Paul Volcker is one of three giants who made a difference as the Chairman of the US Federal Reserve (1979-2014), the other two being Alan Greenspan (1987-2006) and Ben Bernanke (2006-2014). I have no hesitation in saying that Volcker’s contribution to the US economy stands far above both Greenspan and Bernanke.

After graduating from Princeton in 1949, Volcker studied economics at Harvard and then in London, where his focus was on the operations of the Bank of England. Even before he became the Chairman of the Fed, Volcker had left his mark in shaping the monetary policy of the US. In 1971, as the chairman of an administrative committee, Volcker concluded that financing for US deficits had permitted the country to carry out heavy overseas military expenditure and to undertake other foreign commitments; and an important goal was to “free foreign policy……from constraints imposed by weaknesses in the financial system.”

The then US President Richard Nixon therefore was left with no option except to end the war in Vietnam, which had taken a heavy toll on the US fiscal system and led to the European banks losing confidence in the dollar, as well as the vast exodus of gold from Fort Knox — with several countries in Europe rushing to redeem gold for the dollar. On August 15, 1971, Nixon announced that the US would no longer exchange gold for the dollar.

Fight against inflation

In 1979, President Jimmy Carter appointed Volcker as the US Fed chief, and President Ronald Reagan reappointed him in 1983. It has been rightly said that Volcker’s fight against inflation as Chairman between 1979 and 1987 did lay the firm foundation for anti-inflation policies across the world.

Volcker wanted to establish his credibility by controlling the inflation that had been created when Nixon abandoned the gold standard in 1973. The move of then Fed Chair Alfred Haynes to fight inflation and recession at the same time, by raising and lowering interest rates alternatively, had confused both consumers and businesses. The dollar’s value had steeply declined, making the imports costlier. Nixon’s move to contain inflation with wage-price controls retarded growth, leading to the phenomenon called ‘stagflation’.

In 1980, the ‘Volcker shock’ raised the Fed funds rate to its highest point in history, in order to end double-digit inflation. Volcker fought 10 per cent annual inflation rates with a contractary monetary policy. In fact, he boldly doubled the Fed funds rate from 10.25 per cent to 20 per cent in March of 1980. Though he temporarily lowered it in June, he raised it again to 20 per cent in December and maintained it above 16 per cent till May 1981. In 2015, the Volcker rule prohibited banks from using customer deposits to trade for their own profit.

Globalised view

In 2014, Volcker called for a new Breton Woods agreement that could create a coordinated international monetary and financial system and establish rules that could guide to create a new global currency that could replace the dollar. He had observed that a truly globalised world economy needed a global currency.

US economy expert Kimberly Amadeo in January 2019 noted how Paul Volcker “almost single-handedly pulled the United States back from a near Weimar-scale financial collapse: if there were a Nobel Prize for government service, Paul Volcker’s name would surely be on the shortlist.”

Paul Volcker who was undergoing treatment for prostate cancer diagnosed in 2018, died on December 10, 2019 at the age of 92.

The writer is a former member of the IMF and founder-chairman of the Sri Sardar Valllabhbhai Patel School for Monetary Economics

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