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The year was 1962. America was weathering its worst session since the Great Depression. Unemployment soared; interest rates fluctuated in the high double digits. The beleagured construction industry mailed piles of useless lumber to Federal Reserve headquarters in Washington, and Capitol Hill clamored for the Fed chief's hide.
But Paul A. Volcker stayed the course.
Standing by his tight money policy, the Federal Reserve Board chairman bit the bullet and guided the nation's economy into a period of renewed growth. Today, the once reviled central banker is widely credited with almost single-handedly curbing the runaway inflation of the late 1970s and early 80s.
Although less visible than the host of senators, congressmen, and cabinet secretaries who grab the media spotlight. Harvard's 334th Commencement speaker has often been called the second most powerful man in Washington. Appointed by President Jimmy Carter in 1979 and named to a second four-year term by President Reagan in 1983. Volcker enjoys a degree of autonomy shared by no other government official.
Theoretically the first among equals on the Federal Reserve system's seven-man Board of Governors, the 57-year-old Volcker's strong will and effective policies have won him near-absolute power at the Fed.
Through the purchase and sale of Treasury bonds, bills, and notes, he holds the reins on the nation's money supply; by setting the Fed's discount rate, he determines the prevailing lending rates which often dictate whether businesses can expand or families can afford to buy homes.
His independence allows him to defy the political pressures of the moment and concentrate on two unwavering long-term aims: steady growth and low inflation.
"Paul Volcker has been the outstanding economic figure of this decade," says Professor of Economics Martin S. Feldstein '61, former chairman of Reagan's Council of Economic Advisers. "It's very hard to think of somebody else who could do the job that Paul has done."
The New Jersey native's career in finance began at the Federal Reserve Bank of New York after his graduation from Princeton University. Volcker worked at the bank from 1949 to 1957, taking time out to study in London and earn his master's degree at Harvard's Graduate School of Public Administration, now the Kennedy School.
In 1957, the Chase Manhettan Bank lured Volcker away from the Fed, setting the pattern for the economist's pinball path to the top. In the years that followed, Volcker moved between high posts at the Chase Bank, the Treasury Department, and the Fed.
"He was the kind of man you could give a job to and just forget about it yourself knowing that it would be well done," recalls retired Chase Vice President John D. Wilson, who recruited a young Volcker 28 years ago.
Volcker made his name in the public sector while serving as President Richard Nixon's under secretary of the Treasury for monetary affairs. In an effort to rescue the lagging dollar and rebuild the troubled international finance system, Volcker engaged in his own version of shuttle diplomacy. He traveled to international banking capitals and met with foreign finance leaders, ultimately restructuring the international debt.
The revised International Monetary Fund gave preferential credit to developing nations attempting to correct their financial imbalances, such as Mexico and Brazil.
Later, when Carter promoted Volcker from his subsequent position as president of New York's Federal Reserve Bank, a higher challenge beckoned. Carter gave the banker an urgent mandate to end the inflation that was ravaging the economy--and the president's political future along with it.
A firm believer in monetary solutions. Volcker responded by shrinking the money supply. His policy pushed up interest rates and caused additional economic dislocations.
"Fed Bashing" came into vogus, and the 6-ft., 8-in., cigar-smoking Fed chairman became a familiar figure on Capitol Hill, where he was frequently called to testify before irate Congressional committees.
Apparently convinced that the cure was more painful than the original ailment, Carter "pulled the rug out from under" his appointed inflation-buster, Feldstein says.
The president called for independent credit controls and urged a relaxation of the Fed's monetary grip; embattled on all sides, Volcker obliged, and inflation jumped to new heights.
Campaigning for the presidency in 1980, Reagan supported a return to Volcker's anti-inflationary policy. During the mid-term elections of 1982, when the side effects of the Fed's draconian measures were most pronounced, Reagan's motto was "Stay the Course."
Despite mounting pressure from business leaders, congressmen, and administration officials, Volcker stayed. Eventually, his course led to recovery.
"The Federal Reserve under Volcker gets an A or maybe an A-plus for having stood its ground during a time when the risk of not doing something far out-weighed the costs of recession," comments Allen Sinai, chief economist for Shearson Lehman Brothers, a New York based investment banking firm.
Volcker's relations with the president remain smooth. Reagan maps a general direction for the economy, giving Volcker, the technician, a relatively free hand to chart the course, close observers say.
"During my two years in Washington, Volcker visited the White House only three times," says Feldstein, who ate breakfast with Volcker every other week before he left the Administration.
Asked whether the president has a strong understanding of the economy, Volcker nearly sidesteps the issue.
"I'm not going to comment on somebody else in any way," Volcker says, chucking. "Obviously, he has very strong leadership talents and strong points of view."
Many of Volcker's former critics in the White House and the Congress have changed their tune, but the staunchest supply-siders have yet to forgive him for the trade-offs associated with his policies. In particular, Rep. Jack Kemp (R-N.Y.), a possible 1988 presidential contender, blames Volcker for curtailing expansion by keeping interest rates high.
And Volcker has yet to convert some of his public enemies, like the followers of leftist Lyndon LaRouche. Several weeks ago, while Volcker was addressing a gathering in Seattle, one of his detractors released a sack of live rats in the auditorium, temporarily disrupting his speech.
The protest was reportedly directed at his high interest rates and pressures on Third World debtor nations.
Amid the clash of national politics, Volcker comes across as something of an anomaly.
An outspoken exponent of his views, he guards his privacy and dodges the media's attention.
"It's more of a burden than an enjoyment," he explains in a rare interview with The Crimson.
An adept politician, Volcker is said to disdain politics.
"He's somewhat of a loner. He's not the gregarious consensus maker," says Shawmut Bank Chief Economist John Kalchbrenner, who served under Volcker at the Treasury.
An avid outdoorsman, Volcker generally avoids the Potomac cocktail party circuit, favoring more sporting diversions.
"He will take the occasion of an international banking conference to go fishing in some obscure place," Feldstein notes.
When Volcker left the Federal Reserve Bank of New York to accept the chairmanship, he also accepted a 45 percent pay cut. He now earns $67,000 yearly--one-tenth the salary he could command in the private sector, bankers say--and has family has shouldered significant sacrifices.
During the week, Volcker lives in a modest Washington apartment. He spends weekends with his wife Barbara at their New York home.
Several years ago, Mrs. Volcker, who has been ill, went to work as a clerk to add to the family's income. The Volckers also took in a boarder to help make ends meet.
The lucrative options open to Volcker fuel ongoing speculation that he will step down when his current term expires. Nevertheless, Volcker does not appear eager to change jobs.
"I have no plans at the moment," he says. "I don't perceive myself as a great sacrificial lamb here. But there are a variety of circumstances, personal and otherwise, that say at some point, it's time to leave."
Volcker's decision may be influenced by the state of the economy, which is beginning to stall.
Responding in part to a slowdown in the industrial sector, the Federal Reserve last month lowered the discount rate a notch.
But for months, Volcker has been calling for deep cuts in the federal budget deficit, which he believes is beyond monetary solutions.
"I quantified that a long time ago as real savings, one way or another, of upwards of $50 billion in the next fiscal year and then rising thereafter," he says.
If America's problems remain fiscal in nature, the Federal Reserve chairman may be more inclined to move on. However, if inflation returns, and if Volcker perceives a critical role for the Fed, the odds of his leaving seem slim at best.
Why does Volcker continue to resist the temptations of the world outside Washington?
Feldstein offers a widely accepted explanation. "It must be a sense of responsibility combined with the belief that he can do the job--that his successor might not be able to do the job as well."
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