Paul A. Volcker, who helped shape American economic policy for more than six decades, most notably by leading the Federal Reserve’s brute-force campaign to subdue inflation in the late 1970s and early ’80s, died on Sunday in New York. He was 92.
The death was confirmed by his daughter, Janice Zima.
Mr. Volcker, a towering, taciturn and somewhat rumpled figure, arrived in Washington as America’s postwar economic hegemony was beginning to crumble. He would devote his professional life to wrestling with the consequences.
As a Treasury Department official under Presidents John F. Kennedy, Lyndon B. Johnson and Richard M. Nixon, Mr. Volcker waged a long, losing struggle to preserve the postwar international monetary system established by the Bretton Woods agreement.
As a senior Federal Reserve official from 1975 to 1987, in addition to battling inflation, he sought to limit the easing of financial regulation and warned that the rapid growth of the federal debt threatened the nation’s economic health.
In his last official post, as chairman of President Barack Obama’s Economic Recovery Advisory Board, formed in response to the 2008 financial crisis, he persuaded lawmakers to impose new restrictions on big banks — a measure known as the “Volcker Rule.”
Mr. Volcker interlaced his long stretches of public service with a lucrative career on Wall Street, most prominently as chief executive of the investment bank Wolfensohn & Company.
His reputation for austere integrity also made him a popular choice as an independent arbiter. In one instance he oversaw the reclamation of deposits that Swiss banks had failed to return to the families of Holocaust victims.
His defining achievement, however, was his success in ending an extended period of high inflation after President Jimmy Carter chose him to be the Fed’s chairman in 1979.
He prevailed by delivering shock therapy, driving the economy into a deep recession to persuade Americans to abandon their entrenched expectation that prices would keep rising rapidly.
The cost was steep. As consumers stopped buying homes and cars, millions of workers lost their jobs. Angry homebuilders mailed chunks of two-by-fours to the Fed’s marble headquarters in Washington. But Mr. Volcker managed to wring most inflation from the economy.
His victory inaugurated an era in which the leaders of both political parties largely deferred to the central bank, allowing technocrats to chart the course of monetary policy with little political interference.
Ben S. Bernanke, the Fed’s chairman from 2006 to 2014, kept on his bookshelf one of the chunks of wood that Mr. Volcker received during the anti-inflation campaign.
“He came to represent independence,” Mr. Bernanke said in an interview for this obituary. “He personified the idea of doing something politically unpopular but economically necessary.”
Proud, confident and 6-foot-7 in socks, Mr. Volcker struck many as remote and intimidating. Those who knew him well said the gruff exterior concealed a shy man with a puckish wit. His first wife told a biographer that she had waited vainly for a proposal before she finally asked him if he wanted to marry.
He was famously frugal, favoring drugstore cigars and ill-fitting suits. In the 1960s, when the driver’s seat in his Nash Rambler collapsed, Mr. Volcker propped it up with a chair and continued to drive the car. As chairman of the Fed, he lived in an apartment building populated by George Washington University students and took his laundry to his daughter’s house in the Virginia suburbs.
His time in the national spotlight began in August 1979. Mr. Carter, struggling to salvage public confidence in his administration, decided to reshuffle his cabinet, plucking the Fed chairman G. William Miller to serve as Treasury secretary. Mr. Volcker, who was then serving as president of the Federal Reserve Bank of New York, was not Mr. Carter’s first choice as a replacement.
Mr. Volcker was known to be frustrated with the Fed’s halfhearted efforts to curb inflation, leading Mr. Carter’s aides to warn that he might drive the economy into recession.
Meeting Mr. Carter in the Oval Office, Mr. Volcker slumped on a couch, a familiar cigar in hand, and gestured at Mr. Miller, who was in the room. “You have to understand,” Mr. Volcker said he told the president, “if you appoint me, I favor a tighter policy than that fellow.”
In taking the job, Mr. Volcker strained his finances and his family life.
The job of chairman paid half as much as his post at the New York Fed, and Mr. Volcker’s wife at the time, Barbara Volcker, who struggled for much of her life from debilitating rheumatoid arthritis as well as diabetes, remained in New York to be near her longtime physician. (She died in 1998.) Their son, James, who was born with cerebral palsy, also remained in New York.
