Noted scholar and finance expert Silber draws on hours of candid personal interviews and complete access to Volcker's personal papers to render dramatic behind-the-scenes accounts from Volcker's career at the Treasury Department and the Federal Reserve: secret negotiations with European ministers; confrontations with the White House; crisis conferences with Wall Street titans, and even tense boardroom rebellions within the Fed itself. Filled with frank commentary from Volcker himself-including why he was personally irked with the "Volcker Rule" label-this will be the definitive account of Volcker's indispensable role in American economic history.
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About the Author
William L. Silber is one of America's most respected experts on finance and banking. He is currently Marcus Nadler Professor of Finance and Economics and Director of the Glucksman Institute for Research in Securities Markets, at the Stern School of Business, NYU. He has written numerous books and articles on economics and financial history, most recently When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy.
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VOLCKERThe Triumph of Persistence
By WILLIAM L. SILBER
BLOOMSBURY PRESSCopyright © 2012 William L. Silber
All right reserved.
Chapter OneThe Early Years
Paul A. Volcker learned integrity at home. He was born on September 5, 1927, in Cape May, New Jersey, to Alma and Paul A. Volcker Sr. In 1930 his family moved to the northern part of the Garden State when Paul Sr. became the town manager of Teaneck, a small suburban community five miles west of New York City. Volcker Sr., a civil engineering graduate of Rensselaer Polytechnic Institute in upstate New York, rescued the town from the Great Depression and managed its affairs for twenty years, creating a zoning system, a paid fire department, and civil service for township employees. "The population doubled while my dad was manager," Volcker recalls. "I've always been proud of his success."
A quote from George Washington hanging on the wall in his father's office burrowed into young Paul's brain: "Do not suffer your good nature ... to say yes when you ought to say no; remember that it is a public not a private cause that is to be injured or benefited by your choice." Paul Volcker Sr. lived by those words, going to extreme measures to avoid even the hint of impropriety, no matter what the consequence, sometimes at young Paul's expense.
Dick Rodda, the Teaneck recreation director, had hired fifteen high school students, including Buddy Volcker, as Paul was called, to work part-time as safety monitors after a snowstorm. When Paul Sr. found out, he called Dick to his office and said, "I want Buddy off the payroll ... I want you to fire him." When Dick protested, Paul Sr. said, "If you won't fire him I'll find a new recreation superintendent who will." Dick Rodda did as he was told.
Paul watched his father purge the emotion from every decision, deliberating like the pipe smoker he was. "If someone came by on a Monday with a request he had not considered before, he would say, 'Come back on Thursday and I'll have an answer.' He almost turned procrastination into a virtue. He was thoughtful and scrupulous, weighing every option in the process. I learned never to make a decision before its time ... for better and worse."
As far back as he can remember, Paul craved his family's approval. It began when he was five, in kindergarten, the day he brought home his first evaluation from Miss Constance Palmer. Maybe every boy thinks that his first teacher is beautiful, but he insists she really was. "I remember when she led me by the hand into the circle with the other kids. I liked the attention until she added a note to my report: 'Paul does not take part in group discussion and does not play well with others.'" Those comments worried his parents, especially when his sisters chimed in, "And when Buddy plays with his friends they hardly ever speak." Their concern only deepened Buddy's natural reticence.
Paul's reserve continued as he grew older, creating a serious handicap with the opposite sex. During high school, he was too self-conscious to ask a girl out on a date. But his shyness also had an upside, blossoming into self-reliance. He became a Brooklyn Dodgers fan simply because all his friends rooted for the Yankees or the Giants, who played just a few miles away, across the George Washington Bridge. They considered Brooklyn a foreign country, where people spoke a different language. Paul found that he liked being a contrarian.
A curious blend of insecurity and self-confidence emerged in young Paul. At times the insecurity dominated, especially when it came to report cards. He worried about his father's signature on the card. When he did well, his father would embellish the V in his name, as though he was signing the Declaration of Independence; when his grades fell short, a simple PAV flowed from his father's pen. "I always wanted the fancy 'Volcker' on the back of the card but did not get it often enough."
