Paul Volcker, RIP

Paul Volcker was a man of strong convictions, including a commitment to sound money  It surprises me that in 1971 he urged President Nixon to end the United States’ commitment to maintaining the price of gold to which most countries had fixed the exchange rates of their currencies. However, he led the Federal Reserve in ending the inflation that followed.

I first met Paul Volcker while seconded by the International Monetary Fund to the Board of Governors of the Federal Reserve in Washington. During that year (1979) I reported to my former U of Chicago classmate, David Lindsey, while working with another UC classmate, Tom Simpson, in the Capital Markets Department in the Research and Statistics Division (it’s a small world).

At the time Mr. Volcker was President of the Federal Reserve Bank of New York. The New York Fed conducted the monetary operations for the entire system (open market operations buying and selling government securities with Federal Reserve member banks–all of whom had offices in New York). Thus, the FRBNY was the most important and powerful of the twelve Federal Reserve Bank making the Board of Governors in Washington a bit jealous. NY Fed President Volcker had recently taken some decision with regard to “offshore” banking located in New York. The Board of Governors in Washington thought that Volcker had not properly consulted them, so they ordered him to come to Washington and explain himself (and get slapped on the wrists).  My boss, David Lindsey, allowed me to attend that board meeting, sitting quietly at the back of the room.

Cigar smoking Volcker stands 6’7”.  G. William Miller, Chairman of the Board of Governors at that time was a nonsmoker standing something like 5’6”.  Miller had banned smoking in the Board Room during his tenure, driving smoking governors like Nancy Teeters nuts.  Ms. Teeters was the first female Governor on the Board of Governors. The image of the diminutive Miller trying to dress down the towering Paul Volcker is seared into my memory.

As luck would have it (for Ms. Teeters and for the nation), Paul return a few months later (Aug 6, 1979) to replace Miller as Chairman, cigar in hand. Smoking, and firm monetary policy had returned to the Board of Governors. I was again privileged to sit at the back of the Board room on several more occasions.

Paul immediately changed how monetary policy was conducted. He reigned in the rate of growth of the money supply, focusing on Net Borrowed Reserves rather than the federal funds rate, which shot up to almost 20% for a few months.  Inflation had risen from around 4% when Nixon closed the gold window unevenly to almost 15% (percent increase from a year earlier) in April 1980 before plunging to 2.5% in Aug 1983. It took nerves of steel to allow short term interest rates to climb to almost 20% before turning inflation around.