The World Paul Volcker Made

In the early 1980s, Fed chairman Paul Volcker launched the decisive battle of the twentieth century’s class war. We’ve been living in his world ever since.

Former Federal Reserve Chairman Paul Volcker participates in a House Financial Services Committee hearing on Capitol Hill on September 24, 2009 in Washington, D.C. Mark Wilson / Getty

It often feels like the only people who talk about the Federal Reserve are bankers and cranks. The former pay attention because they have to, reading into every utterance from monetary authorities for clues about which way the financial markets might soon track, fearful of falling one step behind the herd. The latter are simply bizarre. They would just as well abolish the thing, and probably burn all paper money while they’re at it.

There are of course a few more voices in the mix. Progressives have been engaged, even if their efforts rarely make the front page. During his presidential campaign, Bernie Sanders demanded greater transparency within and democratic control over the Federal Reserve. A decade earlier, then-Representative Sanders challenged then Fed Chair Alan Greenspan to “meet real people” before formulating monetary policy, because the “country clubs and the cocktail parties are the exception, not the rule.”

More recently, Elizabeth Warren has implored the Fed to force an overhaul of the leadership of banks like Wells Fargo. The scholars Dean Baker, Sarah Rawlins, and David Stein have sought to recover the legacy of the Humphrey-Hawkins Act of 1978, which tasked the central bank with attending to employment maximization as much as it does price stability. And in the most dynamic grassroots campaign for a progressive monetary policy in a generation, activists with Fed Up have conducted popular education programs and direct actions aimed at shifting the terms of debate on a topic that the financial elite would prefer to remain inaccessible to ordinary people.

So far, the officials who run the Federal Reserve haven’t had much reason to listen. This is mainly because it is among the least democratic public institutions in the United States, even if Fed officials wouldn’t put it that way. In their minds, “independence” is what makes a central bank a central bank. Without the ability to superintend the financial system free of political interference, they wouldn’t be able to do their job. Thus, when Trump did what Trump does, and took to Twitter to question their decision to continue raising interest rates, they were aghast. Fed Chair Jerome Powell, Trump’s own appointee, promptly began fighting politics with politics, making the rounds in Congress and asserting that the best government intervention in central bank affairs is no government intervention.

Fed alumni are concerned too. Former Fed Chair Paul Volcker, in his recently published memoir, Keeping at It: The Quest for Sound Money and Good Government (co-authored with Christine Harper), has expressed his fear of what the institutional decay represented by Trump might portend for the management of money, for the economy more generally, and for the republic itself. But what Volcker refuses to recognize is the extent to which his own leadership of the central bank helped to create the nightmare we’re living in. At its helm from 1979 through 1987, Volcker oversaw a program of financial austerity without precedent, one that inaugurated the unforgiving economic order of the late twentieth and early twenty-first centuries. If Ronald Reagan gets most of the credit, Volcker at least deserves an honorable mention.

Looking at Volcker’s early years, one might be excused for assuming that his future was foreordained. Born two years and two months before the 1929 crash, he grew up in the solidly Republican town of Teaneck, New Jersey, a suburb of New York, then home mainly to white-collar commuters and, as Volcker recalls, one black family. Summers during the Great Depression were spent at a cottage on a lake. During the 1930s and 1940s, Volcker’s father, Paul Sr, served as Teaneck’s city manager, an unelected office whose purview included the municipal budget, facilities, and employees, responsibilities that in practice amounted to running the place on his own terms. From the first, Volcker Jr admired his old man’s “dedicated, professional, and nonpolitical management.” This emphasis on the nonpolitical — itself always a kind of politics — is a theme to which Volcker returns again and again.

At Princeton, Volcker immersed himself in a range of economics courses, but notes that it was the money, banking, and monetary policy sequence, taught by Oskar Morgenstern and Friedrich Lutz, both students of the conservative Austrian school, that made the greatest impression. There was one thinker, however, that no Princeton faculty assigned: John Maynard Keynes. “While it hardly seems possible,” he writes about his college years in the late 1940s, Keynes’s work “advocating active government policy to manage the economy received no attention.” His senior thesis reflected the omission. A study of central banking theory and practice during the first three decades of the Federal Reserve’s history, it concluded with “a strong plea to recognize price stability as the central bank’s core objective and to make it independent of partisan politics.” One at least has to credit him with having remained consistent, if not quite modest — even at ninety, he feels that the thesis “could have been written today.”

