Paul Volcker died on Monday at the age of 92. He is best remembered for his tenure as chairman of the Federal Reserve from 1979 to 1987, and for serving as head of President Obama’s Economic Recovery Advisory Board from 2009 to 2011. In death, as in life, Volcker casts a long shadow. Along with his successor Alan Greenspan, he embodied an era of macroeconomic policy-making that is only now coming to an end—one that elevated monetary policy over fiscal policy, price stability over full employment, capital over labor, and technocracy over democracy. And although the two Fed chairs had different temperaments and disagreed on many issues, they had more in common than either would perhaps like to admit: Both were consummate insiders, supremely comfortable navigating the halls of power because they were built for men precisely like themselves.
Upon his passing, pundits and politicians from Elizabeth Warren and Paul Krugman to Ben Bernanke and The Wall Street Journal were quick to praise him as a dedicated public servant, who possessed the integrity and courage to do what was “politically unpopular but economically necessary.” But in reality, Volcker was a deficit hawk who benefited from the revolving door between government and Wall Street; fought to crush organized labor; hurt millions of working-class people; and deliberately misled the public to avoid political responsibility for his actions.
Progressives seeking to avoid repeating the macroeconomic mistakes of the past 40 years, for which Volcker is in no small way responsible, must reckon with the full truth of his ugly legacy.
Volcker began his career as an intern at the Federal Reserve Bank of New York in 1949. At the time, the Treasury was responsible for setting interest rates, with the Fed relegated to the more passive role of defending the Treasury’s rate targets. This arrangement, whereby the elected president’s appointed agent was in charge of monetary policy, was first established by President Roosevelt in 1933, as part of the banking and macroeconomic reforms of the New Deal. In particular, President Truman and Treasury Secretary Snyder had chosen to peg interest rates low, in order to minimize the interest burden of budget deficits, and protect the wealth of savers who purchased bonds during the war. To manage inflation, they advocated for directly regulating specific forms of credit, such as mortgage lending.
The Fed, however, resented this approach, viewing the combination of pegged rates and credit regulation as a policy straitjacket that undermined its institutional independence and ability to respond to inflation on its own terms. From 1950 to 1951, it waged an increasingly public battle against the Truman administration to regain the authority to manage interest rates. In 1951, Truman finally surrendered amid mounting public criticism over his handling of the Korean War. The result was the announcement of the Treasury-Fed Accord in 1951, which granted the Fed authority to manage inflation by adjusting interest rates, and ushered in the modern era of central bank independence. The following year, Volcker accepted a full-time position as a staff economist at the New York Fed.
Volcker’s firsthand experience of the dispute between the Treasury and the Fed proved formative when he assumed the role of Fed chair in 1979. At the time, the American economy was struggling with high inflation, driven by external oil price hikes. Like Truman, Carter favored the use of direct credit regulation to reduce demand and avoid the unnecessary harm to workers and the broader economy caused by high interest rates.
Volcker, by contrast, was convinced that workers’ living standards were artificially high, and that the necessary correction could be achieved only by psychologically breaking organized labor’s commitment to pursuing higher wages. Consequently, he triggered what would later be described as the “Volcker Shock”: a double-dip recession that gutted American farming and manufacturing, exacerbated financial crises in Latin America and other parts of the Global South, and contributed significantly to Carter’s 1980 election loss to Ronald Reagan. During this period, the Fed permitted the unemployment rate to skyrocket, violating the dual mandate that had been recently established under the Humphrey Hawkins Act to pursue stable prices and maximum employment.
Volcker’s shock doctrine was achieved through record-high interest rates, which made refinancing debt prohibitively expensive and induced mass bankruptcies among credit-starved firms and households alike. Rather than simply announcing a higher rate target, however, Volcker and his colleagues instead introduced a new “experimental” policy whereby they set a total cap on the amount of liquidity the Fed was willing to provide to the banking system, and let “the market” determine the resulting overnight interest rate. This policy is often described today as an experiment in “monetarism”—although noted monetarists, including Milton Friedman, declared it nothing of the sort. In fact, Volcker and his colleagues on the Board of Governors of the Fed simply wished to avoid taking direct responsibility for the social harms associated with high interest rates, and consequently decided to hide their actions behind the veil of market forces instead.
As Charles Schultze, chairman of Carter’s Council of Economic Advisers, explained, “In a world in which the Fed runs policy by…setting the interest rate target, they are the ones who did it. Whereas if you get to exactly the same place by squeezing the money supply…[there’s] nobody here but us chickens!”
At the time, Volcker defended the immense pain his policies caused with the Thatcheresque assertion that “there was no alternative” way to successfully overcome the devastating inflation of the 1970s. In reality, Volcker’s opposition to direct credit regulation was purely ideological, reflecting in part the same concern for loss of central bank independence that had motivated the Fed to similarly reject its use in 1951. Furthermore, we now have evidence that inflation had already peaked and was in decline by 1980 thanks to developments in the energy markets. We also know that in retrospect, the 1970s were a period of economic strength relative to the last few decades, with economists still struggling to locate the ostensible costs of higher inflation.
By contrast, as economist Hyman Minsky argued, Volcker’s high interest rates produced the deregulatory and destabilizing financial dynamics that led to the rise of shadow banking and the global financial crisis of 2007–08. Nevertheless, the notion that Volcker’s double-dip recession was a “necessary” correction, which “proves” the importance of having an independent central bank that is willing to make “unpopular choices,” has since been accepted uncritically by the financial and policy elite, and entered the official historical record.
Volcker’s willingness to engage in such drastic action was motivated by his sincere belief in the doctrine of “sound money,” which emphasizes restrictive monetary policy and strongly opposes even mild inflation (the title of his 2018 memoir is Keeping At It: The Quest for Sound Money and Good Governance). Indeed, this belief also motivated his conservative approach to fiscal policy. He consistently railed against “excessive” deficits and “unsustainable” national debt, and in 2016 even co-authored an op-ed in The New York Times with noted austerity advocate and billionaire Pete Peterson. Like Peterson, Volcker generally opposed raising taxes apart from broad-based sales taxes, and believed that the only way to maintain fiscal solvency was through welfare cuts. For someone lauded as an economic genius, his understanding of the federal budget was barely more sophisticated than that of Ron Paul, who once praised Volcker as the only Fed chair in his lifetime who seemed to truly share his concerns about the evils of inflation.
During the Obama administration, Volcker successfully reinvented himself as a preeminent critic of Wall Street excess, despite spending his early years as the vice president of Chase Manhattan, and his post-Fed career earning millions as the chairman of investment firm Wolfenson & Co.. He became a symbol of the Democratic Party’s commitment to stronger financial regulation, most notably through inclusion in the Dodd-Frank Act of the now famous “Volcker Rule,” which placed new restrictions on proprietary trading by commercial banks (although critics argue it was little more than a watered-down version of the Glass-Steagall Act of 1933, and has since become effectively toothless). By his own admission, Volcker was nowhere near as successful in this endeavor as he was in his fight against inflation. Despite his courage and resolve, it seemed he never quite learned how to wage war against his fellow bankers as effectively as he did against the working class.
Today, the most transformative macroeconomic ideas are coming not from “independent” central bankers but from the youth, women, and people of color leading the movement for a Green New Deal. Achieving their vision for a global economy that prioritizes ecological sustainability, democratic participation, and workers’ rights will undoubtedly require a new inflation-management framework, centered around expansionary fiscal policy, low interest rates, full employment, and strict financial regulation. Unfortunately, there is little reason to believe Volcker’s legacy has much to offer that project.