The Washington PostDemocracy Dies in Darkness

Paul A. Volcker, Fed chairman who curbed inflation by raising interest rates, dies at 92

Federal Reserve Chairman Paul Volcker reading the financial page as he waits for a hearing in 1980.
Federal Reserve Chairman Paul Volcker reading the financial page as he waits for a hearing in 1980. (James K. W. Atherton/The Washington Post)
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Paul A. Volcker, a hardheaded economic statesman who as chairman of the Federal Reserve from 1979 to 1987 shocked the U.S. economy out of a cycle of inflation and malaise and so set the stage for a generation of prosperity, died Dec. 8 at his home in Manhattan. He was 92.

The cause was complications from prostate cancer, said his daughter, Janice Zima.

With influence that spanned five decades and seven presidents, Mr. Volcker left as deep an imprint on the U.S. economy and financial system as has anyone of his generation.

As a senior Treasury official in the 1960s and early ’70s, he advised President Richard M. Nixon on taking the United States off the gold standard. At the Fed, he was arguably the second-most-powerful person in the country.

As an adviser to presidential candidate Barack Obama, he gave the young senator credibility. He later counseled him as president on his response to the 2008 financial crisis and proposed a key restriction on speculative activity by banks that would become known as the “Volcker Rule.”

Mr. Volcker was a giant of a man, standing 6-foot-7, with a stature that came from his mastery of finance, his doggedness in navigating bureaucracies and his sheer toughness. His was an imposing moral authority acquired the hard way, the reason in his later years that he was enlisted for such knotty tasks as unraveling the holdings of Holocaust victims in Swiss banks and investigating the United Nations’ oil-for-food program in Iraq.

Mr. Volcker’s greatest historical mark was in eight years as Fed chairman. When he took the reins of the central bank, the nation was mired in a decade-long period of rapidly rising prices and weak economic growth. Mr. Volcker, overcoming the objections of many of his colleagues, raised interest rates to an unprecedented 20 percent, drastically reducing the supply of money and credit.

At a shocking, unscheduled Saturday night news conference announcing those steps just two months after taking office, in October 1979, Mr. Volcker was coy about the likely economic impact.

“Well, you get varying opinions about that,” he told reporters that evening, asked if tighter money could cause a recession. The action indeed triggered what was then the deepest economic downturn since the Depression of the 1930s and drove thousands of businesses and farms to bankruptcy and the unemployment rate past 10 percent.

Mr. Volcker was pilloried by industry, labor unions and lawmakers of all ideological stripes. He took the abuse, convinced that this shock therapy would finally break Americans’ expectations that prices would forever rise rapidly and that the result would be a stronger economy over the longer run.

On this biggest of questions, he was right.

Soon after Mr. Volcker took his foot off the brake of the U.S. economy in 1981, and the Fed began lowering interest rates, the nation began a quarter century of low inflation, steady growth, and rare and mild recessions. Economists attribute that period, one of the sunniest in economic history, at least in part to the newfound credibility as an inflation-fighter that Mr. Volcker earned for the Fed.

“He restored credibility to the Federal Reserve at a time it had been greatly diminished,” William L. Silber, a New York University economist and author of the biography “Volcker: The Triumph of Persistence,” said in a 2012 interview. “He served as the template for future central bank chairmen who came after him.”

An unpretentious power

Blunt and brilliant, Mr. Volcker did not carry himself with the obvious charisma of a politician or the swagger of a Wall Street chieftain; he had a hangdog manner and tended to mumble in congressional hearings.

For a man who understood the mysteries of money more deeply than almost anyone, Mr. Volcker had little use for the trappings of wealth. The cigars he smoked almost constantly before quitting in 1987 were the cheap Antonio y Cleopatra brand, bought at a drugstore. He preferred dinner at a run-down Chinese restaurant to posh Georgetown parties, and his suits, a Fed colleague told author William Greider, were always a bit shiny.

