Volcker loved his job and had trained for it like a chess prodigy. John Carlock, a friend of Volcker’s from his Treasury days, had written to Paul when he was first appointed chairman in August 1979, “I am absolutely delighted … for you, but especially for the Republic. I’m glad for you because you told me once that this was the only job you really wanted.”29 Volcker had reddened at evidence of his unbridled ambition, even though it was in service of his country, and had responded to Car-lock, “I refuse to acknowledge the conversation but I must confess … that the vaunted Fed insulation looks more and more attractive.”30
The independence of the Federal Reserve matched Volcker’s character, but he had also mastered the power of compromise necessary for success. Lawrence Roos, the former monetarist president of the Federal Reserve Bank of St. Louis and a frequent dissenter at the Fed, had penned the following note after he retired, when Volcker’s second term began in 1983: “I cannot describe how pleased all [of us] are at your reappointment. Having served under your leadership I am especially aware of your qualifications for the chairmanship.” Roos then added what everyone knew but few could say with such authority: “But more impressive than the knowledge and experience you bring to the position, is your willingness to continue to serve your nation at considerable financial and personal sacrifice on your part.”31
The sacrifice had taken its toll on Paul, but even more on his family. Barbara’s crippling arthritis had limited her to part-time work for an architectural firm. She told reporters, “Before Paul took the job, you could say that we held on to our pennies. Now they just slip through.”32 And Paul knew he had cause for concern: “How much of a lurch am I leaving my family in?”33 He dismissed considering a third term but felt the palace revolt of February 24, 1986, had foreclosed the early exit he had promised Barbara. “Leaving would give the impression that I had been pushed.”34
It was a poor excuse, a reflection of the insecurity buried deep inside a man whom few would consider as lacking self-confidence. His intellect and professional achievements dominated in public, but his youthful doubts—such as believing that his professors had no time for him—describe a vulnerability that had never disappeared. Barbara knew it all, of course, which is probably why she acquiesced.
A year later Volcker dribbled hints of his departure like the fabled trail of bread crumbs, but the marketplace registered surprise and disappointment when the actual announcement came.
In March 1987 the New York Times teased, “The chairman made a major change in his policy that has gone little noticed. He abandoned his trademark Antonio y Cleopatra Grenadier cigars.”35 Volcker claims, “I got tired of hearing my doctor’s lectures, so I stopped.”36 But a few days before burying his lifelong habit, a letter to the editor in the Washington Post from Annette Penney rebuked him with “I would like to know why the [Federal Reserve] chairman is allowed to pollute the air of the Senate Banking Committee room … why not put a stop to it all … For years I have felt sorry for those who have to be around him.”37
Shortly after Penney’s missive to the Post, George Muller rose to Volcker’s defense with the following response: “As chairman of the Federal Reserve Board, Volcker has one of the most demanding, high-pressure jobs in the country, one that affects the economic well-being not only of the American people but, indirectly, of the free world … Volcker is no doubt wedded to his cigar as was Winston Churchill. If it relaxes him to puff … while giving testimony … I say let those who take offense assume similar responsibilities.”38
Muller flattered Volcker with Churchill’s name, and Volcker returned the favor by renouncing cigars before his excuse expired, or so it seems.
Volcker’s dissent from a far-reaching Federal Reserve Board regulatory decision on May 1, 1987, should have telegraphed his plan to resign. A majority of the board approved applications by three bank holding companies—Citicorp, Bankers Trust Company, and J.P. Morgan and Company—to underwrite certain debt securities that had been outlawed by the Glass-Steagall legislation of 1933.39 Volcker dissented for two reasons. He supported a limited rollback of the prohibitions enacted during the Great Depression but thought that congressional legislation rather than regulatory fiat should lead the way. He also wanted to minimize conflicts of interest by preventing the underwriting subsidiaries of a commercial bank holding company from carrying names similar to the bank itself.40
Volcker’s battle against unrestrained deregulation would turn into all-out war during the twenty-first century, but the contemporaneous press drew immediate political implications: “The vote … represents a rare defeat for the august Mr. Volcker by a majority of the Fed governors appointed by President Reagan. It shows that in regulatory matters the more free-market-oriented Reagan appointees are prepared to vote the chairman down.”41 To downplay the conflict, however, Fed sources denied “that the disagreement was as sharp as one in February 1986 … In the current dispute Mr. Volcker did not threaten to give up his post.”42
And that is because he had already decided to leave.
