78 The EconomistDecember 14th 2019
I
n his spellsof leisure time, when he had any, Paul Volcker liked
to go fishing. Towering above a river in his jerkin and waders, fly
cast, cigar firmly in mouth, was a good way to ruminate on big de-
cisions. And he believed in rumination. “Procrastinate and flour-
ish” was a favourite motto. Another, from George Washington,
which his father had kept above his desk when he was city manag-
er of Teaneck, New Jersey, was: “Do not suffer your good nature...to
say yes when you ought to say no.” So when he was asked in 1974 to
be president of the New York Fed, he went off on a fishing trip to
chew it over. And in meetings and congressional-committee hear-
ings later, as chairman of the Federal Reserve from 1979 to 1987, he
hid his bald head in smoke-clouds, as if he was slowly weighing up
what answers he could possibly give.
His salvo against America’s inflation in 1979, which slew the
dragon for decades, therefore seemed unusually abrupt. The times
certainly required it, with annual inflation then at 12%. And his
measures, announced at an extraordinary press conference in the
boardroom of the Federal Reserve building in Washington, were
drastic. From then on the Fed would control not the price of mon-
ey, by adjusting the interest rate, but its supply, leaving interest
rates to be set by the market. He would force America into reces-
sion to cure people of their expectations that since prices would
keep on rising, they must keep on spending. The downturn that
followed—double-dip, because he briefly took his foot off the
brake—brought soaring unemployment, reaching 10.8% in 1982,
and a federal funds rate of over 20%, the highest in history, before
both rates and prices eased. By 1983 inflation was less than 4%.
Yet he had been ruminating about the beast, and how to subdue
it, since his Princeton student days. He was struck by Friedrich
Hayek’s observation that the only way inflation cured unemploy-
ment was by disguising cuts in real wages. This linked inflation
and deception indelibly in his head. Price instability destroyedtrust, not only in the dollar but in government; and trust that offi-
cials would work for the common good, as his father had selflessly
worked in Teaneck, was basic to the social contract. These feelings,
more than any strong commitment to monetarism, convinced him
that gentle rate-raising would not be enough. And with inflation
running at well over 5% for most of the 1970s, he arrived at the Fed
ready to tighten until interest rates went through the roof.
This caused fury and despair. As consumers stopped spending,
home-building tanked and businesses closed down. Angry crowds
and farmers on tractors besieged the Fed; the keys to cars that deal-
ers could not sell were sent to him in the mail. Though he had
doubts, and wore out his office carpet with anxious pacing, he kept
at it: not just because expectations would leap back up if he relent-
ed, but because persistence was a virtue in itself. And he stayed on
guard, so much so that during Ronald Reagan’s 1984 campaign he
was ordered by Reagan himself not to dare raise interest rates be-
fore the election, even though, by then, he was not intending to.
Reagan’s men thought he wanted to hold the economy back,
and tried to dislodge him. He opposed the president’s tax cut in 1981
unless it was matched by cuts in spending, but this was not politi-
cal; deficits led to inflation. Besides, to a man who believed in fru-
gality and discipline, they were also offensive. He was happy, even
at the Fed, to wear crumpled suits, live in a students’ apartment
block and fly coach back to New York and the family at weekends.
(His salary had fallen by half when he went from the New York Fed
to Washington, and even when he returned to Wall Street in 1987,
making $1m a year, he kept his old pinchpenny ways.) As for disci-
pline, he smoked acGrenadier cigars not only because they were
cheap, at a quarter each, but also because he had trained himself to
like only what he could afford.
Discipline was something he wanted banks to show, too. He
battled to get them better regulated, though the weight of lobbying
from the Washington swamp and, under Reagan, the pressure of
the president’s advisers, made this hard. He mightily defended the
Glass-Steagall Act which, since the 1930s, had prevented banks
from trading in securities, but lost. His failure to clamp down on
reckless lending, either at home or to foreign countries, showed up
in a string of debt crises during and after his tenure, culminating in
the Great Recession of 2008-09. At that low point he was called in
again, the ever-reliable disciplinarian, to chair Barack Obama’s
Economic Recovery Advisory Board. Although he much disliked
having his name on things, it was pinned to the Volcker Rule of
2010, which barred banks from playing fast and loose with custom-
er deposits just to boost their bottom lines.
Behind almost everything he did lay concern about trust in the
dollar, which also meant trust in America as the leader of the free
world. In his time as a Treasury official in the 1960s he had la-
boured to maintain the Bretton Woods agreement of 1944, which
had built an international monetary system round pegging the
dollar to gold at $35 an ounce. When this began to founder he went
along with a temporary suspension and then, in 1973, with decisive
decoupling, but longed for some system of fixed exchange rates.
Instead, the dollar was allowed to float. To him floating exchange
rates were fundamentally dangerous, an open invitation to coun-
tries to manipulate their currencies—and so inherently unstable
that they undermined the stability of governments, too.
It was probably his wartime adolescence that made him yearn
for such a rules-based world. But in so far as he managed to impose
rules himself, they were a success. After 1983 the economy mostly
grew without inflation and political leaders, by and large, learned
to defer to the central bank on monetary policy. What worried him
more as the years passed was a growing lack of trust in and respect
for institutions in general, from the Supreme Court to Congress to
the presidency. America sometimes seemed to be in a mess in ev-
ery direction. Every direction, that was, except the coast of Florida,
where he might get a big plump tarpon on his line, or the sparkling,
ever-beckoning salmon rivers of Maine. 7Paul Volcker, chairman of the Fed and America’s doughtiest
inflation-fighter, died on December 8th, aged 92Through a cloud, brightly
Obituary Paul Volcker