Federal Reserve chairman who held fast with rates rise and was proved right

Paul Volcker, who has died aged 92, was a hard-headed economic statesman who, as chairman of the Federal Reserve from 1979-87, shocked the United States economy out of a cycle of inflation and malaise and set the stage for a generation of prosperity.

His influence spanned five decades and seven presidents. As a senior Treasury official in the 1960s and early 70s, he advised President Richard Nixon on taking the US off the gold standard. As an adviser to presidential candidate Barack Obama, he gave the young senator credibility. He later counselled President Obama on his response to the 2008 financial crisis and proposed a key restriction on speculative activity by banks that would become known as the Volcker Rule.

Volcker was a giant of a man, standing 6ft 7in. But he also had an imposing moral authority that helped him in such tasks as unravelling the holdings of Holocaust victims in Swiss banks, and investigating the United Nations’ oil-for-food programme in Iraq.

His greatest historical mark was in eight years as Fed chairman. When he took the reins of the central bank, the US was mired in a decade-long period of rapidly rising prices and weak economic growth. Volcker, overcoming the objections of many of his colleagues, raised interest rates in late 1979 to an unprecedented 20 per cent, drastically reducing the supply of money and credit.

The action triggered what was then the deepest economic downturn since the Depression of the 1930s, and drove thousands of businesses and farms to bankruptcy and the unemployment rate to over 10 per cent.

Volcker was pilloried by industry, labour unions and lawmakers of all ideological stripes. He took the abuse, convinced this shock therapy would finally break expectations that prices would forever rise rapidly and that the result would be a stronger economy over the longer run.

On this biggest of questions, he was right. Once the Fed began lowering interest rates in 1981, the nation began a quarter-century of low inflation, steady growth, and rare and mild recessions.

‘‘He restored credibility to the Federal Reserve at a time it had been greatly diminished,’’ said William Silber, a New York University economist and author of the biography Volcker: The Triumph of Persistence, in 2012. ‘‘He served as the template for future central bank chairmen.’’

Blunt and brilliant, Volcker did not carry himself with the obvious charisma of a politician, or the swagger of a Wall Street chieftain; he had a hangdog manner and tended to mumble in congressional hearings.

For a man who understood the mysteries of money more deeply than almost anyone, he had little use for the trappings of wealth. The

His tight-money policy caused home-building activity to grind almost to a halt, car sales to plummet, and farms to fail.

cigars he smoked almost constantly before quitting in 1987 were cheap; he preferred dinner at a Chinese restaurant to posh parties; and his suits were always a bit shiny.

In the early 1980s, when he was arguably the second-most-powerful person in the US, he lived in a tiny, cluttered apartment in a complex inhabited largely by students. He filled it with his daughter’s castoff furniture and green milk crates as end tables.

He was president of the Federal Reserve Bank of New York in 1979, when President Jimmy Carter was looking for a new Fed chairman. Prices were spiralling upward, almost out of control, and workers were demanding everhigher wages.

As Carter and his aides spoke with people in financial circles about potential nominees, Volcker’s name came up repeatedly. His appointment may have been judged well by history, but may well have cost Carter reelection in 1980.

Taking the job came at a personal cost for

Volcker. He had to take a 50 per cent pay cut from his salary as New York Fed president, and his wife had to return to work to afford both their New York co-op and the small Washington apartment. Volcker commuted back to New York at weekends.

His tight-money policy caused homebuilding activity to grind almost to a halt, car sales to plummet, and farms to fail. His routine appearances on Capitol Hill became an exercise in lawmakers of both parties attacking him.

But Volcker, confident that this was the only way to rid the nation of double-digit inflation, ignored the calls to relent. By 1986, inflation was down to about 2 per cent.

By the 1990s, Volcker was largely frozen out of meaningful influence on policy. He was sceptical of the emphasis on financial deregulation by the Bill Clinton-era Treasury Department. He instead made a career as a wise man for hire.

He made a return to the public eye with his February 2008 endorsement of Obama’s presidential campaign, as the financial crisis worsened. Obama regularly spoke with him for advice, on at least one occasion reaching him on his cellphone while Volcker was flyfishing, his preferred hobby.

Volcker’s support helped give the relatively untested Obama credibility. After the election, Obama is said to have entertained the idea of nominating him as his treasury secretary, before choosing Timothy Geithner, 35 years Volcker’s junior.

Paul Adolph Volcker Jr was born and raised in New Jersey, in a demanding household that put a high premium on public service. He went to Princeton University, where he played basketball (poorly, despite his height) and studied economics (well).

He went to work at the Federal Reserve Bank of New York in 1952, leaving five years later for Chase Manhattan Bank. He joined the Kennedy administration in 1962 as a Treasury official.

In 1954, he married Barbara Bahnson. They had two children, including a son with cerebral palsy, which made his father’s long absences and small pay cheques in Washington particularly onerous.

Barbara died in 1998, and Volcker married his longtime secretary, Anke Dening, in 2010. She survives him, along with his two children, four grandchildren, and two greatgrandchildren. Volcker died in his home in Manhattan, having been suffering from prostate cancer. – Washington Post