Volcker’s undergraduate introduction to the institution he would later lead occurred at a charged time. During the Depression and continuing through World War II, the Federal Reserve, under the leadership of Franklin Roosevelt’s appointee, Marriner Eccles, voluntarily ceded its independence to the imperatives of the federal government’s crisis management. In practice, this meant keeping interest rates low enough to enable first the New Deal and then the wartime state to borrow as needed. But by the latter 1940s, with those emergency times behind them, Fed officials, led by Eccles, began demanding the freedom to combat what they viewed as the principal scourge of the postwar economy: inflation. After a short-lived feud with the Truman administration over the question, they settled the matter with the Federal Reserve-Treasury Accord of 1951— a handshake, not a statute, that again recognized the central bank’s independence. The Fed would thereafter remain above the fray of partisan politics, just as Volcker had hoped.

Over the next three decades, Volcker found himself in some of the most important places and times in the history of modern finance. He started his professional career at the New York Federal Reserve, and before long had earned a seat at its famed trading desk, which, due to its proximity to the Wall Street banks, is responsible for putting monetary policy targets into practice. It was during his time at the New York Fed that Volcker first encountered the University of Chicago economist Milton Friedman’s monetarist argument on the link between the money supply and inflation. Much later, as Chair of the Fed, he recalls, “I depended on the common sense of that relationship,” a remark that betrays just how ideologically laden was his nonpolitical style.

After bouncing back and forth between Chase Manhattan Bank and the Treasury Department, he eventually rose to the influential position of Undersecretary for Monetary Affairs in the Nixon administration. In this role, “the best job in the world” to his mind, Volcker was intimately involved in Nixon’s monumental 1971 decision to suspend convertibility of the dollar to gold. That move marked the end of the Bretton Woods regime, which had governed the international financial system for a quarter of a century by maintaining a schedule of fixed exchange rates. Over the next few years, he served as the principal US negotiator in a series of international talks to establish a replacement framework, efforts that ultimately proved fruitless and left currencies to freely float on the open market the way they do today.

In 1975, the year New York City entered a fiscal crisis, Volcker returned to the New York Fed, this time as its president. Four years later, the Democrat Jimmy Carter asked him to run the whole central bank. He agreed on one condition: that politics wouldn’t get in the way of his ability to fight inflation by any means necessary. Carter assented, and on August 6, 1979, the Senate unanimously confirmed Volcker as the twelfth head of the Federal Reserve.


The greatest political victory that central bankers ever achieved may have been convincing the world that monetary matters exist apart from politics. No one thought that way before the establishment of the Federal Reserve. In the late nineteenth century, recurrent financial crises resulted in a long, painful deflation that crushed debtors, especially those in the chronically cash-short countryside, where small and landless farmers saw the one thing they depended on — the prices fetched by agricultural goods — tumble year after year. Their plight vaulted the “Money Question” into the national political spotlight, the agrarian equivalent of the “Labor Question” roiling industrial centers. The Populist insurgency of the 1890s was one reaction to this structural crisis, a radical movement with far more to it than the free-silver fetish taught in high schools today.

The corporate-led campaign for a Federal Reserve was another. As the historian James Livingston put it in his classic study of the institution’s founding, “the origins of the Federal Reserve System lie in the awakening and articulation of capitalist class consciousness,” in the way ascendant corporate elites found common cause in a movement that sought to stabilize a tottering financial system before the plebes overthrew it altogether. Their solution addressed some of what the Populists had demanded — establishment of an elastic currency managed by a decentralized body that could ensure an adequate money supply in rural areas — but it did so on terms the corporate class could live with. Most importantly, the Federal Reserve Act of 1913 guaranteed that the integrity of the nation’s money wouldn’t be left to voters.

