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Obituaries

Paul Volcker, the Fed chairman who reined in runaway inflation, dies at 92

Ex-Fed Chairman Paul Volcker
Ex-Fed Chairman Paul A. Volcker, shown in August 2005.
(Tina Fineberg / Associated Press)

Paul A. Volcker, the powerful Federal Reserve chairman whose grit and determination helped break the back of inflation in the early 1980s and put the American economy on a path to extended growth, died on Sunday at his home in New York. He was 92.

Volcker’s career in economics and public service spanned seven decades and several administrations. In the early 1960s he served as director of financial analysis in President Kennedy’s Treasury Department and a decade later was a principal strategist in the Nixon administration’s move to de-link the dollar from gold — a profound shift that led to the collapse of the post-World War II global monetary system known as the Bretton Woods arrangement.

The 6-foot-7 Volcker was widely seen as a man of high principles and unwavering fortitude, and organizations including the United Nations sought his leadership or advice on cases involving institutional integrity and public trust.

President Obama tapped Volcker as an economic advisor during his 2008 campaign for president, and shortly after his election victory, Volcker was named to chair Obama’s outside advisory board to help in the recovery after the Great Recession.

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Though Volcker had little direct influence in the Obama White House, he was a vocal critic of the banking industry’s culture of excessive risk-taking, pushing to limit the power of big banks and their investment activities.

In 2010 the Obama administration proposed a set of banking regulations that it dubbed the Volcker Rule.

In recent years Volcker had worked out of his Fifth Avenue office in Manhattan, and among his activities, he served as chairman of the nonpartisan Volcker Alliance, formed to advance effective government management.

In a memoir that was published last year, “Keeping at It,” Volcker expressed concerns that the increased polarization in politics and the high concentration of wealth in America were hindering sound policymaking. “We have for some time been experiencing a breakdown in the effective governance of the United States,” he wrote.

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Volcker dedicated the book to Anke Dening, his longtime assistant whom he married in February 2010 after his first wife, Barbara, died in 1998.

In addition to Anke Volcker, he is survived by his son, James; a daughter, Janice Volcker Zima; four grandchildren and two great-grandchildren, according to the Volcker Alliance.

News of Volcker’s death brought tributes from many in government, business and academia.

“His life exemplified the highest ideals — integrity, courage, and a commitment to do what was best for all Americans,” said Jerome H. Powell, the current Fed chairman, in a statement. “His contributions to the nation left a lasting legacy.”

When Volcker, a Democrat, was appointed in the summer of 1979 by President Carter to become the Federal Reserve’s 12th chairman, the nation had lived for years with high inflation, caused in part by oil crises stemming from geopolitical and economic shocks.

Consumer prices were soaring at an annual rate of more than 13% that year. And Americans had become almost numb to the problem: Families reacted by making purchases before their money lost value, and businesses routinely bumped up prices and wages.

Volcker wasn’t alone in viewing this as inherently unstable for the economy or in thinking that the Fed needed to lift short-term interest rates to rein in runaway inflation. But few had advocated — or anticipated — the kind of quick and tough medicine that the new chairman would administer.

Within days of taking office, Volcker began the first of what would be repeated efforts to reduce the money supply and ratchet up interest rates, which would climb to more than 20% in 1981.

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The aggressive policy made borrowing very expensive, and many feared that Volcker’s bold strategy would prove to be too costly. In fact, the economy fell into recession, first in mid-1980 and then again in 1982.

Volcker came under withering criticism. Consumers decried the double-digit unemployment. Lawmakers from both parties vilified the Fed as an enemy of America.

Businesses went even further. Some plastered “Wanted” posters of Volcker and his colleagues. Farmers drove their rumbling tractors along Constitution Avenue in downtown Washington, D.C., near the Fed’s marbled building, and home builders dumped piles of two-by-fours at the central bank to show their unsold lumber and the housing market’s woes.

“This guy was berated by an awful lot of people, and day after day he just shrugged,” Lyle E. Gramley, who watched Volcker’s steely performance while serving as a Fed board governor in 1980-85, said in 2014. “He was one very tough guy.” (Gramley died in 2015.)

Volcker’s approach carried a heavy political price for Carter, contributing to his landslide defeat at the hands of Ronald Reagan in 1980.

Carter acknowledged as much in a statement issued Monday through the Carter Center: “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. “His strong and intelligent guidance helped to curb petroleum-driven inflation, easing a strain on all Americans’ budgets. We are grateful for his service to our country.”

In the early 1980s, as the recession deepened, the Reagan White House grew anxious as well, with some top aides deriding Volcker and seeking to pressure him to back off.

But as George P. Shultz, Reagan’s economic advisor and secretary of State from 1982 to early 1989, recollected, none of that mattered because Volcker had Reagan’s backing.

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“He put a political umbrella in effect on Paul,” Shultz said in an interview with The Times in 2014, adding that Reagan and others in the administration knew that a solid economy depended on getting control of inflation.

Although Reagan and his Republican Party lost a number of congressional seats in the midterm elections in 1982, the next year, the nation’s inflation rate — which had peaked at nearly 15% in 1980 — was brought down to about 3%. And the economy began a growth spurt that would last to the end of the decade.

“Paul could think long and act on that basis,” Shultz said.

While Volcker never wavered in his conviction, he later acknowledged that he had no idea that markets would push up interest rates as high as they did.

Nor was he oblivious to the heat, which wasn’t just political. Volcker knew he was also acting against the prevailing thinking among his peers inside and outside the Fed.

