fearless. He was independent."
Mr. Kudlow started his career at the New York Fed and served for
about a year as an assistant to Mr. Volcker, then the bank's
president, working on speeches, "which was quite an experience for
a kid, frankly, at that time," Mr. Kudlow said. The two men spoke
last year before Mr. Kudlow accepted his current post working for
President Trump. "I don't think he was a big Trump supporter, but
he encouraged me to do the job," he said.
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 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 -- dubbed
the Volcker Rule -- to bar big banks from hedge-fund-like
speculative trading activities.
"Because of Paul, our financial system is stronger, safer, and
more accountable to those who matter most -- the American people,"
Mr. Obama said in a statement Monday. "I'll remember Paul for his
consummate wisdom, untethered honesty, and a level of dignity that
matched his towering stature."
The strongest bulwark against the risk of any future crisis
continues to be maintaining prudent regulations, Mr. Volcker told
the Journal in October 2018.
"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.
Mr. Volcker loved to tell the story of how he developed his
aversion to inflation. Before he went off to college at Princeton,
Mr. Volcker argued he should receive a bigger allowance than his
sisters received years earlier, in part because of rising prices.
He even convinced his sisters to write letters to their mother on
his behalf.
"My mother said, 'I don't care about all that. You're going to
get $25, just like what your sisters got,' " he recalled in a 2008
interview for the Fed's oral history project.
--Nick Timiraos contributed to this article.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Kate
Davidson at kate.davidson@wsj.com
(END) Dow Jones Newswires
December 09, 2019 16:24 ET (21:24 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.