Paul Volcker’s Greatest Lesson Wasn’t on Economics. It Was on Being a Public Servant.

The key to understanding Volcker's legacy is not really in terms of his being a public servant. The key, I believe, is that he understood that "shock therapy", in other words reversing the engines by hiking interest rates to squeeze inflation out of the system, worked better in the long run than "gradualism", that is slowly bringing the ship back on course over a decade or so. The other thing that is neatly omitted from this article is that Volcker was at the Fed during the monetarist period - the monetary aggregates were very much in focus at this time - a fad in economics that had Milton Friedman pressuring the Fed to be even more aggressive with monetary policy. Volcker's instincts were to temper those responses which in hindsight was clearly correct. The other thing about Volcker though was that he earned the respect of the markets like no other Fed Chairman had done before - they hung on his every word, as he was clearly a dominant figure at the Fed, and because of his stature almost demanded respect. I remember when he was replaced, many market commentators saying that there could never be another Fed Chair like Paul Volcker.

Kudos to the growing notion that economies like the rest of nature including mother nature herself are about cycles and equilibrium. Continued growth is a cancer, and don't we just see the results.

Nice, thanks. I wish we could expunge Reagan's one-liner, "I'm from the government and I'm here to help." The tradition of civil service created the country Trump is destroying. The vilification of people who sacrificed for the country is criminal and guarantees that good people will avoid service.

Volcker was a bad Fed Chairman who destroyed the economy in order to save it. In the process, the hapless and awful president who appointed him was cast out and destroyed the Democratic brand permanently. Carter also managed to go through three Fed chairmen in only four years. The legacy and damage continues as nearly all economists and both major parties accept these false precepts. 1) They mistakenly think high wages cause inflation (vs prices) 2) They think it's ok to use interest rates to slow the economy (a bludgeon that destroys everything and kills the patient excruciatingly slowly, especially destroys the young and financially vulnerable). 3) This way of thinking reinforced the corollary about the trade off between inflation and unemployment, disproved twice, the late 90s and currently. Just how stupid are economists, politicians, journalists, and the so callled informed citizenry to buy into all this? Well there is self interest for sure. Better some rules that appear to keep order, than actual thinking. Bankers and rich people laugh all the way to the bank. It is true that economists were equally wrong in 1980 to predict inflation would never go back to 1960s or 1950s levels. But the tragic lesson of Volker's legacy is we would resort to the same measures of leaching the economy at the first sign of inflation. Ben Bernanke adhered to the same principle, raising interest rates in the face of a crashing real estate market. There are better ways.

Wittingly or unwittingly, Volcker was an enabler of the Reagan Restoration of the plutocracy as the increasingly disproportional main (and almost exclusive now) beneficiary of American economic production. The Fed since his watch began has been putting the thumb on the scales for the capital investor sector, and setting the middle class and poor wage earner adrift in a globalized and disrupted disadvantage if not outright disenfranchisement. It's another part of the "too big to fail" syndrome operating with bipartisan imprimatur: Too influential politically to turn down for favored treatment. (And the slightest questioning of the status quo for the 1%, of the carried interest loophole for example, is rabidly accused of Hitlerian evil.) But the manna is going to trickle down. Any day now, right?

Wittingly or unwittingly, Volcker was an enabler of the Reagan Restoration of the plutocracy as the increasingly exclusive beneficiary of any new economic gain. The Fed since his watch has been putting the thumb on the scales for the investor/financial sector, while setting the wage earner and small business owner adrift in a globalized and disrupted disadvantage if not outright disenfranchisement. It's another part of the "too big to fail" syndrome operating with bipartisan enthusiasm: Too influential politically to turn down for favored treatment. (And the slightest questioning of the status quo for the 1%, of the carried interest loophole for example, is rabidly accused of Hitlerian evil.) But surely the manna is going to trickle down. Any day now, right?

Well, what about the small businesses, retail establishments, home builders he wiped out?

The lesson that neoliberals learned from Paul Volcker: if the economy is distressed, squeeze the poor and working class for all their worth, ruin their livelihoods, and write them off as irrational when they fight back. Paul Volcker's legacy of ushering in Reaganomics will pass along with him. No more.

