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Nowadays, I don’t give much credit to the Federal Reserve due to all its dirty tricks on markets, but today one of its best leaders deserves respect.
On Sunday, November 8, 2019, Paul Adolph Volcker Jr., the greatest central banker ever, succumbed to prostate cancer at the age of 92.
“Tall Paul,” as the 6’7″ living legend was known, will be missed by everyone who knew how tall he stood facing blistering political pressure, Wall Street criticism, and millions of Americans who once blamed him for the country’s economic misery and the 10.8% unemployment rate that he presided over in 1983, which cost so many of them their jobs.
But his plain-speaking smarts, resolve, unquestionable honesty, and integrity always shined through and eventually turned every one of his detractors into admirers, if not apostles.
How Volcker’s Early Start Made Him a Smart Choice for Any Role
Paul Volcker was smart. He had “street smarts” which he probably learned growing up in Teaneck, New Jersey. He had shining academic smarts too. He earned a B.A. at Princeton where he graduated summa cum lade, writing his senior thesis on the Fed’s failure to curb inflationary pressures after World war II.
After working a second summer as a research assistant at the New York Federal Reserve, he went to Harvard and earned an M.A. in political economy. From 1951-1952, Volcker attended the London School of Economics as a Rotary Foundation Ambassadorial Fellow.
In 1952, fresh out of school, Volcker joined the New York Federal Reserve Bank as an economist. He left in 1957 for the legendary Rockefeller bank Chase Manhattan, where he continued his role as a financial economist.
When one of the young economist’s mentors at Chase left for the U.S. Treasury, Volcker followed him in 1962 becoming a director of financial analysis. He was promoted in 1963 to Deputy Under Secretary for Monetary Affairs.
The private sector called him back in 1965, when he returned to Chase as Vice President and Director of Planning. Then Washington called him back, and he became Under Secretary of the Treasury for International Monetary Affairs from 1969-1974, where he played a part in the Nixon Administration’s decision to suspend gold convertibility in August 1971.
The Turning Point for America’s Financial History
In 1975 the already seasoned financial economist and Washington hand became president of the Federal Reserve Bank of New York, the Fed’s most powerful regional bank.
President Jimmy Carter nominated Volcker to serve as chairman of the Board of Governors of the Federal Reserve System on July 25, 1979, a decision he quickly came to regret. Volcker was confirmed by the Senate on August 2, 1979.
The trouble for Jimmy Carter and the Americans who were to suffer under rising interest rates and dove-tail recessions in the late 1970s early 1980s began on a Saturday night, with an event that became known as the Saturday night massacre.
During a rare press conference on the evening of October 6, 1979, the Saturday before Columbus Day, Volcker announced the results of an unscheduled FOMC meeting held earlier that day. Instead of managing the day-to-day level of the fed funds rate, the FOMC was going to focus on managing the volume of bank reserves in the system.
Targeting monetary reserves by reducing the amount on monetary aggregates in the financial system caused interest rates to start climbing.
Jimmy Carter complained that rising rates and tightening economic conditions were impacting his reelection chances. He was partly right, as the Iran hostage crisis didn’t help his reelection hopes either.
In spite of unending criticism, from Washington, from Wall Street, from Main Street, from a country reeling from rising inflation and a sinking economy, Paul Volcker stuck to his guns, stayed the course, and not only broke the back of inflation, but also set up the American economy for decades of extraordinary growth without a whiff of inflation.
Sure enough, in order to kill inflation that reached 14.8% in March and April 1980, interest rates had to rise to extraordinary levels. The fed funds rate which averaged 11.2% in 1979, already super-high by historical standards, got up to 20% in June 1981. The “prime rate” got up to 21.5% at the same time.
The pain was pervasive.
But Tall Paul, who smoked 30 cent Antonia y Cleopatra Grenadiers, which I started smoking when I was 20 to emulate my hero, prevailed, and so did America.
Volcker’s Legacy Goes On
The smarts, resolve, and integrity to do what no other central banker in the world would have even attempted, makes Paul Volcker the greatest central banker in history.
He didn’t stop there either.
After serving the country as Fed Chairman from August 1979 to August 1987, Paul Volcker worked at a boutique investment bank, chaired the Group of 30 Report on the Derivatives Market, challenged Swiss banks’ accounting of Holocaust victim’s assets, investigated corruption in Iraqi oil as a United Nations representative, and chaired several philanthropic, financial, and strategic institutes and clubs.
And most famously of late, he was recognized by President Obama for his stand on separating investment banking business from commercial banking and reducing systemic risk at big banks by stopping them from using depositor money to make market bets for their own profitability, which became known as the Volcker rule.
The Volcker Rule may not survive, but the legend of Paul Volcker will.
For good reason and the good of the country.