To read William L. Silber’s engaging biography of Paul Volcker in the fall of 2012 is to be reminded of a time, not so long ago, when a cadre of public servants, respected for their knowledge, integrity and practical experience, were allowed to guide government policy even as presidents, partisans and ideological fashions swept in and out of Washington.
It’s hard to imagine what today’s partisans and ideologues make of someone like Volcker. He is a graduate of Princeton and the London School of Economics who admired the libertarian Austrian economics of Friedrich von Hayek but voted for Adlai Stevenson for president; a Democrat first recruited to Washington by the Kennedy Treasury who played the key role in Richard Nixon’s decision to break the link between dollar and gold; an inflation hawk who was appointed chairman of the Federal Reserve Board by Jimmy Carter but won reappointment and respect from Ronald Reagan after pressuring the famously anti-tax president to undo some of his tax cuts.
To say the man has an independent streak doesn’t quite capture it.
Silber, a professor at NYU’s Stern School of Business and author of a widely used textbook on banking and finance, certainly has the academic cred to write the definitive Volcker biography. But he is also an unabashed Volcker admirer who spent more than 100 hours interviewing his subject and many more reading through personal papers that Volcker made available through government archives. Although Volcker exercised no control over the final product, Silber makes no pretense that he has brought the same critical eye to his subject as would a historian or a tough-minded journalist. What he does bring is a sophisticated and nuanced understanding of monetary policy and international finance, along with that rare ability among academics to explain it while weaving an interesting tale.
Volcker arrived on the policy scene just as the United States was making the bumpy transition out of the “golden era” of the 1950s, a time when everything seemed to be right with the American economy and the United States dominated the global scene. Suddenly, Americans were faced with the reality of ballooning trade deficits and budget deficits and inflation that gradually eroded the foundations of an international monetary system based on gold, fixed exchange rates and a strong U.S. dollar. Volcker’s legacy was to push and prod the country and the world to adopt a system that broke all ties with gold and allowed all currencies, including the dollar, to float freely on currency exchanges.
By the time he stepped down as Fed chairman in 1987, Volcker had managed to wring inflation out of the American psyche and bring the country’s trade account and the government’s budget much closer toward balance. His triumph over inflation persists to this day, even as the victory over trade and budget deficits proved short-lived.
Perhaps the most interesting chapters in Silber’s account are those concerning the Nixon years. Volcker teamed up with his boss, John Connally, the wily Texas governor turned Treasury secretary, to outmaneuver key Nixon confidantes such as Arthur Burns and Milton Friedman and to engineer the devaluation of the dollar and the end of fixed exchange rates. It was from Connally that Volcker learned the trick of standing pat and allowing problems to approach the crisis stage so that people finally agreed to the kind of fundamental changes they would otherwise resist.
Indeed, one theme running through Silber’s biography is the degree to which Volcker’s success was due to the instincts of politicians he worked with rather than the theories and models of trained economists.
As Volcker saw it, it was John F. Kennedy, not his esteemed economic advisers, who correctly saw the long-term challenge posed by the growing trade deficit. It was Nixon who rejected the orthodoxy of his advisers and imposed temporary controls on wages, prices and currency speculation in order to move the markets and trading partners toward flexible exchange rates. And it was Reagan, not his advisers, who understood that taming inflation was a political and economic imperative, even if it meant raising taxes and tolerating recession-inducing high interest rates.
The one president who disappointed Volcker, not surprisingly, was disappointed by him. Carter blamed his hand-picked Fed chairman for dooming his reelection by raising interest rates three percentage points — an almost unprecedented move — in the weeks before the 1980 election. Biographer and subject both see this as a sign of Volcker’s courage and independence. Others might see it as a sign of self-righteousness and pig-headedness by someone who could just as well have waited a few weeks until after the election, as other Fed chairmen have done.
At other moments, Volcker was certainly willing to use a bit of sleight-of-hand in the service of his policies. Shortly after taking over as Fed chairman, for example, he appeared to shed his skepticism about monetarism and convinced the Fed’s policy committee that the only way it could get a handle on double-digit inflation was to try to control the supply of money directly, rather than try to control interest rates, as monetarists such as Friedman had long espoused. In truth, Volcker never really bought into the monetarist theology, in part because it was never certain what the total supply of money was at any moment. But, according to Silber’s account, Volcker realized that by cloaking the Fed’s actions in monetarist garb, he could justify raising interest rates faster and higher than any Fed had dared to do before. The policy worked and the inflation genie was put back in the bottle, but for years afterward Friedman and others complained that Volcker and the Fed never really were serious about or successful in controlling the money supply.
Although Silber sprinkles his narrative with some personal details — the cheap Antonio y Cleopatra cigars, the argyle socks, the financial strain that forced his wife in New York to seek part-time work and take in a boarder — this is a not a book about Volcker’s life so much as one about his work.
And even in that there are some glaring gaps, such as the coyness with which Silber recounts Volcker’s judgments about his successors at the Fed.
Although he recommended Alan Greenspan for the Fed chairmanship and admired Greenspan’s pragmatic management of monetary policy, Volcker was no doubt more than a bit resentful of the excessive public adulation that Greenspan received, culminating in Bob Woodward’s book “Maestro.” By 2007, Volcker had begun to direct some thinly veiled criticism at Greenspan for refusing to acknowledge the giant credit and real estate bubble growing right under his nose. Yet Silber shies away from exploring the Volcker-Greenspan relationship.
Silber is equally circumspect in dealing with Ben Bernanke and his repeated rounds of money-printing known as “quantitative easing.” Volcker no doubt views such actions as handing a free pass to politicians by giving them the financial headroom to continue running large budget deficits — something he refused to do during the Reagan era.
Then again, such circumspection is what we’ve come to expect from Volcker, whose genius has always been to play the Washington game brilliantly while appearing not to play it at all.
The Triumph of Persistence
By William L. Silber
Bloomsbury. 454 pp. $30