Imagine how Trump would be character-assassinating Volcker, impugning his character and undermining his authority at every opportunity were Volcker at the head of the Fed today. As the threat of dictatorship looms larger with each passing day in America, we need to try to remember that the current president's behavior is not normal, presidential, or ethical; and is often illegal. Getting accustomed to his outrages means we have forgotten how things once were. “The public will never be made to believe that an appointment of a relative is made on the ground of merit alone, uninfluenced by family views.” – Thomas Jefferson

@Bob Diesel Excellent comments here, which obviated more from me. Carter's appointment of Volcker set the stage for the robust economy that we enjoy today. Nixon, Ford, and Carter found the stagflation intractable. Then Carter got Volcker. There were hard economic times made more severe under Carter. Then the recession during Reagan's first term, People became unemployed; people lost farms. Reagan's chief of staff wanted to get rid of Volcker, but Ronnie stayed the course. Hence, he gets credit for whipping inflation and setting off the bull market. However, an objective look at history says Jimmy Carter set the stage for the current U.S. economy. Also, Carter reduced big government, e.g., deregulated the airlines. This painting of Jimmy Carter as feckless is very tiresome and a canard. The only trouble with Jimmy Carter was that he could not sell his policies like "B" movie actor or a reality TV star.

Why oh why do so many journalists, including the estimable Mr Irwin and even Paul Krugman, accept and perpetuate the canard that inflation is too low? Lower priced consumer staples like milk and meat may be price-stable, but high-ticket necessities like education and health care, which devour an ever-rising portion of family budgets, continue to soar; they are disproportionately underrepresented in government accounting, which badly needs a major overhaul. And why, pray tell, does nobody consider ASSET inflation? It's the biggest driver of the wealth gap. My guess is that Mr. Volcker would turn a gimlet eye toward both of these delusions so embraced by bankers and parroted by the media.

Economic historians are still assessing Volcker’s inflation strategy. For example, Bank of America, world’s largest bank at the time, was nearing insolvency financing 10% mortgages with 20% deposits. Volcker’s conduct as Fed Chairman was unusual. Historically its the Fed’s professional staff that does the “serious work”. Not the Fed Governors who traditionally come from “business and finance ranks”. Volcker brought some unusual economic/financial skill sets to his role as Chairman. Arguably none of his successors have matched that success. Even those with “academic skill sets”. Finally, what sets Volcker aside was that he was courteous and pleasant to all that he worked with. Was a good manager. And didn’t take “academic expertise” too seriously. Arguably he was the most impressive Chairman in the Fed’s history. A true public public servant and kind, courteous leader. We’ll not see his likes again.

Mr. Irwin is entitled to his opinion, but he is not entitled to ignore certain facts, so two quick corrections: First, the 1980s recession wasn't "brief" for many people. It devastated rural Americans from the eastern industrial corridor to the Midwestern farm belt to the Pacific Northwest forests. Many of these industries never recovered. Second, the economy that came out of the 1980s recession was different, less about production and more about financial instruments. Volkers innovations are directly tied to the forces that have widened the gap between the ultra rich and everyone else. By all means credit Paul Volcker with stemming global inflation, but put down the pom poms long enough to also acknowledge that his solution came at the cost of millions, probably billions, of hard working people around the world.

Last decent and well meaning central banker.

Both this piece, and Neil Irwin's obit for Volker in yesterday's WaPo, exhibit historical perspective, and passion! Thanks for coverage appropriate the subject.

Paul Volker was a true gentleman and a real Renaissance man. When I was young and a nobody, I was a reporter for German television. Our editor in chief really wanted an interview with Paul Volcker with regards to the Independent Committee of Eminent Persons. He not only found the time to sit down for an exclusive on-camera interview with me but was extremely gracious with both his insights and his time given I was a cub reporter who rattled on with one question after another. He towered above me both in stature and experience and yet he could not have been nicer. I went on to write for The New York Times and broadcast for NPR from overseas and interviewed many famous public officials but he remains a favorite, not just for his knowledge but also his kindness. I hope his family sees this as I too mourn the loss of a class act. It's a cliche but true: They don't make them like this anymore. May he rest In peace.

Mr. Irwin needs to reconsider his views about academic history. He writes incorrectly that Mr. Volcker "was willing to rethink the Fed’s policy based on what was happening on the ground, not on the theories of politicians and tradition-bound economists." Many years before Mr. Volcker's Herculean efforts, it was received wisdom in the academy that "Inflation is always and everywhere a monetary phenomenon" (Milton Friedman). Mr. Volcker was operating well within established academic thinking in the 1970's and 1980's about monetary policy. Two cheers for Mr. Volcker, as well as his academic contemporaries.

it is interesting to look back and review the actual data. Inflation was rampant, interest rates became quite high (FHA mortgage rates were almost 11%) and we got a recession of epic proportions and higher unemployment than the Obama administration. Those of us graduating college had a much tougher time than those graduating during the more recent recession. The results since then became stagnant workers wages since the first Reagan term. Comparing Obama to Trump ignores history of the bigger problems of the Reagan era. It also ignores the entrenchment of trickle down and supply side economics which now over 30 years later has proven to be a failure for the working class.