Paul Volcker Sr. graded like a headmaster: no nonsense ... and no hugs or kisses either. The tension rose when Paul applied to college in the spring of 1945. His father suggested his alma mater, Rensselaer. Paul decided to apply to Princeton, just to see if he could make it. The application form itself was intimidating—it felt like parchment when he filled it out—but two weeks later he was accepted. His father tried to persuade him not to go, with a warning: "Prep school students will do better at Princeton than a graduate from Teaneck public high. You'll find out that you're not so smart."
Paul decided to take a chance to prove a point.
Uncle Sam almost accomplished what Paul Sr. failed to do. A formal invitation arrived in April 1945, soon after the Princeton acceptance, requesting that Paul visit his local draft board for a physical exam. The war was winding down in Europe, and Paul had been unhappy when the captain of the Teaneck varsity jumped the gun and volunteered. "We were having a championship season on the basketball court, and that derailed our prospects. When I went for the physical I thought about crouching down so that I would not exceed the maximum acceptable six-foot, six-inch height. I didn't try very hard and was rejected with a physical deferment ... I've always regretted that decision, wondering whether I let myself and my country down."
Volcker concentrated on economics and basketball at Princeton between 1945 and 1949. Much to his disappointment, he was far better at economics, despite his elongated frame. "I never got along with the coach," Volcker complains, sounding like a benchwarmer covering up for bad footwork or bad hands, "so I didn't play much." Perhaps that is why he found refuge with Princeton's two famous German-born economists, Friedrich Lutz and Oskar Morgenstern, who had come to America after Hitler's rise to power. Lutz taught Volcker about money and banking, his lifelong preoccupation; Morgenstern taught him to worry, his lifelong compulsion.
Morgenstern is best known for his book Theory of Games and Economic Behavior, published in 1944 with John von Neumann, one of the most famous mathematicians of the twentieth century. Volcker never studied much game theory, a formal approach to strategic decision making, beyond what Morgenstern had discussed in class, but the professor left his mark by turning Paul into a professional skeptic.
Morgenstern worried about the relevance of economics. He said that "unless [economics] offers a contribution to the mastering of practical life ... it is but an intellectual plaything ... similar to chess." Morgenstern probably disliked chess because the Russians dominated it, but he really did want economics to be more than just a game and warned that "insufficiency of data is in great part responsible for the fact that economic policy is so often lacking in rationality." Back then, his colleagues spent most of their time thinking rather than doing.
Oskar Morgenstern would soon write On the Accuracy of Economic Observations, published in 1950, warning against the mistreatment of economic data. He did not mince words: "It [is] grotesque to see the New York Times, for example, often reporting on its front page that 'consumer prices' have 'risen' or 'fallen' by 1/10 of 1 percent without any qualifying word about the significance of this change in a mere index of doubtful validity."
Volcker recalls Morgenstern's shocking example of data on international gold movements, which often made front-page headlines throughout the world. "Oskar showed numerous years in which Britain's reported gold imports from the United States differed substantially from America's reported gold exports to the U.K. This logical inconsistency made a mockery of further analysis."
Volcker spent most of his days at Princeton reading and playing basketball, not necessarily in that order. "I devoured Friedrich Hayek's Road to Serfdom. His defense of free enterprise made me wary of government intervention—and proud to be an American, even though Hayek warned against our creeping socialism. As for coursework, I listened to what the professors had to say and found that I could get As by repeating their views, almost verbatim, on the exams."
Princeton dealt with students who were too smart for their own good by requiring a thesis for graduation—a lengthy tome on some weighty subject that could not be written while shooting baskets. Paul responded to the looming deadline by ignoring the problem. With less than a semester left, he had done nothing.
