In the early 1980s, when America was beginning to emerge from the economic doldrums of the previous two decades, the liberal view was that recovery was due to the tight-money policies and grim determination of the chairman of the Federal Reserve, Paul Volcker. The conservative view gave credit to Ronald Reagan, then in his first term as president and the maestro of a series of personal and corporate tax cuts and business-friendly policies.
Both were right: The Reagan tax cuts were instrumental in stimulating business growth and raising consumer confidence; Volcker’s mission to keep inflation under control by strictly controlling the money supply was bitter but necessary medicine. Most importantly, while Volcker had been a President Jimmy Carter appointee, Reagan put the full force of his presidency behind the Fed chief. The recovery of the 1980s, which yielded an unprecedented era of growth and prosperity lasting into the present century, might not have been possible without Volcker, who died last week in New York at 92.
In retrospect, when a growing economy boasts full employment and an annual inflation rate under 2%, the parlous conditions of the late 1960s and ’70s are hard to recall. In 1979, when Volcker took office as chairman of the Federal Reserve, the rate of inflation was just under 15% and threatening to rise. The country was emerging from the shock of two successive Arab oil embargoes, and the era combined chronic steep inflation with persistently stagnant economic growth or “stagflation.” High inflation encouraged overspending by consumers, who feared for the value of their income and savings, and discouraged investment. It also bred political instability.
For Volcker, the diagnosis was clear: “We meant to slay the inflationary dragon,” he told an interviewer years later, and at a memorable late-evening news conference in October 1979, he announced that the Fed would aim to control the supply instead of the price of money, allowing interest rates to rise of their own accord. This monetary revolution had the long-term effect of shifting from government management of economic policy to a greater reliance on financial markets. It also had the immediate effect of slowing the economy with high interest rates, imposing long-term austerity and discipline — and sustaining those policies through hardship, business failures, two brief but severe recessions, and intense political pressure.
It took a certain kind of public servant to resist the pressure and, with Reagan’s support, stay the course. But Volcker was that public servant. The son of the city manager of Cape May, New Jersey, 6 feet, 7 inches tall, and, in his later years, stooped and balding, Volcker’s great height made him a basketball star in high school but barred him from military service in World War II. At Princeton University, his 1949 senior thesis was entitled, “The Problems of Federal Reserve Policy Since World War II.”
Volcker had intended to pursue an academic career, but after graduate study, he embarked on a hybrid career as a Wall Street banker and a federal appointee. In and out of the Treasury Department under three presidents, he was the head of the Federal Reserve Bank of New York when Carter summoned him to Washington as Fed chairman.
A dour, slightly rumpled, dryly humorous man, Volcker was unlike the stereotypical central banker. While his wife remained in New York, he lived in a modest Washington apartment building near the Federal Reserve, largely occupied by college students. He smoked cigars from the drugstore, drove an elderly Nash Rambler, and cultivated the solitary sport of fly-fishing. In 1987, when Reagan declined to appoint him to a third term, he quietly made way for his flamboyant successor, Alan Greenspan.
He returned to teaching, private banking, and occasional service on panels and commissions, including a tenure as President Barack Obama’s adviser on the 2008 financial crisis. But Volcker’s greatest achievement was his steady and steadfast tenure as Fed chairman when he slew the inflation dragon and fashioned the economy we still enjoy today.
Philip Terzian is the author of Architects of Power: Roosevelt, Eisenhower, and the American Century.
