The Forgotten Legacy of Paul Volcker

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Paul Volcker has been a figure both hated and revered in equal measure throughout his tenure at the Federal Reserve. Nowadays, he is something of a distant figure, consigned to a now bygone era of late 70s’ stagflation and high interest rates. Occasionally Volcker’s comments on the current environment rise to the surface of financial news — one always hears them in his characteristic low drawl. But his prudent counsel often lays untouched, passed over without so much as a cursory, slightly wary glance.

Volcker is a representative of a dying attitude of fiscal responsibility, increasingly rare in today’s environment. As a (previous) member of the public sector, he is an endangered species in this respect. Volcker approached his station as Fed chief with an admirable sense of public duty and he persisted in his mission of proper monetary policy with a whole lot of backbone and moral fiber. Volcker is not quite cut from the same cloth as all the others, one could say, if his formidable integrity and ideological consistency are any indication.

The distillation of Volcker’s legacy into a single, overarching idea might read something like the following: stability for the American people is paramount. For it was, after all, the American people that Volcker most cared about. It is tremendously easy for Fed officials to bend to the pressing wishes of the political class or the financial elite of the private sector. Volcker’s allegiances, then, time and again lay with Main Street — not Wall Street. This clarity of mission he brought to the fore of America (that few others had the courage to pursue) benefited the country as whole in the long-term.

Volcker’s legacy ought not to be confined to a dusty period of history, regarded as obsolete. Volcker’s legacy is built upon a series of judicious monetary principles (and not fashionable economic theories, say) and principles never die. They are the undying laws of the world. They are the backbones of good governance.

Price Stability

Some may find the association between Volcker and price stability a strange idea. After all, was it not he that presided over an era of rocketing prices? The Great Inflation of the ’70s was a scarring experience for everyone involved. And given that Volcker’s interest rate spikes ratcheted up prices and caused a frenzied economic tailspin, was this not the antithesis of stability?

After all, Volcker’s rate increases famously hit the 20 percent mark — an unthinkable number to our modern eyes. And this feat subsequently made him a hated man. It was a brave and risky move. But Volcker knew what he was doing.

And come the early 1980s, the fever broke, the economy cooled back down, and interest rates began their descent. It would be a while before the vilification would subside, but Volcker deserves some credit for his resoluteness — for his ability to abide by his own tough prescription. In the long-term, his aggressive program inspired confidence.

The situation Volcker stepped into when he was appointed Chairman in 1979 was one of runaway inflation, likely birthed when Nixon took the U.S. off the gold standard earlier in the decade. Nixon’s subsequent emergency experimentation with wage-price controls proved disastrous. Volcker was thus tasked with addressing a diseased economy crippled by high unemployment and flagging demand. And he did this by choosing the road less-traveled — by administering a dose of bitter medicine.

A period of ugliness, however, needed to be endured before relief could arrive but is this not true of any disease? It is not so outrageous, then, what Volcker enacted. He wanted to bring the consequences to the fore — in effect, to induce the messy recovery process himself instead of casting the problems into the future or otherwise abstracting them.

President Reagan thankfully stood by his efforts in the early ’80s — and to his benefit, for the ’80s would not have been the Reagan ’80s without Volcker. Volcker’s process may have been confusing — even infuriating — for America had to travel down through the darkened tunnels of two recessions before we arrived on the shores of some semblance of stabilization. But Volcker’s determination ultimately halted what would have been a progressively downward spiral. He cleaned the slate, excised the disease, and made room for something new to develop in its place.

“Price stability” smacks of rigidity, but really, it is nothing more than avoiding prolonged periods of inflation or deflation. It’s a fairly uncontroversial concept but should not be underestimated in importance in the domestic sphere — that is, in the lives of everyday Americans. Price stability is equivalent to price transparency wherein the masses are not battered by distorted economic signals. Price stability also fashions a sense of confidence in people, generally encouraging them to make smarter economic decisions due to their being appropriately well-informed.

On the flipside, an environment of wildly fluctuating prices may read as disorienting to everyday consumers, but it reads as opportunity to Wall-streeters who are well-equipped to capitalize on these unruly environments via arbitrage and hedging activities. And this layer of opportunists — forever a fixture of any economic ecosystem — in the wake of price instability usually only carries things further into weird, distortionary territory.

In any case, it was Volcker’s ideological commitment to price stability and his belief in its healing powers that ultimately motivated him to make hard choices in the short-term to salvage our national long-term prospects. He presciently understood how the stability of prices trickled down to the level of the individual, and infused their everyday choices. In boosting rates, he knew things would be bad for a while before they could be good again. The ensuing period of temporary price instability caused tumult in the lives of citizens, but Volcker bore the outrage as best he could for what would turn out to be several uncomfortable years. But soon enough, the seas quieted, the subsequent prosperity of the ’80s was ushered in and people started to smile on Volcker again.

As well, price stability famously correlates to dollar stability — a necessary feature of a strong America. Much depended, then, on Volcker managing to successfully purge the system quickly and return to so-called calmer waters.

Political Independence

Paul Volcker largely resisted the pull to indulge the wishes of the political class. Historically, Fed chairmans have to endure quite a bit of tug-of-war with the current President. It always happens the same way: Presidents buckle under the temptation to pressure the Fed for lower interest rates. Generally speaking, lower interest rates paint a brighter economic picture to Americans. Many are oblivious to this effect — all they know is that things look better. (Unfortunately, on the flipside, low interest rates sap savings and hurt those that are fiscally responsible themselves — effectively punishing them for their thrift.)

