'The integrity and will of ten men': the life of Paul Volcker ’49

Paul A. Volcker ’49, the former Chairman of the Federal Reserve, died last month at the age of 92.

Volcker served under Presidents Jimmy Carter and Ronald Reagan, and led the effort to suppress inflation throughout the late 1970s and early 1980s. On Sunday, Dec. 8, he passed away from complications of prostate cancer in his New York home, according to his daughter, Janice Zima.

“[Volcker] came to represent independence,” said Ben S. Bernanke, the 14th Chair of the Federal Reserve and former chair of the University’s economics department. “He personified the idea of doing something politically unpopular but economically necessary.”

Paul Adolf Volcker, Jr. was born in Cape May, N.J., on Labor Day, Sept. 5, 1927. His mother, Alma, was the Vassar College Class of 1913 valedictorian. Volcker described her as “approachable, understanding, and a patient mediator of childhood squabbles” in his memoir, “Keeping At It: The Quest for Sound Money and Good Government.”

His father, Paul Sr., was the oldest son of German immigrants and a city manager for Cape May, and later Teaneck, NJ. Volcker’s father exerted profound influence over his son’s career as a public servant. While serving as city manager during the Great Depression, Volcker Sr. volunteered to reduce his annual salary of $8,000 by $2,000.

His success in Teaneck was well-known: the FBI identified Teaneck as the lowest-crime town in the nation in 1945, and the U.S. Army selected Teaneck as a model town to educate residents of occupied countries about democratic practices after WWII.

“As I look back, there’s no doubt that my father’s prominent position in local government had a huge impact on the way I view life and the world,” Volcker wrote in his memoir.

Volcker, known to family members as “Buddy,” was the quiet only son among four children. He had three older sisters: Ruth, Louise, and Virginia — a fourth sister passed away during infancy. In July of 1945, after graduating from Teaneck High School, Volcker entered the University and studied among veterans of WWII, with whom he celebrated Japan’s 1945 surrender with a bonfire on Cannon Green.

Despite his father’s worries that he would be unable to compete among better-prepared students at the University, Volcker excelled academically. Standing at 6’7’’, he was a shoo-in for the varsity basketball team.

Volcker decided to study in the Woodrow Wilson School, then known as the School of Public and International Affairs, where he would return as a faculty member decades later. Volcker enrolled in numerous economics courses while he was at the University, including two taught by eminent Austrian liberal school of economics scholars, Oskar Morgenstern and Friedrich A. Lutz.

Graduating with highest honors in 1949, Volcker wrote a seven-chapter, roughly 250-page senior thesis titled “The Problems of Federal Reserve Policy Since World War II,” in which he examined the post-WWII policies of the U.S. Federal Reserve System and the state of the U.S. economy at the time.

Volcker’s conclusion was clear: the combined wartime policies of the Department of Treasury and the Federal Reserve had produced a dangerously high level of inflation, and the Federal Reserve needed to shrink the size of the money supply to combat it.

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“A swollen money supply presented a grave inflationary threat to the economy. There was a need to bring this money supply under control if the disastrous effects of a sharp price rise were to be avoided,” Volcker wrote near the end of Chapter II.

In the final chapter of his thesis, Volcker concluded that the Federal Reserve’s actions to curtail the money supply or the use of bank credit were bound to be ineffective because large amounts of marketable government securities remained outside the Federal Reserve Banks.

“From this standpoint,” wrote Volcker, “Federal Reserve policy has been largely a failure.”

Volcker later studied at the Littauer School of Public Administration at Harvard University, now the John F. Kennedy School of Government, receiving a master’s degree in political economy. He then attended the London School of Economics on a Rotary Club scholarship.

Volcker returned to New York from the United Kingdom in 1952, having missed the opportunity to vote for Democratic presidential candidate Adlai E. Stevenson II ’22. Still, Stevenson inspired Volcker immensely, and caused him to register as a member of the Democratic party.

Volcker met Barbara Bahnson through his former college roommate Donald Maloney ’49 in 1952, and the couple married in September of 1954. They had a daughter, Janice, born in 1955, and a son, James, born in 1958. Their marriage lasted over four decades, until Barbara died in June of 1998, having fought a lifelong battle against diabetes.

The same year he met Barbara, Volcker joined the Federal Reserve Bank of New York as a junior economist and moved near his beloved Brooklyn Dodgers. In 1957, he joined Chase Manhattan Bank as a research economist.

Five years later, Volcker entered the U.S. Department of Treasury as the director of the newly created Office of Financial Analysis under then-Treasury Undersecretary for Monetary Affairs Robert V. Roosa, who had been Volcker’s mentor since his first job at the New York Federal Reserve.

In less than two years, Volcker would be named as Deputy Undersecretary of the Treasury for Monetary Affairs, and by 1969 he was the Undersecretary himself.