Less than a month later, Volcker asked the president’s new chief of staff, former Tennessee senator Howard Baker (no relation to the Texas Baker), to meet in his office at the Fed on Tuesday, May 26, 1987. Speculation that Volcker would be offered a third term as chairman had increased ever since Baker replaced Donald Regan a few months earlier. Baker had complimented Volcker with a smile, saying that he and the president had “great admiration” for the Fed chairman and that Volcker had done “an extraordinary job.”43 Volcker came straight to the point in their meeting.44
“It’s time for me to step down. I do not want to be considered for a third term.”
Baker objected: “Why don’t you think it over carefully and let me know for sure on Monday.”
“You’ll hear from me bright and early.”
“By the way, who would you recommend?”
“Either Alan Greenspan or John Whitehead.”
“Okay, but think about it till Monday.”
“I’ll be prepared.”
Baker reported the conversation to the president, who made the following entry in his diary a day later: “Paul Volcker’s term winding up—to re-appoint or not. Well, he told Howard Baker he wants to leave. So we put a list of possible replacements together.”45
Reagan was known for playing “his cards right to the end,” but his advisers had prepared well in advance.46 Their list included the names Volcker had offered: Alan Greenspan, the former chairman of Gerald Ford’s Council of Economic Advisers; and John Whitehead, a former cochairman of the investment bank Goldman Sachs, then serving as the deputy secretary of state. But earlier in the spring, Treasury Secretary Baker and Chief of Staff Baker had gone a step further. They had met with Greenspan to ask about his availability for the job. Greenspan had said, “If you need me I will be there.”47
James Baker wanted Volcker to leave.48 He worried that Volcker’s independence could threaten Republican prospects in the 1988 presidential election, just as it had derailed Carter’s campaign in 1980. But he also knew that dismissing him could roil the financial markets. Moreover, Reagan could not have risked rejecting Volcker if the chairman still wanted the job, especially after the Iran-Contra affair, which had weakened his moral authority.49 The exit would require a delicate touch.
On Friday afternoon, May 29, Howard Baker managed the press like a Madison Avenue publicist. A reporter asked for guidance on the situation at the Fed: “We’re all writing that it looks as if [Volcker’s] going to get reappointed.” Baker said, “I wouldn’t try to lead you off that … [but] one of the major factors … is what Volcker wants to do.”50
Both the New York Times and the Wall Street Journal published articles dated Monday, June 1, 1987, confirming that “the Reagan administration is inclined to reappoint Paul Volcker as Chairman of the Federal Reserve Board.”51 That same afternoon, Volcker visited the president and delivered his letter of resignation.
Volcker wrote to Reagan, “You w
ill recall that, upon my reappointment as chairman in 1983, I felt unable to make a firm commitment … to remain in office for a second full four-year term. Despite my reservations at the time, that term is in fact now almost finished. However, I do think, after eight years as chairman, a natural time has now come for me to return to private life as soon as reasonably convenient and consistent with an orderly transition.”52
Ten o’clock the following day, Tuesday, June 2, 1987, was convenient for the president. Reagan stood before a microphone in the White House Press Briefing Room flanked by Volcker and Greenspan. He accepted Volcker’s resignation “with great reluctance and regret” and praised his efforts to bring inflation under control.53 He said, “My dedication to our fight to hold down the forces of inflation remains as strong as ever,” and added that Greenspan “shares the same commitment.”