A century later, that plan is still holding up. The Federal Reserve System today is comprised of twelve district banks, each of which is controlled by the largest private banks in their respective regions. Overseeing the whole thing is a Board of Governors, made up of seven members nominated by the President and confirmed by the Senate for a term of fourteen years — longer than any other federal position outside the judiciary (although the board’s chair serves a six-year term). The Board of Governors, along with five rotating district directors, constitute the Federal Open Market Committee (FOMC), the Fed’s principal policymaking body, which convenes in private every couple of months to assess the health of the economy and decide whether to loosen or tighten the monetary leash (basically, to lower or raise interest rates). Those decisions, which are made with a heavy focus on inflation, have profound effects on employment — the most important economic statistic to working people. This was something they learned the hard way during the Volcker era.

In fairness, Volcker had been clear about what he intended to do as Fed Chair. And he did take over at a challenging time. The 1970s were marked by the surprising incidence of high inflation during a period of slack growth, what contemporaries called “stagflation,” something few until then had thought possible. The month Volcker took office, unemployment was at 6 percent and inflation at 10 percent (for reference, the Fed today aims for a 2 percent inflation rate). Both numbers would only climb during his first year. And, from Volcker’s perspective, improving one of those problems meant intensifying the other.

Understanding why requires appreciating how difficult inflation is to define. First, what kind of inflation are we talking about? Rising consumer or wholesale prices, commodity prices, asset prices, some combination? And even if we’re able to isolate rising consumer prices as the problem — which may or may not have been an appropriate way to classify what Volcker inherited — there’s a second, more difficult, question: what to do about it?

Price controls are one answer, something the capitalist class will, as a rule, oppose (in spite of the fact that in those rare historical instances when they’ve been applied, they’ve been accompanied by wage controls that were at least as stringent). In 1971, Richard Nixon actually went this route. Another way to zap consumer price inflation it is to create a recession and intentionally drive up unemployment. If workers are too weak to bargain and too broke to spend, prices will eventually come down. Seen this way, the politics of inflation become about nothing less than the distribution of the national income — or, as the Cambridge economist Joan Robinson put it in 1976, inflation is an “expression of class struggle.” It is no coincidence that the middle part of the twentieth century was the only time in US history when consumer price inflation was a pressing issue: it was only during the heyday of the New Deal order that the working class had the power to make it one.

Working for the Clampdown

Through the Volcker Shock, as it is now remembered, the Federal Reserve didn’t just opt for the recessionary approach. It did so in the harshest way possible. Instead of adjusting short-term interest rates — which the Fed could do with some precision through conventional measures — Volcker took the radical step of contracting the total money supply, which effectively translated into the central bank encouraging interest rates to soar without any regard for their deleterious effects. In practice, it involved the Fed using its power to limit the growth in commercial bank deposits, which in turn reduced the amount of lending and by extension the amount of money in circulation. This was a page right out of Friedman’s monetarist textbook. Technical as it all sounds, the move was decidedly ideological. Following “years of compromise and flinching from a head-on attack on inflation,” Volcker to this day maintains, “it was time to act — to send a convincing message to markets and to the public.”

Interest rates, already above 10 percent when Volcker took office in August 1979, climbed above 17 percent within six months. At the start of 1981, they exceeded 19 percent, and they wouldn’t fall to single digits for almost two years. (Over the quarter-century before Volcker’s term began the benchmark federal funds rate had averaged just under 5 percent). The expected recession ensued, with unemployment surging to almost 11 percent, still the highest on record since the Depression. And again, this wasn’t any ordinary cyclical downturn. It resulted in a wave of plant closures across the manufacturing core, hastening the deindustrialization that had already begun to devastate US cities. Between 1976 and 1986, the trade deficit increased almost twenty-three-fold, a trend to which the extremely strong dollar that accompanied high interest rates contributed in no small part.

Volcker does remember that ordinary people weren’t happy about his actions. In April 1980, the National People’s Action Group demonstrated outside the Fed’s Washington headquarters. At one point, farmers encircled the building with tractors, and home builders ran a letter-writing campaign on sawed-off two-by-fours. AFL-CIO president Lane Kirkland, for his part, pleaded that Volcker worry about inflation only after the economy recovered. But these complaints fell on deaf ears. And that was because Volcker had no reason to listen. Moreover, as Leo Panitch and Sam Gindin have put it, the Volcker Shock “was not so much about finding the right monetary policy as shifting the balance of class forces in American society.” People were supposed to be pissed.

