Volcker, Keeping At It

The 91-year-old Paul A. Volcker has had a long, distinguished career, highlights of which he recalls in Keeping At It: The Quest for Sound Money and Good Government (Public Affairs / Hachette, 2018). For those with a financial memory, he is best known for his role as the Federal Reserve chairman who shepherded the economy through a period of high inflation (14.8%) in the early 1980s, raising the federal funds rate to a peak of 20% in 1981, even as the nation was in a recession (1980-1982). By 1983 inflation had been tamed. For those whose memory is not so long, his name is associated with bank regulations adopted during the Obama administration, the Volcker Rule.

Volcker’s memoirs, written with the help of Christine Harper, combine personal reminiscences with reflections on economic policy decisions in which he played a role, such as abandoning the gold standard. Among the personal reminiscences, the one that stood out for me was his cut in salary when he left his job as president of the New York Fed, which paid $110,000, and accepted the job as chairman of the Federal Reserve, which paid just $57,000. His wife, who had serious medical problems, remained in New York, and Volcker rented a one-bedroom apartment in a building full of George Washington students for $400 a month. The family’s financial squeeze led Volcker’s wife to take on a part-time accounting job and rent out their back room.

Presaging events in the financial crisis, Volcker describes the quick fix for Continental Illinois, which was suffering in the wake of the 1982 bankruptcy of a small Oklahoma bank, Penn Square, which “had originated more than $2 billion of loans to speculative oil developers” and sold them on to several large banks around the country, including Continental Illinois. The chairman of Continental said that the Penn Square loan portfolio could sink his bank. The Fed and the FDIC initially decided to follow the model they had applied successfully to the bailout of First Pennsylvania Corporation. There, “encouraged by the Fed, which was providing emergency lending, the FDIC and a group of a couple dozen banks provided a $1.5 billion rescue made up of loans and a line of credit. They also received twenty million warrants to purchase common stock—enough to provide a controlling majority.” But, in the case of Continental, the bankers were wary, and the FDIC ended up offering them its de facto guarantee to increase their line of credit. Continental survived for a while, but shareholders never recovered their losses. “This episode,” Volcker writes, “has often been credited with popularizing the phrase ‘too big to fail.’ Any ambiguity about the willingness of the government to bail out the big banks seemed to be lost when the comptroller of the currency, the supervisor of most of the big banks, went beyond his authority, seeming to commit to such support for the eleven largest in his later congressional testimony.”

Volcker’s memoirs are rich in detail about events that shaped the American economy and its financial institutions in the second half of the twentieth century. As for the future, although he has deep concerns, he quotes his mother, who said to him on an earlier occasion: “The United States is the oldest and strongest democracy in the history of the world. In two hundred years it has survived a lot. Get back to work.”