The Fed’s Heavyweight

Paul Volcker’s old-fashioned grit is sorely lacking in Washington.

By Roger Lowenstein

As chairman of the Federal Reserve, Volcker defied Carter and Reagan


Volcker: The Triumph of Persistence

By William Silber

Bloomsbury Press 464pp; $30

Some statesmen blossom late in life; others bloom early and disappear. Paul Volcker did both. The young Volcker was an influential Nixon administration official during the 1971 crisis when America ditched the gold standard. Volcker later ran the Federal Reserve Board for eight years, where he had the guts to raise interest rates and brook a recession, thereby subduing inflation. When he retired in 1987 he was an international hero, having acquired a reputation for unflinching rectitude. He retreated from public view and became a partner for a spell at Wolfensohn, an investment bank. Then, as Wall Street began to lose its head with mortgages, Volcker, like a curmudgeonly deity on Olympus, began to toss thunderbolt warnings about the frothiness of America’s financial system. President Barack Obama, capitalizing on Volcker’s wise man rep, brought the banker back to public service and — briefly — to center stage.

William Silber, a financial historian and professor at the Stern School of Business at New York University, has the challenge of fitting this lopsided story — his subject, who turned 85 last month, enjoyed his most fruitful years before age 60 — into a coherent narrative. He succeeds admirably in Volcker: The Triumph of Persistence. Silber, who had Volcker’s cooperation, emphasizes the former Fed chief’s independence and willingness to take unpopular stances, a trait as laudable in public life as it is uncommon. Silber all but ignores the 20 years following Volcker’s Fed chairmanship; even his recent service is an afterthought.

As an Obama adviser, he fought for adoption of the “Volcker Rule,” which forbids proprietary trading by banks. The reason his star doesn’t shine as brightly in this section is that Volcker himself admits the rule wouldn’t have prevented the failures at Lehman Brothers or American International Group, or much else that went wrong in 2008. One has the sense that Volcker’s motivation for promoting the reform was partly emotional — that the banks had gotten too big and too risky and something had to be done.

Yet this episode underlines a little-noted facet to his character. Contemporary bankers loathe the Volcker Rule and tend to see its creator as a flame-throwing radical. As Silber deftly brings out, he’s anything but. The son of the town manager of Teaneck, N.J., Volcker “learned integrity at home.” Modest despite his towering, 6-foot-7 height, he was a throwback to the era of less-moneyed officials who endured personal sacrifice to work in government. His son was born with cerebral palsy and his wife suffered a variety of ailments; as Fed chief, Volcker lived in virtual student quarters in a one-bedroom apartment furnished with a bridge table and a 10-inch black-and-white TV, commuting to his family in New York on weekends.

On the job as a public official, he was a quintessential pragmatist committed to finding workable solutions. As Silber says of Volcker’s perception of an early boss, “he knew that politics, not economics, dominated Nixon’s mind and heart.” Moderation also ran in Volcker’s blood. To the extent that any ideology had a hold on him, it was the ideology of hard work, of earnestness, and old-fashioned virtues. He harbored a visceral dislike for traders of modern collateralized-debt obligations because they upended the traditional, more stable banking culture centered on lending to clients.

Volcker’s a conservative in the true sense of resisting change. Even in the early 1970s, as undersecretary of the Treasury for monetary affairs, he evidenced a profound reluctance to abandon Bretton Woods, the postwar framework under which every currency was pegged to the dollar and the dollar pegged to gold. As Americans bought more products overseas, the dollar came under fierce pressure and the system collapsed. Volcker jetted around the world trying to patch together a new set of fixed rates. Free-floating rates were inevitable, but he wanted no part of it. He likewise abhorred inflation because it can destabilize the economy.

Silber devotes most of the book to the first two of Volcker’s “crises” — the collapse of the gold standard and the battle against inflation (the third crisis being the meltdown of 2008). These sections are extra-ordinarily well researched; readers come to realize that the crises were joined, and that Volcker was engaged in one sustained battle. Once gold was no longer relevant, the dollar had no anchor, and inflation became unavoidable — at least until the Fed developed the will to combat it. This required the sort of gruff resolve that was Volcker’s forte. As Silber says, Volcker “showed that a determined central banker can behave like a surrogate for gold.”

It was Jimmy Carter who in 1979 nominated Volcker as Fed chairman. The president later complained when Volcker’s policies of high interest rates threatened to tip the economy into recession and thus jeopardize Carter’s reelection. Volcker never blinked and proceeded to stare down Ronald Reagan as well. He hiked the overnight rate (also known as the fed funds rate) by two percentage points, to 14 percent, in the midst of a major recession — and he made clear that such tight money policies would continue until Reagan got serious about cutting the deficit. When Reagan (or his underlings) tried to undercut the Fed chief, Volcker demanded a solo meeting with the president. Afterward, Reagan issued a conciliatory statement and months later signed a bill raising taxes and moderating the deficit. It’s hard to think of a Fed chief acting so independently since, what with Alan Greenspan cozying up to then Treasury Secretary Robert Rubin and Ben Bernanke clinging to Secretaries Hank Paulson and Tim Geithner. As Silber sums up, Volcker “refused to accommodate increases in government debt as the economy expanded.” Not for nothing is he missed today.


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