When Mr. Volcker arrived in Washington, the national inflation rate was exceeding 1 percent a month. (By comparison, in 2017 inflation was less than 2 percent for the whole year.) Rapid and unpredictable inflation encourages spending while discouraging investment, a combination that creates economic instability and, often, political instability.
Henry C. Wallich, a Fed governor who had lived through the hyperinflation of Weimar Germany and often told of paying 150 billion marks to use a neighborhood swimming pool, was among those warning that the Fed was losing control.
Many economists still argued that the Fed could reduce inflation gently, without causing a recession, by raising interest rates just enough to slow economic activity. But Mr. Volcker said inflation had become a self-fulfilling prophecy. People had come to expect prices and wages to rise, so they borrowed and spent more and demanded larger pay increases, and prices and wages rose.
The Fed had been promising to crack down on inflation for more than a decade, but it had repeatedly caved in to intense political pressure so as to avoid a recession. Mr. Volcker decided a dramatic gesture was necessary to convince the public that this time would be different.
“I wanted to move the story at least to the front page,” he told a biographer.
Channeling the Money
On Saturday, Oct. 6, 1979, Mr. Volcker held an evening news conference in the grand boardroom at the Fed’s headquarters on Constitution Avenue. It was the first time in memory that a Fed chairman had addressed the news media, and the Fed’s staff scrambled to gather the press corps.
Pope John Paul II was visiting Washington; when CBS said that it didn’t have a spare camera crew, Mr. Volcker’s spokesman persuaded the network to abandon the pontiff. “Send your crew here,” he told a CBS producer. “Long after the pope is gone, you’ll remember this one.”
Mr. Volcker’s message was that the Fed was declaring war on inflation. “The basic message we tried to convey was simplicity itself,” he said later. “We meant to slay the inflationary dragon.”
To underscore the Fed’s determination, Mr. Volcker announced a significant change in the conduct of monetary policy. Historically, the Fed had aimed to control interest rates — the price of money. Under the new policy, he said that the Fed would instead aim to control the supply of money. Limiting the money supply would cause interest rates to rise, but the Fed would no longer aim for a specific increase. The central bank would determine how much money was available; markets would set the price.
The change was part of a broader shift in economic policymaking toward a greater reliance on financial markets. It marked the end of the postwar era in which disciples of the British economist John Maynard Keynes had argued that governments could deftly manage economic conditions, including interest rates.
An immediate result was that markets pushed interest rates a lot higher than Mr. Volcker had anticipated. The prime rate, which banks charge their most creditworthy customers, nearly doubled by Election Day 1980, peaking at 21.5 percent. Farmers on tractors circled the Fed’s headquarters. Auto dealers sent the keys to cars they could not sell. “Dear Mr. Volcker,” one builder scrawled on a wooden block with a knothole. “I am beginning to feel as useless as this knothole. Where will our children live?”
Mr. Volcker later confessed to doubts, telling an interviewer in 2016 that he had worn a path into his office carpet while waiting for inflation to surrender. And, early on, he blinked: After tipping the economy into recession in early 1980, the Fed briefly took its foot off the brakes.
But when inflation showed signs of accelerating, the foot slammed back down, and a deeper recession began. Thereafter, Mr. Volcker was obdurate, insisting that the pain was necessary and ultimately worthwhile.
Asked by a reporter how much unemployment he was willing to accept, Mr. Volcker responded, “My basic philosophy is over time we have no choice but to deal with this inflationary situation.”
The harsh Fed policy no doubt contributed to Mr. Carter’s re-election defeat at the hands of Ronald Reagan; he had to campaign when interest rates were at their peak, and before the inflation fever had begun to break. Mr. Carter, in his memoirs, would offer a typically understated assessment: “Our trepidation about Volcker’s appointment was later justified.”
Unemployment rose to a peak of 10.8 percent in November 1982 — higher than at any point during the recession that began in 2008 — but by then the benefits of the Fed’s campaign were beginning to appear. Inflation fell below 4 percent in 1983, and Mr. Volcker’s critics were soon drowned out by a burgeoning chorus of admirers.
Some economists continued to argue that the Fed could have brought inflation under control more gently. Alan Greenspan, Mr. Volcker’s successor as Fed chairman, later described the policy as an excess of necessary medicine, although he added that it had been preferable to not doing enough.