“The favorite word at the time, which was very popular within the Federal Reserve, but I think popular in the academic community generally, was ‘gradualism,’” Volcker said in a 2013 interview with Harvard economist Martin Feldstein published in the Journal of Economic Perspectives.

“I don’t quite remember them saying, ‘Don’t bring it down at all,’” Volcker said, referring to inflation. “But instead, it was ‘Take it easy. It will be a job of … years, decades, whatever, and you can do it without hurting the economy.’

“I never thought that was realistic,” Volcker said.

Paul Adolph Volcker Jr. was born Sept. 5, 1927, in Cape May, N.J., the youngest of four children and only son of Paul A. and Alma Louise Volcker.

When Paul Jr. was 3, the family moved north to Teaneck, N.J., a suburb of New York City where Volcker’s father, a civil engineer, became town manager.

Like their father, all of the Volcker children grew more than 6 feet tall. They also apparently inherited their parents’ Great Depression-imbued sense of thrift, something that would come to characterize Volcker’s lifestyle into his old age.

“Frugality was a family tradition,” said journalist Joseph B. Treaster, writing in the biography “Paul Volcker: The Making of a Financial Legend.”

“The Volcker girls made their own clothing, and Paul Sr. wore double-breasted tweed suits until they frayed. Most days, Paul Sr. went home for lunch.”

The Volcker family expected a solid effort at school, and Paul Jr., though shy and reserved, played varsity basketball at Teaneck High School and graduated at the top of his class in 1945.

Although the war in the Pacific was still raging, Volcker was deemed unfit for military service because of his height. He enrolled at Princeton University, studying history, economics and political science, and graduated with highest honors in 1949 after producing a 250-page senior paper on the Federal Reserve, according to Treaster.

Volcker went on to obtain a master’s degree in political economy and government from Harvard’s Graduate School of Public Administration in 1951, and also studied at the London School of Economics under a Rotary Club fellowship.

On Sept. 11, 1954, Volcker married Barbara Bahnson, a New Jersey physician’s daughter. The couple started out on his $3,000 annual salary as an economist at the New York Fed.

It was difficult to live on so little in a big city, and it would prove to be a harbinger of the financial challenges the Volckers would face as he pursued a career of public service, especially when her diabetes and then rheumatoid arthritis became severe in later years.

Early in his career, Paul Volcker twice left government jobs for higher-paying work at Chase Manhattan Bank, each time for a few years. But he never sought the trappings of the rich and famous. Volcker smoked cheap cigars because he didn’t like spending money for expensive ones.

His daughter, Janice Louise Zima, once said that her father, while a Treasury Department official in the 1960s, wouldn’t pay to repair the broken driver’s seat in his beat-up Ford sedan. Instead, he placed an old kitchen stool behind the seat to prop it up.

Besides Zima, the Volckers had a son named James Paul who was born with cerebral palsy and went on to graduate from New York University.

Though Volcker is publicly known for beating back inflation, he was influential in developing an escape from an earlier financial crisis: the credibility of the dollar.

Since World War II, the international monetary system had been based on a commitment by the United States to back the greenback with gold, an arrangement that stemmed from a multinational conference in Bretton Woods, N.H.

The system had worked for years, but in the 1960s it became increasingly untenable. A decade of heavy U.S. borrowing for war, inflationary pressures and an eroding balance of payments left Washington with insufficient gold reserves to cover foreign holdings of dollars.

Volcker had studied the dollar-gold problem in an earlier stint at Treasury. Shortly after he was appointed Treasury undersecretary at the start of Richard Nixon’s presidency in 1969, Volcker produced a 48-page memo for the new president, suggesting the U.S. suspend gold convertibility and at the same time freeze wages and prices to control inflation while revamping the value of the dollar.

Two years later, in a Sunday night announcement on television, Nixon adopted Volcker’s proposal, in what was tantamount to a unilateral dismantling of Bretton Woods.

The action drew praise at home as it addressed a growing monetary crisis, but was met with anger and confusion abroad.

Volcker was immediately dispatched to Europe and elsewhere to explain the change and placate America’s unhappy trading partners. Virtually overnight, he went from an obscure technician to what his biographer, William L. Silber, called an “international financial diplomat.”

It also paved the way for Volcker to move into ever higher echelons of financial policymaking, culminating in his appointment in 1979 to Fed chairman, a position he held until 1987.

Volcker’s reputation brought numerous requests for his service from around the world. In 1996, he headed up a committee investigating the dormant Swiss bank accounts of Jewish victims of the Holocaust, a project that resulted in a settlement of $1.25 billion.

In 2004, the United Nations appointed him to look into possible corruption in the Oil-for-Food program in Iraq. In 2013 he launched the Volcker Alliance, a nonprofit group aimed at strengthening policymaking and restoring public trust in government at all levels.

In recent years Volcker re-emerged as an economic advisor to Obama and particularly for his efforts to overhaul regulations to prevent the kind of speculative activities that contributed to the Great Recession and prompted controversial government bailouts of big financial firms. Volcker wanted an outright ban on banks from making risky bets with their own money, or so-called proprietary trading.

Though the Volcker Rule was watered down a bit in the end, it nonetheless was regarded as one of the most important parts of America’s financial regulatory reform.

There’s little doubt that the return of Volcker to Capitol Hill made a marked difference in passing the politicized legislation. Even as he struggled to have his voice heard inside the White House, Volcker kept his distance from the bitter partisan environment of Washington.

On July 21, 2010, the Volcker Rule became law — “a testament,” Silber observed, “to the moral authority he had earned in 50 years of public service.”


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