Indeed, in the early 1980s, when he was arguably the second-most-powerful person in the country, Mr. Volcker lived in a tiny, cluttered apartment in a Foggy Bottom complex inhabited largely by George Washington University students. He filled it with his daughter’s castoff furniture and green milk crates as end tables. (His primary residence was in New York, straining the family finances.)

While it was his time at the Fed that made Mr. Volcker famous — his name and face became known to average Americans to a degree that no Fed chair had been before (his successors, Alan Greenspan and Ben S. Bernanke, kept up the pattern) — his fingerprints are on a larger swath of U.S. and global economic history.

He was both a lifelong student of the free-market system and a perpetual skeptic of its excesses. For example, as a Treasury official in the late 1960s, he opposed allowing global exchange rates to float freely, arguing presciently that they would allow speculators to “pounce on a depreciating currency, pushing it even lower.”

In 1971, international investors were dumping dollars, pushing down their value on the global currency market and throwing into question the long-standing practice of making dollars convertible to gold at a fixed rate.

“Paul Volcker came to see me,” George P. Shultz, then a White House staffer, told author William R. Neikirk for the biography “Volcker: A Portrait of the Money Man.” “The gist of his message was that the demands for gold were coming, he thought, at such a rate that our hand was forced and that we must close the gold window. . . . It was getting to be a run on it, so there wasn’t an alternative. So we went to Nixon and said, ‘Time has run out. We have to do this, and we have to do it this weekend.’ ”

Nixon brought a group of aides, including Mr. Volcker, then Treasury undersecretary for monetary affairs, to a weekend of talks at Camp David, Md. They judged that maintaining the dollar’s peg to the price of gold was an untenable policy, and acting on Mr. Volcker’s advice, Nixon elected to abandon what had been a bedrock of the global financial system.

Three hours after Nixon announced the decision on national television on Aug. 15, 1971, Mr. Volcker left for Europe. He was to meet with finance ministers and central bankers across the continent and try to explain and defend the decision in a streak of high-stakes economic diplomacy.

He would spend the remainder of the decade grappling with the aftermath of that move, at the Treasury and then as president of the Federal Reserve Bank of New York.

The international financial system created in Bretton Woods, N.H., in the waning days of World War II had broken down, and it was Mr. Volcker, as much as anyone, who led the creation of a new order, in which the values of currencies would float freely against each other.

“Volcker was the crucial guy in the middle of that historic moment,” C. Fred Bergsten, who worked with Mr. Volcker in the Nixon administration and later headed the Peterson Institute for International Economics, said in a 2012 interview.

That moment of economic diplomacy would also fuel higher inflation in the United States, which led to Mr. Volcker’s defining moments of leadership.

Putting brakes on inflation

In 1979, when President Jimmy Carter was looking for a new Fed chairman, prices were spiraling upward, almost out of control.

A vicious cycle was underway: Because prices had been rising rapidly in the recent past, workers demanded ever-higher wages.

As the nation’s central bank, the Federal Reserve was the agency best positioned to try to end that demoralizing cycle, but it would exact a cost.

To reduce inflation, the Fed would need to raise interest rates to choke off the flow of money into the economy, probably prompting much higher unemployment. For that reason, the previous two men in the job, Arthur F. Burns and G. William Miller, had moved only timidly in trying to combat inflation. Miller left the job after a single ineffective year as Fed chair.

As Carter and his aides spoke with people in financial circles about potential nominees, Mr. Volcker’s name came up repeatedly. The president appointed Mr. Volcker, a decision that had been judged well by history but may well have cost Carter reelection in 1980.

Taking the job came at a personal cost for Mr. Volcker. He would have to take a 50 percent pay cut from his salary as New York Fed president, and his wife had to return to bookkeeping work to afford both their New York co-op and the small Foggy Bottom apartment. Mr. Volcker commuted back to New York on the weekends.

Just two months after taking office, Mr. Volcker was ready to make the boldest move of his tenure. He called his Fed colleagues from across the country to Washington for a secret, emergency policy meeting on a Saturday. After hours of argument and debate, he steered the Federal Open Market Committee to change the entire framework the Fed would use to control the nation’s money supply.