Following the announcement, Volcker invoked Ecclesiastes to explain why he was resigning: “There’s a time to come and a time to leave.”54 A senior White House adviser emphasized to reporters that a third term was “Volcker’s for the asking, but he didn’t ask.”55 In a sidebar, Charles Schumer, at the time a congressman from New York serving on the House Banking Committee, offered a different perspective. He said the president “should have been on his hands and knees begging Mr. Volcker to stay.”56
The financial world agreed with Schumer.
Investors hold elections for stocks and bonds every day with ballots made of cash. Prices rise significantly for the winners and decline for the losers in a daily referendum on information arriving in the marketplace. On June 2, 1987, Volcker’s resignation hit the newswires a little after ten o’clock in the morning, and investors bought gold and sold the U.S. dollar as though Fidel Castro had become Fed chairman. The significant jump in the price of gold and the decline of the dollar versus the German mark combined to register sharp disapproval of President Reagan’s failure to reappoint Volcker.57 In France the news was greeted with the gravity befitting the loss of a head of state; trading in Paris was suspended for the first time since a false 1982 report that Reagan had suffered a heart attack.58
The governor of the Bank of Japan, Satoshi Sumita, wrote to Volcker the following day: “The sudden fall of the U.S. dollar in the foreign exchange market immediately after your resignation evidences the extent to which the international financial community believes in you.”59 On Capitol Hill, bipartisan praise showed that even American politicians believed in the outgoing Fed chairman. Utah Republican senator Jake Garn had urged the president to reappoint Volcker, and said, “Chairman Volcker has enjoyed enormous respect and has served extremely well.”60 Democratic senator Bill Bradley of New Jersey, a leader in the effort to deal with third world debt, said that Volcker deserves “the Nobel Peace prize as the party responsible for keeping the world economy together … during a very volatile time.”61
Wisconsin senator William Proxmire recalled bumps along the road: “We should keep in mind that it was Paul Volcker’s policies, unpopular policies, that broke the back of inflation. And he persisted in those policies for three or four tough years in spite of the overwhelming criticism by both administrations and by Congress … We’re going to miss him, miss him very much.”62
Not everyone would miss him, of course. Texas Democrat James Wright, the Speaker of the House, said that under Mr. Volcker “we’ve had the longest sustained high interest rates in our history.”63 When asked to describe Volcker’s term as chairman, Wright replied, “Long.”
Congressman Wright would have been surprised to learn that investors linked Volcker with lower rather than higher interest rates. News of Volcker’s resignation caused a fire sale in government bonds. Falling prices raised interest rates on the ten-year Treasury security from 8.45 percent on June 1 to 8.72 percent on June 2, a significant one-day jump in yields for that maturity sector.64 The bond market warned that Volcker’s departure meant that the cost of credit would rise.
The movement in gold and Treasury bonds on June 2, 1987, offers a snapshot of an inflation scare. Unlike the deficit scares of 1981 and 1984, when gold remained unchanged and bond yields rose, on June 2 gold prices rose along with the jump in yields. Investors in Treasury bonds demanded a higher inflation premium going forward now that Volcker was no longer guarding the vault.
They should not have worried. He had left a handbook.
