The complicated legacy of Paul Volcker
Paul Volcker, one of the most recognizable and consequential figures in American economics, died Sunday at 92.
Over several decades the central banker effectively remade the American economy. As a Treasury Department official under President Nixon, he helped dismantle the Bretton Woods system, finally ending the convertibility of the U.S. dollar into gold. He was a lifelong skeptic of big finance, and later in life provided advice to burgeoning presidential candidate Barack Obama that ended up enshrined into law. But most of all, he led the Federal Reserve from 1979 to 1987 through what was arguably the central bank’s most important moment in modern history.
In its obit, The New York Times described Volcker's reputation as one of "austere integrity." During his time as a Washington, D.C., official, Volcker was personally frugal, preferring low-cost suits, cheap cigars, and a small apartment. His approach to economic policy was built around an almost puritan belief in the importance of sacrifice, moderation, and pain in the service of long-term goals. And this devotion did indeed cut across partisan lines, taking aim at excess inflation, Wall Street financial wizardry, and national debt build-ups under Republicans and Democrats alike.
"[Volcker] came to represent independence," Ben Bernanke, another former Fed chairman, told the Times. "He personified the idea of doing something politically unpopular but economically necessary."
Bernanke's is the conventional wisdom, but it belies thorny questions about the political economy. For whom were Volcker's decisions economically necessary? And how does what is necessary relate to what is right?
For progressives and liberals, Volcker's most attractive trait was probably his lifelong skepticism, bordering on contempt, for business elites, particularly in finance. He remained convinced that the vast majority of innovation occurring on Wall Street was useless, providing no real value to society. Volcker even reportedly mused that the automated teller machine was the last genuinely helpful breakthrough offered by the financial industry.
As Fed chairman during the 1980s, one of Volcker’s duties was to help with regulatory oversight of America's private banks. The Reagan administration was in favor of deregulating the industry, but Volcker wasn't keen, and the White House undercut him by packing the rest of the Fed's governing board with pro-deregulation members. During the Clinton years, when enthusiasm for unshackling finance was at its height, Volcker disappeared from the political scene — banished to some degree as an unwelcome voice of doubt and restraint. After the 2008 financial crisis proved Volcker's prescience, he re-emerged as a supporter and advisor to Democratic presidential candidate Barack Obama.
As Obama's White House pushed through a new suite of financial regulations, the former Fed chairman proposed the "Volcker Rule," a limitation that hived the economy's biggest and most important banks off from speculative financial activity — and which Republicans and deregulation advocates have been fighting ever since. Obama even reportedly considered Volcker as treasury secretary, before picking Tim Geithner instead. It's interesting to wonder how a Volcker Treasury might have dealt differently with the banks in the aftermath of 2008's aftermath, given how American families fared under Geithner's effort to avoid forcing the banks into either nationalization or bankruptcy.
But, as mentioned, the pinnacle of Volcker's career — and of his import to American history — was his previous chairmanship of the Federal Reserve. Nominated to the post by President Carter and then continuing under Reagan, Volcker set out to finally tame the ever-rising inflation that had bedeviled the country for all of the 1970s.
As part of the government's apparatus for creating U.S. dollars, the Fed has two options in carrying out monetary policy: It can target interest rates, and pump however much money into (or out of) the economy as is needed to hit them. Or it can target the supply of money, and let the market set interest rates in reaction to the supply. Time and again Volcker leaned towards the latter option.
He viewed low interest rates as indulgent and imprudent — he unsuccessfully opposed them as a lower Fed official under a previous chairman, Arthur Burns, and he unsuccessfully opposed them again in the economic boom of the late 1980s. The gold standard had been an earlier mechanism for limiting the creation of U.S. dollars, and under Nixon, Volcker was deeply apprehensive about undoing it.
So in 1979 and 1980, when inflation was brutally high, Volcker chose to squeeze the money supply to bring it down. His policy briefly drove interest rates to an astonishing 20 percent, setting off a massive recession that destroyed millions of jobs and sent unions into a freefall. But in terms of its ostensible goals, Volcker's strategy worked, and inflation fell back down over the next few years. Volcker's admirers point out that ever since, America's economy has enjoyed longer and more stable runs of growth, with perpetually low inflation.
Unfortunately, Volcker's recession also marked a turning point in the evolution of the U.S. economy: Inequality has skyrocketed and real wages for the vast majority of Americans effectively stopped growing. Our economic growth has been more stable, but it has also been slower. In particular, Volcker was explicit that taming inflation required breaking the organized power of workers to demand higher wages. When Reagan smashed the air traffic controllers' union, Volcker praised it as "the single most important action of the administration in helping the anti-inflation fight."
The inflation crisis had many intersecting causes, each pointing to different possible solutions that would've required sacrifices from different groups. But Volcker's chosen strategy essentially loaded all the pain onto the working class. This approach to monetary policy has shaped Fed policy ever since, and the country's workers are still living with the consequences.
Ironically, as much as Volcker may look askance at the self-congratulatory elites of Wall Street, he also helped demolish the labor movement — one of the few bases of bottom-up power in U.S. politics that could've restrained them.
Recently, some of these realizations seem to have seeped into the Fed's consciousness, even if its implications for Volcker's legacy remain unacknowledged. In response to the Great Recession, the Fed created and injected trillions of new dollars into the economy with almost no effect, casting doubt on Volcker's focus on the money supply as the key lever. The central bank has also changed course on interest rates in a very un-Volcker-ish manner, keeping them low even as unemployment has fallen to its lowest rate in decades.
Volcker was undoubtedly a stoic and principled champion of following the rules. But he also crushed the American worker in the name of monetary discipline.
It seems clear that second half of his legacy left a deeper mark on American society.