The Fed then, and now, set a target for short-term interest rates and then bought and sold securities to ensure that interest rates actually settled at that level. When the Fed wants to slow the economy and choke off inflation, it raises its interest rate target. Mr. Volcker concluded in October 1979 that the Fed needed to change strategies and start targeting the actual amount of money floating around in the economy.

Angry reaction

The media called it the “Saturday Night Special,” and it most certainly put a bullet in the U.S. economy. The unemployment rate that month was 6 percent. By the time Mr. Volcker’s campaign of monetary tightening was done, in 1982, joblessness would peak at 10.8 percent.

This, understandably, led to intense pressure on Mr. Volcker and the Fed to relent, to hold off on the tight-money policies that had caused the deepest recession since World War II.

With interest rates over 20 percent, home-building activity practically came to a halt. People who worked in construction trades mailed two-by-four pieces of lumber to Mr. Volcker in protest. Auto dealers mailed keys to the cars for which there were no buyers. Farmers drove their tractors around the white marble Fed building.

A man with a sawed-off shotgun and other weapons, who later told police he was angry about high interest rates, charged past guards at the Fed’s building and nearly made it to the boardroom of the central bank before a guard tackled him. (After the incident, Mr. Volcker was assigned a full-time security detail for the first time.)

Mr. Volcker’s routine appearances on Capitol Hill became an exercise in lawmakers of both parties attacking him. The economic downturn caused by Mr. Volcker’s tight-money policies was surely a significant factor in former California governor Ronald Reagan’s landslide victory over Carter in the 1980 presidential election. Both Reagan and Carter expressed public support for the policies, even as many of their aides assailed them behind the scenes.

But Mr. Volcker, confident in his analysis that this was the only way to rid the nation of double-digit inflation for good, ignored the calls. It was successful: Inflation was about 12 percent over the 12 months before Mr. Volcker became Fed chairman. By 1986, it was down to around 2 percent.

Once that vicious cycle of out-of-control inflation expectations was ended, Mr. Volcker relented and cut rates, unleashing an economic boom that would continue with few interruptions for more than a quarter century.

After the Fed

In the 1990s, Mr. Volcker, was largely frozen out of meaningful influence on policy. He was a skeptic of the focus on financial deregulation by the Bill Clinton-era Treasury Department. He instead made a career as a wise man for hire, helping return assets in Swiss banks to Holocaust victims and insisting that the banks come to grips with their actions during that period; his team identified 36,000 accounts containing up to $1.4 billion that rightfully belonged to Holocaust victims or their families.

He examined corruption in a U.N. program to funnel food to Iraq. His commission’s report in 2005 described “serious instances of illicit, unethical and corrupt behavior within the United Nations.”

Mr. Volcker made a return to the public eye with his February 2008 endorsement of Obama’s presidential campaign when Obama was locked in a Democratic primary battle with then-Sen. Hillary Clinton (N.Y.) and a new financial crisis was worsening by the week. Obama regularly spoke with Mr. Volcker for advice, on at least one occasion reaching him on his cellphone while Mr. Volcker was fly-fishing, his preferred hobby.

Mr. Volcker’s support helped give the relatively untested Obama credibility. Obama even mentioned the former Fed chairman, at that point two decades removed from federal office, in one of his debates with the Republican presidential nominee, Sen. John McCain of Arizona.

After the election, Obama is said to have entertained the idea of nominating Mr. Volcker as his treasury secretary, before choosing Timothy F. Geithner, 35 years Mr. Volcker’s junior. Mr. Volcker’s consolation prize was the chairmanship of an outside advisory group, the President’s Economic Recovery Advisory Board, but he was, in the early months of the Obama administration, on the outside looking in when major decisions were made.

Mr. Volcker emerged as a strong critic of the modern financial industry, arguing that most of the innovation by Wall Street banks offered no real gains for the overall economy. The only financial innovation of recent decades that really improved Americans’ lives, Mr. Volcker once said, was the automated teller machine.