16. An Equestrian Statue
Within the first week of Volcker’s resignation, letters and postcards arrived by the bagful at the Federal Reserve Board. Some came addressed formally and on recognizable stationery, including messages from former presidents Gerald Ford and Richard Nixon and from British prime minister Margaret Thatcher. But the vast majority bore the spartan address Chairman Paul Volcker, Washington, D.C., with postmarks from places such as Fredonia, Pennsylvania; Winnetka, Illinois; and Anchorage, Alaska. Volcker waited until the beginning of July 1987, his last month at the board, to read each one and to compose an appropriate response, just as his mother had taught him.1
Gerald Ford penned an especially flattering handwritten note, emphasizing Volcker’s “magnificent service” in handling “domestic and international pressures and challenges with superb skill and unquestioned integrity.” Ford summed up with: “The United States and the world as a whole are fortunate that you were at the helm during these difficult times. I thank you for a job well done and your personal sacrifices.”2
Margaret Thatcher highlighted Volcker’s international contribution. “I have very much admired your resolute pursuit of sound monetary policies, and the great skill and understanding you have brought to the complex task of … reducing inflation in the world’s largest economy. At a time of rapid change and considerable strain in the world financial system, the role you have played has been invaluable.”3
Donald Regan, who had fought Volcker at every turn, tried to make amends: “Your efforts and support in dealing with the international debt crisis, starting that August weekend in 1982 … have been exemplary … I enjoyed it when our paths crossed—including your ‘involuntary’ participation in my 1985 birthday party … I know you have always been motivated by your sense of duty and commitment to public service. I respect that and wish you the best.”4
Compliments from world leaders pleased Volcker, but admiration from the American heartland warmed him more, especially when it came from those who bore the scars of battle. Michael Pavelek of Fredonia, Pennsylvania, wrote, “Though I was unemployed for an extended period, I always understood and agreed with your policy as chief of [the] Federal Reserve. You saved my life savings from becoming worthless. While a lesser person might have caved in to political pressure, you sir, served our nation and all its people with distinction.”5
Hans Hospes of Toms River, New Jersey, added historical perspective: “You saved me from the fate that befell my parents in the 1920s during runaway inflation in Germany. I am 79 years old but remember my father, a workingman, coming home … with his daily wages already spent … If he had waited till later in the day or [the] next day, the wages would not have bought anything … I hate to see you leave your position in August.”6
And some letters focused on the future. Richard Stechert of Jenkintown, Pennsylvania, began with praise: “As a taxpayer and American citizen I have this chance to thank you for your years of service to our country. Today it has always been reassuring to feel safe because of your policies.” He then asked a favor: “Hopefully you will have time to tutor Alan Greenspan so that he will be able to continue in your footsteps … We’ve all taken you for granted. It kind of scares me that you’re stepping down.”7
Greenspan took a positive step on June 2, 1987. He stood behind the microphone in the White House Press Briefing Room alongside the outgoing chairman of the Federal Reserve Board and said, “Under Paul’s chairmanship, inflation has been effectively subdued. It will be up to those who follow him to be certain that those very hard-won gains are not lost.”8
They would not be—and here is why.
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Volcker delivered a surprising message at the annual Per Jacobsson Lecture on Sunday, September 23, 1990, at the Sheraton Hotel in Washington, D.C.9 His title, “The Triumph of Central Banking?,” stands in sharp contrast with “The Anguish of Central Banking,” delivered by Arthur Burns in Belgrade a decade earlier to a similar international gathering of central bankers and finance ministers.10 Volcker claims that the question mark at the end of his title negates the boast, but he began his talk with: “I realize there is great wisdom in the old adage that what you think depends on where you sit … Nonetheless, I am convinced there is objective reality in my impression that central banks are in exceptionally good repute these days.”11
Volcker had much to do with the improved image, according to Sir Jeremy Morse, chancellor of the University of Bristol, who moderated the event, but Volcker counseled humility rather than hubris.12 He said that the monetary authority cannot be “all things to all men,” and that combining the goals of “growth, full employment, and [price] stability risk[s] confusion and misunderstanding about what a central bank can really do.”13 He recommended that Congress narrow the Federal Reserve’s mandate. “The recurring difficulty in acting before inflation builds momentum could be reduced if … the main continuing purpose of monetary policy [were] the stability of prices.”14
Congress kept the old rules, but Volcker gave them new meaning. During his eight years as chairman, he put inflation first, despite the hydra-headed congressional mandate, because both Jimmy Carter and Ronald Reagan had made inflation priority number one, and, more fundamentally, because he believed that “inflation undermines trust in government.”15 Volcker could ignore the continuous carping, especially from Reagan lieutenants in and around the White House, because double-digit inflation had galvanized public opinion behind him
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