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Opinions: Paul Volcker was the savior our economy needed

The Washington Post logo The Washington Post 12/9/2019 Sebastian Mallaby

Sebastian Mallaby is the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations and a contributing columnist for The Post. He is the author of “The Man Who Knew: The Life and Times of Alan Greenspan.”

On Sept. 30, 1979, former Federal Reserve chairman Arthur F. Burns gave a speech on “The Anguish of Central Banking.” It was an abject confession of failure: Burns had allowed the great inflation of the 1970s. “One of the time-honored functions of a central bank is to protect the integrity of its nation’s currency,” Burns began. And yet, because it faced political pushback, doubts and divisions among professional economists, and popular craving for ebullient growth, the Fed had failed in its mission. “Fairly drastic therapy will be needed to turn inflationary psychology around,” Burns lectured. He declared that central bankers were not up to it.

Some time after Burns had begun speaking, a huge, rumpled, egg-headed figure entered the auditorium. Not seeing a convenient chair free, he slouched down against the back wall like an overgrown schoolboy and crossed his legs in front of him. The strange impression he created — powerfully gigantic in stature, meekly childlike in posture — mirrored Burns’s message. As the newly appointed Fed chairman, the giant had the weaponry to halt inflation at will. But few expected the disheveled figure on the floor to break through the constraints that Burns listed.

They underestimated him. Paul A. Volcker, the cross-legged giant who died Sunday at age 92, had been raised by a fiercely ethical town manager in a small New Jersey suburb: “Do not suffer your good nature . . . to say yes when you ought to say no,” ran a quotation from George Washington on the wall of his father’s office. As a student at Princeton, Volcker had imbibed the writings of the austere Austrian economist, Friedrich Hayek, who taught that inflation could only boost employment by disguising cuts in real wages. “Hayek’s words forever linked inflation and deception deep inside my head,” Volcker told his biographer William L. Silber.

Just a week after Burns’s pessimistic lecture, Volcker convened a secret weekend meeting of the Fed’s policy committee. Emerging from that confabulation, he unleashed what became known as his Saturday Night Special, a sharp break in the way that the Fed would conduct business. Rather than targeting a particular short-term interest rate, Volcker decreed that the Fed would henceforth impose a rigid cap on the supply of money. Although some contemporary economists hailed this “monetarism” as a magical elixir, Volcker’s intention was purely psychological. By announcing a scary new doctrine, Volcker intended to demonstrate that he was tough. He was delivering the drastic shock that Burns had deemed impossible.

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The Saturday Night Special became a celebrated moment in Fed history. Over the following three years, the Fed drove inflation down from around 12 percent to around 6 percent. It was a grueling battle: At one point, Volcker’s monetary straitjacket caused the short-term interest rate to rise to 20 percent, prompting a congressman to accuse him of “legalized usury beyond any kind of conscionable limit.” The economy endured two recessions, and unemployment hit double digits; furious farmers drove their tractors to Washington and encircled the Fed’s headquarters. But by dint of iron-willed persistence, Volcker turned the inflationary 1970s into the disinflationary 1980s.

For the rest of his Fed tenure, extending to 1987, Volcker personified the cause of responsible economic policy. Lawmakers threatened to impeach him, but he sat stoically through congressional hearings in his cheap suits, puffing on Churchillian cigars and occasionally shaking his domed head as if to say he pitied the simpletons who abused him. When Sen. Lawton Chiles (D-Fla.) threatened to “cut the head off the Federal Reserve,” Volcker retorted that “even when the Federal Reserve is running around headless you will have exactly the same problem you started with.”

Volcker’s blunt style was not always successful. By the end of his tenure, the Reagan administration had stacked the Fed’s policy committee with loyalists who were willing to frustrate his preferences. Humiliated after losing a vote on interest rates, Volcker came close to resigning. And though he was persuaded to stay on, he was powerless to prevent the Fed from letting banks underwrite bonds, setting the stage for the rise of freewheeling financial giants that later destabilized the economy. And for all his reputation as an Old Testament scourge, Volcker authorized the first too-big-to-fail bailout, of the Chicago-based Continental Illinois. From that precedent flowed the later taxpayer rescues of Wall Street.

But whatever those failings, Volcker’s status was forever cemented by that bold Saturday Night Special, a rare moment of courage in the dog days of the Jimmy Carter era. Inflation was raging; the dollar was in free-fall; in August 1979, Gallup had reported that fully 84 percent of Americans thought the country was on the wrong track. That summer, the president himself had warned the nation of “a crisis of confidence . . . a crisis that strikes at the very heart and soul and spirit of our national will.”

Paul Volcker’s achievement was to remind Americans of their better selves by demonstrating that he lacked neither confidence nor will nor spirit.

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a close up of a cow: Then-Fed Chairman Paul A. Volcker puffs on his trademark cigar during congressional testimony in  1981. © James K.W. Atherton/The Washington Post Then-Fed Chairman Paul A. Volcker puffs on his trademark cigar during congressional testimony in 1981.
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