In September 1974, he was named as a senior fellow at the University, but his absence from public service was short-lived. About a year later, he became the president of the Federal Reserve Bank of New York.

In 1979, Volcker was nominated by President Jimmy Carter to become the 12th Chairman of the Board of Governors of the Federal Reserve System, after the previous chair, G. William Miller, was nominated to become Secretary of Treasury. The Senate unanimously confirmed Volcker’s nomination, and he was sworn in on Aug. 6.

Volcker took office amid a time of economic turmoil. The United States were suffering from severe inflation, about which Volcker had warned in his senior thesis three decades prior. Exacerbated by the Arab oil embargo of the 1970s and the Federal Reserve’s loose monetary policy, monthly inflation had reached above 1 percent, and the annual rate of inflation in 1979 rose to 13.3 percent, a level unseen since President Harry Truman removed wartime controls in 1946.

Hence began the crusade against inflation that would come to define Volcker’s tenure as Federal Reserve Chairman. Volcker soon announced a series of policies aimed at reducing the size of the money supply, quickly driving up interest rates in the process.

By December of 1980, prime lending rates had ascended to a record-setting 21.5 percent, while the rate of unemployment climbed to a high of 10.8 percent in November of 1982. Volcker had almost single-handedly sent the United States into the worst recession since the Great Depression. In his war on inflation, he might have cost President Carter the chance for re-election.

Volcker’s policies triggered protests as farmers on tractors blockaded a building of the Federal Reserve, while car dealers sent to the Federal Reserve the keys of cars they could not sell. One man nearly reached the boardroom of the Federal Reserve with a sawed-off shotgun before being tackled by a security guard.

But in the end, Volcker prevailed.

The rate of inflation had dropped below four percent by the end of his first term as Federal Reserve Chairman.

“I would describe [Volcker] as having the integrity and will of 10 men,” said Alan S. Blinder ’67, the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs and former Vice Chairman of the Board of Governors of the Federal Reserve System.

“The tenure of Paul Volcker running the Fed enormously raised the prestige and respect of the institution,” he added.

After handing a letter of resignation to President Reagan, Volcker concluded his tenure as Federal Reserve Chairman in 1987, upon which he agreed to serve as chairman of the National Commission on the Public Service. In his resignation letter, he conveyed his continued trust in the Federal Reserve, an institution that was and still is profoundly shaped by his rectitude and competence.

“I believe the nation will continue to be well served by a strong Federal Reserve system — a system firmly dedicated to fostering economic and financial strength and stability and able to bring to that effort a combination of sound and independent professional judgment and continuity beyond any partisan considerations,” he wrote.

In March of 1988, Volcker returned to the University as the first Frederick H. Schultz ’51 Professor of International Economic Policy, a professorship named after the Federal Reserve vice chairman who served alongside Volcker from 1979 to 1982. Volcker also joined James D. Wolfensohn Inc. as chairman and later became CEO after the firm was renamed Wolfensohn & Company in 1995.

In the decades following his departure from the Federal Reserve, Volcker repeatedly assumed leadership positions in international organizations.

Volcker led the Independent Committee of Eminent Persons, more commonly known as the “Volcker Commission,” which investigated the dormant accounts in Swiss banks that held assets belonging to victims of the Holocaust. The Volcker Commission released a report in December of 1999 and eventually reached a settlement that saw nearly $1.29 billion in total distributions.

In 2004, the United Nations unanimously passed a resolution, selecting Volcker to lead an independent panel to investigate possible corruption and wrongdoing in the U.N. Oil-for-Food Programme for Iraq.

In February of 2009, President Barack Obama selected Volcker to lead the newly created President’s Economic Recovery Advisory Board (PERAB) during the financial crisis. Volcker became an acerbic critic of the financial industry, which had undergone years of deregulation prior to the recession. Volcker advocated for increased regulation and the breaking-up of large investment banks. A critical component of the Dodd-Frank Act, named the “Volcker Rule,” stipulated that U.S. banks are not allowed to engage in speculative investments that are not meant to benefit their customers.

By the time the board dissolved in February of 2011, Volcker’s lengthy and storied career in public service had spanned the administration of Presidents John F. Kennedy, Lyndon B. Johnson, Richard M. Nixon, Jimmy Carter, Ronald Reagan, and Barack Obama.

During his retirement, Volcker was deeply involved with teaching and mentoring students in the Wilson School, and repeatedly attempted to push the school to increase the resources it devoted towards training professional public servants. Volcker’s intention of cultivating public servants for an effective government led him to launch the Volcker Alliance in 2013.

“He was refreshingly blunt. He said what he thought, whether you were going to like it or not,” said Anne-Marie Slaughter ’80, Bert G. Kerstetter ’66 University Professor of Politics and International Affairs, Emeritus, and former Dean of the Wilson School.

“He really did represent an ideal of public service that he took very seriously in his lifestyle as well as his career,” she added. “It really is as if a giant tree has fallen in the forest.”