In retrospect, it has also become clear that the developed world was on the cusp of an era of declining inflation, arriving as a result of the globalization of manufacturing and capital markets.
But Mr. Volcker’s triumph was undeniable: Inflation has remained under control ever since.
“Paul was as stubborn as he was tall,” Mr. Carter said in a statement on Monday morning, “and although some of his policies as Fed chairman were politically costly, they were the right thing to do. His strong and intelligent guidance helped to curb petroleum-driven inflation, easing a strain on all Americans’ budgets.”
President Reagan appointed Mr. Volcker to a second term as board chairman in 1983. But the relationship soon soured. Mr. Volcker was increasingly vocal in his criticism of the federal government’s growing deficits and reliance on foreign investors. In his austere view, there were no shortcuts to economic growth. The government needed budget discipline as well as low inflation.
The White House, for its part, grew increasingly unhappy with Mr. Volcker’s focus on inflation. In the summer of 1984, as Reagan campaigned for re-election, Mr. Volcker was summoned to meet the president at the White House. Mr. Volcker recounts in his memoirs, published in October 2018, that Reagan sat silently while his chief of staff, James A. Baker III, delivered a blunt message: “The president is ordering you not to raise interest rates before the election.”
Mr. Volcker was “stunned,” he wrote, but he maintained his composure and left without giving a reply. He added that he had not planned to raise rates before the election, and he did not do so.
Mr. Volcker and Mr. Baker also clashed over financial regulation. The Fed played the leading role in overseeing the nation’s largest banks; in Mr. Volcker’s view, they were getting into enough trouble already.
One of the nation’s largest banks, Continental Illinois, failed in 1984 after a long run of reckless lending, particularly for oil exploration, prompting the former Fed chairman William McChesney Martin to observe acidly that Mr. Volcker was “very good on monetary policy” and “a complete flop on bank supervision.”
The largest American banks, mostly based in New York, also got into trouble by lending heavily to Latin American countries. As the Fed raised interest rates, those countries struggled to make interest payments, precipitating a debt crisis. Mr. Volcker played a leading role in devising bailouts for the countries and the banks.
But the big New York banks, with the support of the Reagan administration, kept pressing for permission to re-enter the business of securities trading for the first time since the Great Depression.
Mr. Volcker delayed consideration of the banks’ requests, but the administration forced his hand by appointing new members to the Fed’s board. In early 1986, those new members outvoted Mr. Volcker. He threatened to resign but decided to serve out his second term.
On June 1, 1987, Mr. Volcker went to the White House to say that he did not want a third term; Reagan promptly telephoned Mr. Greenspan to offer him the job.
Over the next two decades, the Fed maintained firm control of inflation, but policymakers otherwise ignored Mr. Volcker’s advice, allowing the national debt to balloon. The government also continued to reduce regulation of the financial industry. The long era of growth that began with Mr. Volcker’s victory over inflation would come to a crashing end in 2008, bringing him back to Washington one last time.
Jersey Boy
Paul Adolph Volcker Jr. was born on Sept. 5, 1927 — Labor Day — in Cape May, on the southern tip of New Jersey, where his father was the city manager. Paul moved as a child to Teaneck, a leafy North Jersey suburb, which had recruited his father to keep the town from bankruptcy.
Mr. Volcker credited his father with inspiring his own career as a public servant.
Nicknamed Buddy by his family, Mr. Volcker had three older sisters — like him, they were all more than six feet tall — and all were so determined not to spoil him that “they leaned over backward to abuse me,” he told a biographer.
A reserved youth, he became a top student and, thanks to his height, a member of the varsity basketball team at Teaneck High School. Journalists seeking tales of teenage high jinks have come up empty-handed.
“When my buddies went shooting out streetlights, I said goodbye,” Mr. Volcker recalled in an interview for this obituary in 2010.
After graduating from high school in May 1945, with the end of World War II still months away, Mr. Volcker tried to enlist in the Army but was rejected because he was an inch too tall. He decided to apply to Princeton University, despite his father’s warning that the other students there were very smart. Mr. Volcker was soon getting top marks. He would later observe wryly of his classmates, “They weren’t as smart as my father thought.”
