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.