Vol c k e r
system on the verge of collapse. In the last great economic crisis, the epic battle against the Great Inflation of the 1970s, Paul Volcker was the hero. Jack Kimm, a resident of Anchorage, Alaska, penned the following message to him when Volcker left office in 1987. “Losing you at the Fed seems and feels like losing George Patton in the middle of war.”1
This book began as the story of a determined central banker who confounded the critics while defeating an entrenched inflation in America, but turned out to be much more. I will show that Paul A. Volcker not only restored price stability in the United States, but also led a battle for fiscal responsibility in America. Volcker never held elective office, but his refusal to accommodate the Reagan-era budget deficits by creating money—what economists call monetizing the deficit—forced up real interest rates during the mid-1980s until Congress delivered a plan to balance the budget. Volcker relied on public opinion, integrity, and persistence to overcome the political pressure to finance government spending the easy way, by printing money rather than by taxation. Congress created the Federal Reserve System, America’s central bank, and can abolish it with a simple majority vote. Volcker deflected repeated threats, including a bill of impeachment, and stuck to his principles. His tenure at the Federal Reserve began the process of reining in the deficit. Volcker promoted the goal of fiscal integrity that Ronald Reagan had promised to the American people, turning Reagan into Reagan. Foreigners rewarded the United States for its monetary and fiscal discipline by investing in U.S. securities and by treating the dollar as a safe haven currency. The United States enjoys lower interest rates and a higher standard of living because countries from China to South Korea send clothing and children’s toys to America in exchange for U.S. dollars. Current Federal Reserve chairman Ben Bernanke credits Volcker’s policies with setting “the stage for decades of economic growth and stability.”2 Volcker’s linkage of responsible monetary policy with fiscal virtue carries a message for today, as the United States emerges from the greatest financial crisis since the Great Depression. Unprecedented low
2
206-50197_ch01_4P.indd 2
6/2/12 8:01 AM