According to Volcker, Professor Frank Graham, assigned as his thesis adviser, saved him. "I decided to write on Federal Reserve policy after World War II. It turned out more complicated than I had anticipated. Professor Graham gave me great advice: to write first and edit later. I would submit a handwritten chapter on yellow legal-size paper on a Friday afternoon, and he would return it the following Monday with detailed comments and corrections. I was too embarrassed not to push ahead."
Graham, an expert in international trade, flattered Volcker with his attention. Paul had always been too shy and insecure to meet with professors. "I thought they did not have time for me." Graham pushed his young protégé, hoping he would pursue graduate study in economics, and Paul ultimately submitted his thesis with a week to spare, graduating summa cum laude in the process. Volcker would follow this "procrastinate and flourish strategy" throughout his professional career. "I found that it worked, so I never changed." And then he adds, "Besides, it gave me time to think and to get it right."
Volcker continued his studies in economics while attending the Graduate School of Public Administration at Harvard in 1950 and 1951, listening to lectures by, among others, Alvin Hansen, the foremost expositor of the new Keynesian theory of activist government intervention. "Hansen was a great teacher," Volcker recalls, "but I had cut my teeth in economics as an undergraduate at Princeton. I was very skeptical."
Volcker received his master's degree from Harvard in 1951 and then left for the London School of Economics, armed with a Rotary Club fellowship to write his doctoral dissertation. Paul spent most of his time traveling through Europe. "I found a girlfriend who kept me busy. And when time got short, there was no Professor Graham to save my hide. I still feel bad about not completing my degree. I had also disappointed my father, who had saved the clipping from the local newspaper when I received the fellowship. He was an active member of the Rotary Club. I screwed up a good opportunity."
Paul redeemed himself by pursuing a career in public service, like his father. Paul Sr. helped by getting his son an interview at the Federal Reserve Bank of New York. The New York Fed is the most important of the twelve regional Federal Reserve Banks that serve as branches of America's central bank, headed by the Federal Reserve Board in Washington, D.C. The New York Bank, a fortress-like building in Lower Manhattan, serves as the observation post of the Federal Reserve System, located two blocks from the New York Stock Exchange and within walking distance of the numerous government bond dealers that buy and sell securities with the Federal Reserve every day.
Robert Roosa, vice president of the Research Department at the Federal Reserve Bank of New York, molded Volcker's thinking after he was hired as an economist in 1952. Roosa drafted Volcker to help produce Federal Reserve Operations in the Money and Government Securities Markets, a little red booklet (107 pages long) that instructed a generation of policy makers about central bank strategy. Illinois senator Paul Douglas, chairman of the congressional Joint Economic Committee, described Roosa as "probably the foremost authority on the technical operation of the money market in Government securities." He had become an expert after transferring in 1954 from the New York Bank's Research Department to the open market desk, where traders bought and sold securities for the Federal Reserve System.
Roosa's move to the practical side of the Federal Reserve was unprecedented. Economists were considered too cerebral for the instinct-driven trading business, and in the mid-1950s they were segregated in research, barely a notch above the accountants. Roosa broke further ground by putting the twenty-seven-year-old Volcker in the trading room—as an observer, of course. The experience married theory and practice in Volcker's brain and altered the trajectory of his career. If Oskar Morgenstern had convinced Paul that data were essential, but fraught with error, then Robert Roosa gave him the opportunity to examine data under a microscope—data from the heart of Wall Street.
Volcker encountered a new world when he entered the trading room at the New York Fed. Unlike modern trading facilities, decorated with computer terminals and multicolored electronic displays, the 1955 model carried the stark imprint of a black-and-white movie production. A U-shaped desk, equipped with telephone consoles for each trader, filled the entire space, while a large chalkboard hanging on the wall at the open end of the U recorded the relevant statistics, much like a primitive scoreboard at a baseball game. Prices of government bonds, which were frozen in print in the Research Department, now danced in Volcker's head during phone conversations with Wall Street's bond dealers. Shorthand words for buying and selling could make the conversations sound like gibberish. It took a practiced ear to decipher the meaning of "9 bid, offered at 10, 100 by 100," but Paul caught on quickly and reveled in the details, feeling as though he had been initiated into a secret fraternity.