Time and again, politicians have gravitated towards this simple means of bolstering the confidence of the population. It’s also been a documented trend for Presidents to pressure the Federal Reserve to specifically lower interest rates prior to elections. Whether to secure favorable reelection odds or to lock in a flattering economic legacy, the end result is that the Fed has historically had to fight against the political badgering contaminating their mission. After all, they have far-reaching standards to uphold that transcend the political cycle.

During the Volcker years, President Reagan reportedly continued this tradition, meeting one-on-one with Volcker, vying for a bit of an economic makeover on the part of the Fed in time for the 1984 election. Volcker didn’t indulge him. He knew better then to bend to governmental will. This separatism — this drawing of cold, clean lines of demarcation between public finance and the political cycle is wise and usually somewhat of a protective feature for the American people.

Meanwhile, Volcker was also exercising persistence in the face of political intimidation to print money to solve the stagflation woes. Instead, he held fast to his convictions and forced up interest rates as an alternative. Printing our way out of tricky situations has been a popular escape mechanism in the 21st century and commonly is cloaked in cryptic language, usually masquerading under the purposefully opaque term “quantitative easing”. Most recently, Donald Trump publicly pressured Fed Chairman Jerome Powell to lower interest rates and even tossed out the suggestion of trying out some QE — technically an emergency measure that we first experimented with in the 2008 aftermath. It’s not something to mess around with.

Now, Trump’s rationale itself isn’t completely ridiculous considering inflation has been stubbornly low for years upon years now — which would technically signal it’s safe to experiment with stimulus. However, stimulus rarely ends well and is famous for temporarily goosing the economy and then falling flat. Volcker wasn’t a fan of monetary stimulus. In any case, it’s usually best for Fed chiefs to eschew the pressure of their political overlords (or are they the overlords?), if only to avoid mucking up their business.

Inflation Expectations

Volcker knew that to meddle with the cognitive perceptions of the people was a dangerous game. He took inflation expectations seriously — people’s beliefs in how much inflation can be anticipated and for how long. Uncertainty about what the Fed will do in response to inflation leads to shaky market behavior and economic anxiety for the masses. What Volcker essentially demonstrated was that he would rise to meet the challenge. It was unnervingly bold. Some might argue that “breaking the back of inflation” was too austere and costly in its rigidity — that it was something like blind ideological obedience. But Volcker’s actions were, in a lot of ways, the necessary display of followthrough needed to restore confidence back into the financial system.

After all, public trust in the financial system is one of the most overlooked components of the whole enterprise. It’s the invisible substance that adheres everything together. Havoc erupts when it is scarce. Volcker has lamented in the past the deteriorating levels of trust in the public sector, and warns against the ramifications of that. He correctly identifies the importance of treating inflation expectations with tremendous care, noting that inconsistency in this area can seriously undermine the structural integrity of the financial system. Without the confidence of the markets and the people, the effectiveness of the Fed withers — and we often lack the visionary prowess necessary to see that happening before our eyes.

Years prior, JFK once distilled this wisdom with bold, precise candor, noting the following:

“Price stability belongs in the social contract. We give the government the right to print money because we trust our elected officials not to abuse that right, not to debase the currency by inflating. Foreigners hold our dollars because they trust our pledge that those dollars are equivalent to gold. Failure to maintain those promises undermines trust in America. And trust is everything.”


What anchored Volcker in the years of his tumultuous reign at the Fed was a strong sense of ethical duty and an unwavering focus on what he had been appointed to do. His unique, careful approach to public service as just that — “public service” — would eventually lend him a well-earned reputation for credibility. Humble to the very end and surprisingly resistant against ideological shape-shifting, a man of Volcker’s character wasn’t everyone in Washington, that was for sure.

He kept his eyes on the principles of fiscal responsibility — at its core, an ethical concept. This differentiated him from other, more recent Federal Reserve chiefs who couldn’t tear their eyes from complicated economic models and who perhaps prioritized the lofty merits of financialization over protecting the basic mechanisms of public finance. It was evident it was people Volcker cared about — and less about math. He cared about principles — less about metrics.

It’s enormously difficult to require ethical fortitude from one’s leaders and there’s no real way to ensure you actually get it. Profit beckons and so does pandering to beneficial alliances. Volcker largely eschewed both. He also was one of the few to see the merits in monetary tightening — for all we have today is uncurbed monetary stimulus.

In addition, he knew that to protect the strength of the American dollar would be to protect the American people and it was this he placed at the center of his vision. Absent of a gold standard, the best Volcker could manage was a dollar standard and he went about achieving just about that — resurrecting a global faith in the U.S. currency that did double-duty in fashioning a new, bolstered reputation for America at large.

Volcker wasn’t perfect and like any national figure, is not immune from blame for any number of things. Regardless, he stands as a premier American figure who accomplished good governance as a result of staying moored to ever-vanishing, perpetually-slipping standards of fiscal integrity. His lessons are timeless and his strong leadership is exemplary. We ought never to let his legacy die.

Writer of economics, psychology, and lots in between.

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