At Princeton, Mr. Volcker pursued a new major that combined the study of economics, politics and history. Searching for a thesis topic his senior year, he decided to write about the Federal Reserve. He produced a 250-page analysis entitled “The Problems of Federal Reserve Policy Since World War II.” It argued that the Fed needed to act more firmly to control inflation.
His adviser, Frank D. Graham, encouraged him to pursue a graduate degree in economics. Mr. Volcker applied both to the Harvard Law School and to Harvard’s Littauer School of Public Administration (later the John F. Kennedy School of Government), which he chose when it offered a full ride.
Two years later, Mr. Volcker had a master’s degree and had finished course work for a Ph.D. in political economy when he won a Rotary Club scholarship for foreign study. He decided to write his doctoral thesis at the London School of Economics. In fact, he wrote no thesis but had a grand time traveling the Continent, sometimes on a bicycle, forging relationships that later proved valuable.
He returned home to become a staff economist at the New York Fed, then was recruited by Chase Manhattan, where he served as special assistant to David Rockefeller, the bank’s vice chairman at the time, and on a commission advising the Treasury Department in Washington.
In 1962, Robert V. Roosa, a mentor to Mr. Volcker at the New York Fed who had become a Treasury official in the Kennedy administration, gave Mr. Volcker his first job in Washington, as an adviser to the Treasury. He was later a deputy under secretary.
Mr. Volcker, raised in a Republican family, said he joined the Democratic Party because he had been inspired as a young man by the politician and diplomat Adlai E. Stevenson II, but he saw himself primarily as a civil servant. He would never realize an ambition to become Treasury secretary, in part because several presidents would conclude that he was insufficiently political. But his reputation as a technocrat meant that as presidents came and went, Mr. Volcker stayed put.
“One of my old friends from abroad once told me — I think he meant it as an ironic compliment — that he thought of my career as a long saga of trying to make the decline of the United States in the world respectable and orderly,” Mr. Volcker said.
As a Treasury official under three presidents, Mr. Volcker struggled to preserve the postwar international monetary system that the United States and its allies had created in 1944 at the Bretton Woods resort in New Hampshire. Under the agreement, nations fixed the values of their currencies in dollars, and the United States promised to exchange dollars for gold at $35 an ounce.
The agreement was a mainstay of the postwar effort to foster global economic cooperation, which in turn was considered a powerful means of discouraging military conflict. But during the 1960s, the fixed rates became increasingly untenable because of the resurgence of the German and Japanese economies.
In 1971, Mr. Volcker played a key role in persuading Nixon to suspend the Bretton Woods agreement by closing the “gold window,” meaning the United States would no longer guarantee the value of the dollar.
Mr. Volcker hoped to negotiate a new set of fixed exchange rates. Instead, the dollar was allowed to float, leaving markets to determine the value of the dollar in British pounds or Japanese yen.
This change was celebrated by many economists as a key step in the deregulation of financial markets. Mr. Volcker long regretted it for the same reason. He foresaw, correctly, that the absence of an international system would make it easier for other nations to manipulate their currencies. And he would go on fighting, with little success, to create an alternative system for regulating exchange rates — an idea that has attracted some new interest since the 2008 financial crisis.
Mr. Volcker left the Treasury in 1974, intending to return to Wall Street.
Instead, Arthur F. Burns, the Fed’s chairman, asked him to take the top job at the New York Fed. It was a powerful position: The bank was the Fed’s operational arm, and its president served as vice chairman of the Fed’s policymaking committee.
Mr. Volcker, a dedicated fly fisherman, headed out on a vacation to clear his mind, then called collect from a pay phone to take the job.
At the New York Fed he would watch with growing frustration as Mr. Burns and then Mr. Miller failed to deliver on promises of tough measures to rein in inflation. It would be another four years before Mr. Volcker had his own chance.
After Mr. Volcker stepped down from the Fed in 1987, at age 59, he returned to a financial industry that was being transformed by deregulation.
Paydays on Wall Street
At first he took a teaching post at Princeton and a part-time role at Wolfensohn, an investment banking firm that cultivated a reputation for providing disinterested advice. Within a few years he was running the firm. He made $89,500 in his final year at the Fed (about $312,000 in today’s money). At Wolfensohn, he earned more than a million dollars a year (about $3.5 million today). When Wolfensohn was acquired in 1995, he earned more in one day than he had in 30 years of public service.