A few additional highlights from Volcker’s tenure as Fed Chair underscore Panitch and Gindin’s point. In late 1979, when Chrysler was on the brink of bankruptcy, Volcker stepped in to hash out an agreement with its stakeholders, including the United Auto Workers, intended to keep the company afloat. The resulting deal forced the autoworkers — not for the last time — to pay for the mistakes of their bosses, and it became a model for the rest of corporate America: the UAW accepted a disastrous two-tier contract that would soon become a template in other industries. Volcker recounts with some pride that UAW president Doug Fraser later called him “the toughest negotiating counterparty he ever had.” And the UAW wasn’t the only union with whom Volcker had beef. He thought organized labor was in large part responsible for the stagflation of the 1970s, which is why the monetarist class offensive was necessary in the first place. But he at least had the humility to share some of the credit for vanquishing inflation: “one important but little-recognized contribution to the fight against inflation,” Volcker notes, was Ronald Reagan’s decision to fire thousands of striking air-traffic controllers in 1981, a watershed moment in the modern history of anti-unionism.

During the Mexican debt crisis of the mid-1980s, Volcker also played a central role in crafting the structural adjustment programs that the IMF and World Bank would soon export around the world. Seemingly unconcerned with the impact his own monetarist policies at the Fed had on the ability of states in the Global South to service sovereign debt, he and his counterparts used the opportunity created by the financial panic that began in Mexico and spread across Latin America to impose a program of austerity that intensified inequality in the region. He sees the Latin American left that ascended in response to this shock treatment as “a sad culmination of hard-fought, constructive efforts to deal with a debt crisis that … grew out of chronic absence of suitably disciplined economic policies.” Such was his nonpolitical perspective.

The world the Volcker Shock made is the one that gave us Trump. By the mid-1980s, the Federal Reserve had exorcised inflation, but inflation had merely been a symptom all along. The problem underlying inflation — an organized working class with real power — had been eliminated with it. Faced with the prospect of permanent job loss, workers grew increasingly anxious and employers smelled blood. Reagan’s anti-labor and deregulatory agenda only aided the cause. As skyrocketing inequality since then suggests, they haven’t relented in their attack.

There’s a straight line from there to 2008. Households began relying on greater amounts of debt to maintain a decent standard of living. Explosive growth in the financial sector, nurtured in no small part by a Federal Reserve led by Volcker’s successor, Alan Greenspan, brought about a new era in the history of inflation: this time, in asset prices. Since 2008, we’ve seen just how ugly the political consequences of the collapse of this post-Volcker economy can be.

Yet, if nothing else, the crash did demonstrate for the public the awesome power of the Federal Reserve. Ben Bernanke responded to the crisis with unprecedented measures, taking responsibility for providing adequate liquidity to the global financial system and staving off a spiral into deflationary depression. In the years to come, he and then Janet Yellen would ignore complaints from monetary hawks to their right, using the Fed to almost single-handedly keep the economy afloat. There’s no telling what would have happened had the central bank’s leadership been unwilling to experiment in that period. The title of Bernanke’s own memoir, The Courage to Act, may lack in humility, but one can see where he’s coming from.

And, even if it mainly helped the banks, there’s a lesson to be learned from Bernanke and Yellen’s courage. The kind of economic restructuring required to address the insecurity that Trumpism has exploited — and also to save the planet — will have to be financed somehow. The question to ask isn’t how we’re going to pay for it. It’s how we’re going to hold the financial sector accountable to the public, how we’re going to force them to finance the changes we so desperately need. Assuming the world’s biggest private banks won’t go along willingly, perhaps the way forward is through a democratized Federal Reserve, one that deploys the power it displayed after 2008 in the service a range of socially productive ends. If we ever get there, we can thank Paul Volcker for teaching us about the political nature of central banking.