The papers of Paul Volcker, digitized in partnership with Princeton University Library’s Public Policy Papers Collection, have been added to FRASER’s research collections of archival materials covering the Federal Reserve System and the U.S. economy. Volcker is credited with ending the inflation that reached historic highs in the late 1970s, and he was involved in changing international monetary agreements during his nearly 30 years of public service. His papers provide a first-person view of the changing economic and monetary policies of the late 1970s and the effects of those policies on everyday Americans.
Volcker began his career with the Fed in 1952, when he joined the Federal Reserve Bank of New York as an economist. In 1957, Volcker left his post at the New York Fed for the private sector until the U.S. Department of the Treasury under secretary for monetary affairs, Robert Roosa, brought him on as the director of the Office of Financial Analysis in 1962.[1] In 1969, President Nixon appointed Volcker as the Treasury’s under secretary for international monetary affairs, a position Volcker held until 1974. Volcker then returned to the Fed, serving as president of the Federal Reserve Bank of New York from August 1975 until August 1979, when President Carter nominated him to become Chairman of the Board of Governors of the Federal Reserve System to replace Chairman G. William Miller, whom President Carter had nominated to become secretary of the Treasury. Volcker served as Chairman under presidents Carter and Reagan until August 1987.
Volcker’s first term began in a time of economic turmoil: The unemployment rate was on the rise[2] as the country entered an era of steep inflation and stagnant economic growth known as “stagflation.” In 1971, in response to rising inflation and unemployment, President Nixon abandoned the Bretton Woods Agreement[3] and enacted wage and price controls that had been designed by his economic advisers, including Volcker and then-Fed Chairman Arthur Burns.[4] These measures, which became known as “Nixonomics” and the “Nixon Shock,” complicated the international balance of payments[5] and only temporarily slowed the rise of inflation.
Volcker made clear in his confirmation hearing that he intended to make fighting inflation his top priority and worked on it right away. Under Volcker’s direction, the Fed began to restrain the growth of the money supply (instead of the growth of the price of money) while slowly raising the federal funds rate.[6] These measures allowed interest rates to rise quickly, with prime lending rates reaching a historic 21.5 percent. On the evening of October 6, 1979, in a press conference that would become known as the “Saturday Night Special,” Volcker announced another change: The FOMC would no longer manage the day-to-day level of the federal funds rate; it would instead manage the volume of bank reserves in the banking system. With the previous strategy, the FOMC had fine-tuned the federal funds rate to gradually bring down the inflation rate. There was some skepticism, however, that Volcker’s new strategy could bring inflation under control quickly and without enormous economic disruption.[7]
By late 1980, the federal funds rate had reached a record high of 20 percent, and inflation peaked at 11.6 percent. High interest rates had negative effects in nearly every sector of the economy, and Volcker’s policies brought the Fed widespread criticism. His correspondence during that time includes many letters from Americans dissatisfied with his anti-inflation measures and the responses he provided. Farm organizations and labor unions pulled their support of the Carter administration and took part in nationwide demonstrations against Volcker’s policies.[8] The Home Builders Association of Mississippi made their thoughts on the high inflation rates known with an interesting piece of mail. The economy entered a recession, with the unemployment rate hitting a high of 10.8 percent in November of 1982.
Attacked by politicians on both sides, and with calls for his resignation,[9] Volcker remained steadfast in the midst of political unrest and the recession that persisted until the end of November 1982. Before the end of his first term, the inflation rate had dropped below 4 percent.[10] The unemployment rate began a steady decline, and as the volatility of the Great Inflation passed, the economy entered a long period of sustained growth known as the Great Moderation. Volcker resigned from the Federal Reserve Board in 1987.
Well into his retirement years, Paul Volcker never actually retired. He returned to teaching and private banking, serving as professor of international economic policy at Princeton University and chairman and later CEO of Wolfensohn & Company. From 1996-1999, he chaired the Volcker Commission, which ultimately sought to have the funds that Holocaust victims had deposited in Swiss banks during World War II returned to the rightful owners. The Commission’s work secured $1.29 billion in distributions to Holocaust victims and their heirs.[11] Volcker also chaired an independent panel to investigate possible corruption in the U.N. Oil for Food Program, serving from 2004 to 2005. In 2009, he became chairman of President Obama’s Economic Recovery Advisory Board and contributed significantly to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act introduced the “Volcker Rule,” which prohibits banking entities from engaging in proprietary trading in securities and derivatives, and from investing in, sponsoring, or having certain relationships with hedge funds and private equity firms.
In 2014, Volcker called for a new Bretton Woods Agreement at a meeting of the Bretton Woods Committee, already having expressed regret in 2011 about the abandonment of Bretton Woods.[12] He remarked that “the absence of an official, rules-based cooperatively managed, monetary system has not been a great success,”[13] citing the 1980s debt crisis in Latin America and the similar 1990s crises in Mexico and Asia. Those events had dominated much of Volcker’s focus during his second term as Chairman of the Federal Reserve. Despite his efforts, no new agreement developed.
Paul Volcker died in 2019.
To learn more about Paul Volcker, see his Federal Reserve History biography, read an interview with him for the Federal Reserve Oral History Project, peruse his statements and speeches, or browse his papers on FRASER.
[1] Allan Shen. “‘The Integrity and Will of Ten Men’: The Life of Paul Volcker ’49.” Daily Princetonian, January 9, 2020.
[2] Unemployment rate. U.S. Bureau of Labor Statistics via FRED®, Federal Reserve Bank of St. Louis.
[3] To learn more about the creation of the Bretton Woods Agreement see the following: Sandra Kollen Ghizoni. “Creation of the Bretton Woods System.” Federal Reserve History, as of November 22, 2013.
[4] Sandra Kollen Ghizoni. “Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls.” Federal Reserve History, as of November 22, 2013.
[5] Michael Bryan. “The Great Inflation.” Federal Reserve History, as of November 22, 2013.
[6] Bill Medley. “Volcker’s Announcement of Anti-Inflation Measures.” Federal Reserve History, as of November 22, 2013.
[7] Nicholas von Hoffman. “Can Volcker Stand Up To Inflation?” New York Times, December 2, 1979.
[8] Marcia Merry Pepper and Bonnie Mesaros. “Opposition Mounts to Volcker’s Austerity.” Executive Intelligence Review, April 22, 1980.
[9] “Volcker Urged to Resign.” New York Times, June 9, 1982.
[10] Medley.
[11] Shen.
[12] Roger Lowenstein. “The Nixon Shock.” Bloomberg BusinessWeek Magazine, August 4, 2011.
[13] “Remarks by Paul A. Volcker at the Bretton Woods Committee Annual Meeting.” May 21, 2014.
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