On Wednesdays, when commercial banks had to meet their required reserves prescribed by the Federal Reserve, Volcker would work past midnight on his weekly report for the Federal Reserve's Open Market Committee. The committee, referred to as the FOMC, is the central bank's decision-making body. It consists of the seven members of the Federal Reserve Board, appointed by the president of the United States, plus five of the twelve regional Reserve Bank presidents, who serve on the FOMC on a rotating basis.
The FOMC was run by the then chairman of the Federal Reserve Board, William McChesney Martin, who had been appointed by President Harry Truman in 1951 and would serve until 1970. Martin was a former banker, just like everyone else on the board in the mid-1950s. Perhaps the economy was a lot simpler in those days, but the absence of economists bore the chairman's imprint. Martin thought economists' forecasts rivaled the accuracy of fortune teller predictions, probably an insult to the fortune tellers: "If the decision were mine alone, I would dispense with [that] kind of analysis." He also felt that economists lacked the practical experience needed of central bankers.
With Martin at the helm, it is not surprising that economist Paul Volcker failed to make the distribution list of those permitted to read the weekly report that he wrote. His wife, Barbara, taunted him: "You can write it but can't read it. What's wrong with these people?"
Barbara, a pretty woman with short dark hair that she denigrated as mousey, had majored in irreverence at Pembroke College, part of Brown University. She had been married to Paul for less than two years at the time and did not appreciate his midnight scribbling. Paul knew that she was right about the Fed, as she was about most things. The rigid bureaucracy would wear him down. But he also knew that his memoranda to the FOMC mattered, even though he was a mere economist, because they came from his observer status on the open market desk. He had the credibility of an embedded reporter on the front lines. He even went to an FOMC meeting as Roosa's scribe and recalls thinking, "It would be nice to sit around the table as a member of the board."
Volcker's memos bristled with facts and figures: how many securities were bought or sold, at what prices, who was buying and who was selling, and perhaps most important, what the dealers expected interest rates to do in the near term. Dealers profit by anticipating whether interest rates will decrease or increase, whether bond prices rise or fall. They make money buying before prices jump and selling before they drop. Volcker paid attention to the details, especially the link between expectations and behavior, and recognized the importance of itting the pieces together, much as he had in his boyhood hobby of building model airplanes. Every plane, made from balsa wood and paper, with a rubber band to crank the propeller, was perfectly balanced, ready to fly.
The Fed's trading room was a bridge between economic research and the real world, and Volcker had crossed the span and liked what he saw. He remained a reporter rather than a player on the trading desk until 1957, when he took another step toward real-world practice and joined the Chase Manhattan Bank. Chase Manhattan took its name from Salmon P. Chase, Abraham Lincoln's treasury secretary during the Civil War, and from the Bank of Manhattan, founded by Aaron Burr, the vice president of the United States who killed the first treasury secretary, Alexander Hamilton, in America's most famous duel.
Excerpted from VOLCKER by WILLIAM L. SILBER Copyright © 2012 by William L. Silber. Excerpted by permission of BLOOMSBURY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Introduction: More Than a Central Banker 1
Prologue: The Three Crises of Paul Volcker 6
Part I Background
1 The Early Years 15
2 Apprenticeship 32
Part II Confronting Gold, 1969-1974
3 Battle Plan 68
4 Gamble 68
5 Transformation 86
6 Compromise 104
Part III Fighting Inflation, 1979-1987
7 Prelude 125
8 Challenge 147
9 The Plan 165
10 Sticking to It 178
11 New Territory 190
12 The Only Game in Town 202
13 The End of the Beginning 216
14 Follow-Through 235
15 The Resignations 252
16 An Equestrian Statue 264
Part IV The Twenty-First Century
17 In Retrospect 273
18 The Rule 287
19 Trust 297
Personal Records and Correspondence 301
Photographs and Cartoons 317
Source Material and Data 337
Selected Bibliography 427