Mr. Volcker also agreed to serve as unpaid chairman of the National Commission on the Public Service, a nonprofit organization founded in 1987 to encourage private-sector leaders to serve in government. He later described its failure to win support for civil service changes, like higher pay, as “probably my biggest regret.”
During the 1990s and 2000s, Mr. Volcker found his services as a chairman of public commissions in demand: He investigated the United Nations’ oil-for-food program in Iraq, corruption at the World Bank and the failings of Enron’s auditor, the Arthur Andersen accounting firm.
Probably his most contentious role was as chairman of a committee created in 1996 to mediate the claims of Holocaust victims and their families against Swiss banks. In some cases the banks had actively impeded efforts to reclaim money that had been deposited before World War II.
“There was a feeling of failed justice on the Jewish side,” Mr. Volcker said of the process, which resulted in a settlement of $1.25 billion. “And on the Swiss side, a feeling of unfair criticism. I think I was genuinely neutral.”
Even after making a fortune on Wall Street, Mr. Volcker never lost his distaste for bankers, whom he often criticized as avaricious and fond of risk-taking at the public’s expense.
In a 2005 speech, Mr. Volcker, who had long taken a dim view of the debt-fueled expansion of the American economy, warned of a looming financial crisis. “Baby boomers have been spending like there is no tomorrow,” he told an audience at Stanford University. “Big adjustments will inevitably come.”
After the crisis came in 2008, Mr. Obama named Mr. Volcker to an advisory role, but the embrace was lukewarm. Most of the president’s advisers were veterans of the pro-deregulation Clinton administration.
Mr. Volcker, sensing the moment, began to campaign publicly for stronger financial regulation.
“Wake up, gentlemen,” he lectured bankers at a conference in December 2009. “I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy.”
He added that it was hard to think of a worthwhile financial innovation since the A.T.M.
Mr. Volcker found a more receptive audience among congressional Democrats. Judging the Obama administration’s initial proposal to overhaul regulation to be too weak, he lobbied for a new measure that would restrict risk-taking by the largest banks. The White House was forced by its allies to acquiesce.
On Jan. 21, 2010, Mr. Obama announced a late change to his plan, which had already passed the House. “I’m proposing a simple and common-sense reform which we’re calling the ‘Volcker Rule,’ after this tall guy behind me,” he said, pointing at Mr. Volcker, who loomed over the president’s other advisers.
The rule restricts banks from making investments that are not intended to benefit customers but rather only to increase the bank’s bottom line. The Trump administration has said that it plans to loosen those strictures as part of a broader review of post-crisis financial regulation.
Mr. Volcker married Barbara Bahnson in 1954. After her death, he married Anke Dening, his longtime assistant, in 2010. Besides her and his daughter, he is survived by his son, James, and four grandchildren.
Asked in the 2010 interview for this obituary about mistakes he had made, Mr. Volcker cited a personal rather than a professional one.
“The greatest strategic error of my adult life was to take my wife to Maine on our honeymoon on a fly-fishing trip,” he said, referring to his first marriage.
For his second marriage, the honeymoon was in the Virgin Islands.
Mr. Volcker, who long resisted entreaties to write a memoir, finally published an account of his life in October 2018, entitled “Keeping at It: The Quest for Sound Money and Good Government.” He said he had agreed to write the book to call attention to what he described as a crisis: “a breakdown in the effective governance of the United States.”
The government, he said, has lost the ability to address even the most obvious problems, like the need for better infrastructure.
“We’re in a hell of a mess in every direction,” he said in an interview with The New York Times in 2018. “Respect for government, respect for the Supreme Court, respect for the president, it’s all gone.”
In Mr. Volcker’s view, a key cause of this breakdown is a lack of qualified and committed public servants. In his memoir, he is particularly critical of his alma mater, Princeton, and other elite institutions for failing to prepare students for careers in public service.
“My plea is very simple,” he said. “Good policy is dependent on good management.”
He expressed the hope that it was not too late to restore trust in government, but he closed on a characteristically sober note, writing, “It will not be easy.”
Johnny Diaz contributed reporting.
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