Paul Volcker, Who Guided U.S. Monetary Policy and Finance for Nearly Three Decades, Is Dead

Date : 12/09/2019 @ 9:39PM
Source : Dow Jones News

Paul Volcker, Who Guided U.S. Monetary Policy and Finance for Nearly Three Decades, Is Dead

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.


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