Mr. Volcker’s biggest policy achievement in the Obama years was an effort to ensure that speculative activity should be far removed from banks that have access to a government safety net, such as deposit insurance and inexpensive emergency loans from the Fed. In 2010, Obama endorsed what would become known as the Volcker Rule, included in the Dodd-Frank Act that year, that prohibits large banks that have access to funding from the Federal Reserve and are viewed in the marketplace as “too big to fail” from engaging in speculative activity.

“Paul knew from his own experience the importance of separating proprietary trading from commercial banks,” said Thomas Hoenig, a longtime bank regulator as president of the Kansas City Fed and then as a director of the Federal Deposit Insurance Corp. “He had a long history and deep understanding of the issue, and he worked hard and got it into the law.”

Impatient with academia

Paul Adolph Volcker Jr. was born in Cape May, N.J., on Sept. 5, 1927, and raised in Teaneck, N.J., where his father was town manager and a Republican.

The young Mr. Volcker was raised in a demanding household that put a premium on public service. He went to Princeton University, where he played basketball (poorly, despite his height) and studied economics (exceptionally well).

After graduating summa cum laude in 1949, Mr. Volcker received a master’s degree in public policy at Harvard University in 1951 and attended the London School of Economics. He would later express embarrassment for never having completed his doctorate while at LSE, but at the time he found academic life tiresome. He would maintain a lifelong skepticism of the theoretical ideas of academic economics, viewing them as often disconnected from the real world.

Mr. Volcker went to work at the Federal Reserve Bank of New York in 1952, prepared reports for policymakers on the inner workings of the financial markets and thus experienced a crash course in the nexus of economics, finance and public policy.

In 1957, he left to work at Chase Manhattan Bank, where he gained both practical knowledge of banking and was a protege of David Rockefeller Sr., who had a deep Rolodex of political contacts. He joined the Kennedy administration in 1962 as a Treasury official working on complex international financial matters. After another sojourn at Chase Manhattan, Mr. Volcker was named by the Nixon administration in 1969 to one of the U.S. government’s most important yet least visible jobs.

As Treasury undersecretary for monetary affairs, Mr. Volcker was the U.S. government’s point man on economic relationships with other nations as well as the government’s own finances.

So broad were his responsibilities that the job was later divided into two, one undersecretary for international affairs and another for domestic finance. He led a small task force with officials from the White House, the Treasury, the State Department and the Federal Reserve that was known as the Volcker Group, which guided the intersection between finance and diplomacy.

In 1954, Mr. Volcker married Barbara Bahnson. They had two children, Janice and James. Their son had cerebral palsy, which made his father’s long absences and small paychecks while working in Washington particularly onerous for the family.

Barbara Volcker died in 1998, and Mr. Volcker married his longtime secretary, Anke Dening, in 2010. In addition to his wife, of Manhattan, survivors include two children, Janice Zima of McLean, Va., and James Volcker of Boston; four grandchildren; and two great-grandchildren.

Throughout his career, Mr. Volcker displayed a no-nonsense manner. In early 1986, when he was Fed chairman, a group of Fed governors who had been appointed by Reagan and who followed the administration’s inclination toward lower interest rates ignored Mr. Volcker’s arguments that it would be best to leave rates unchanged lest the risk of inflation reappear.

The four Reagan appointees initially outvoted Mr. Volcker on the seven-member Board of Governors, demanding the rate cut. One of them, Martha Seger, later said that the Fed “is not supposed to be a one-person show,” implicitly questioning the idea that Mr. Volcker should be able to direct the decisions of the Fed’s policy committee.

After he was outvoted that day, Mr. Volcker stood up and, according to Silber’s biography, citing confidential sources, said, “You can do what you want from now on . . . but without me,” slammed the door and went to his office. He drafted his resignation letter on a legal pad, prepared to step aside rather than remain chairman of an institution he could not bend to his will.

That afternoon, one of the would-be dissenters came in and agreed to relent, and Tall Paul got his way.

Irwin, a former Post staff writer, is the author of “The Alchemists: Three Central Bankers and a World on Fire.”