A nice but also cogent eulogy, Neil!

When Woodrow Wilson sold out the US to the bankers to get elected and created the FED....our fiat currency doomed our county to an ill fated end.

Messrs Irwin, Applebaum and Hershey have produced and provided us with outsized, exhaustive coverage, analysis, reflection on Paul Volcker. For those of your readers who weren't aware of or following Mr. Volcker through his complex and complicated career, today's New York Times articles give us a fine view, almost a mini-biography, of him. And for others of us who've followed him it's been a refresher course in the life & times of the man. This may be a tad hyped, but the pithy quotes & musings & asides of Mr. Volcker are always a pleasure to read. Former chair Volcker almost wrote his own obit. I trust that the NYT will be publishing an editorial on Mr. Volcker tomorrow in tandem with some op eds. Thanks again for 'all the news that's fit to print' & then some!

Thanks, Volker. I had to endure outrageous interest rates, pay off my student loans, and work for low wages for decades.

The year 2019 has seen the loss of two of the most reputable and upstanding individuals in the financial world for sure, and even in the broader public domain. Mr. Volcker and his contemporary John Bogle, who passed away back in January, were exceptional human beings and particularly uncommon in the sharp-elbowed world of finance and politics (to the extent "The Fed" is a political body). Both were men of immense intelligence and integrity with a burning drive to do good, yet seemingly disinterested in fame, fortune or other trappings of self-interest. I already miss their weighty insights and even keeled advice. But, thankfully, both lived long and robust lives, and to their very ends continued to share their insights and be fantastic role models.

Pres. Carter and Chairman Volcker gave the "efficient markets" hypothesis, which was then relatively new, its shot. They let the markets know clearly, in advance, how the profile of disinflation policies would roll out, which theoretically would allow smooth adjustment. The markets flunked and we got a bad recession instead. I think part of the problem was that Carter and Volcker were projecting their level of understanding on the markets. Anyway, in principle everyone ought to have put the EM hypothesis into the rubbish and gone back to Keynesianism, which by then was explaining the 1970s perfectly even in undergraduate textbooks. But that wouldn't have allowed the Reagan-Bush administration to go on saying, oh, financial markets don't need regulation, and it wouldn't have allowed their cronies to steal scores of billions from the S&Ls. So we still have to hear about the efficient markets hypothesis.

Why do you believe inflation is too low? In 1979 high inflation was destroying the real wages of American workers, Volcker took the risk to right the economy. He was successful and for that we all should be eternally grateful. He was truly a giant and his dedication to public service should be emulated today.

It’s interesting to see everyone lauding Volker as the greatest economist. Those that laud him must be either very young, willing to follow what’s trending, or doomed to laud policies that are not in their own best interests. Who Volker helped is a matter of perspective. Yes, he appealed to us liberals because of thinly disguised disgust for the Chicago Schoool mentality. But the other reality was that his policies ensured the demise of the middle class died, that two-wage households became a mandatory way of life, that 98 million dollar Manhattan condos would be commonpla e. Present opinions are solid proof that Americans will always act against themselves. Hence, MAGA and Trump.

To a large extent, Volker inherited the results of a debt-financed Vietnam War, and OPEC. His policies ultimately gave rise to Reaganism. He was the right man at the right time for his role. It was a nasty time for interest rates.

Cutting my teeth in economics at the FRBNY under the stewardship of an inspiring economist & president.....R.I.P. Paul Volcker

Agree with everything you say. Basically he did his job, in fact probably the best Fed Chairman in history. It wasn't rocket science, stimulus when needed, fire retardant when not. He was the role model for the modern fed chairman. We still had the crash in 2008 but wasn't his fault. It was the fault of the Congress and Bill Clinton and Bush 2 who sent the country on a wild party ride like the period before the the Great Depression.

As policies going forward are being formulated, it is a good time to assess basic financial education for consumers. It is too easy to spend in our increasingly cashless society, and too easy to overcommit given the lengthier terms of major purchases. Workforce employment and interest rates may reflect the Fed’s dual mandate, but if people do not fully understand their overall purchase implications then society will become cash rich yet asset poor. What measure will track that?

Volcker was probably the greatest Fed Chairman of the Post-WW2 era. He was willing to administer a harsh, unpopular remedy, in the form of punitively high interest rates, to finally end chronically high inflation and the widespread fear it caused. Jimmy Carter should be acknowledged as brave and principled for supporting a monetrary policy that carried very high political costs, but was undoubtedly the right solution to the problem of chronic inflation. Carter dearly paid for Volcker's tight-money policy in the 1980 election. Reagan reaped the considerable economic and political benefit - and then reappointed Volcker, whose policies brought about a long economic boom.