Keeping At It

Before he ever ran the Fed, Volcker was at the center of one of the great unwindings of the postwar era. As under secretary of the Treasury for monetary affairs under Nixon, he helped manage the collapse of the Bretton Woods system — the arrangement, built at the end of the Second World War, that had pegged the world's currencies to the dollar and the dollar to gold. By 1971 the United States no longer held enough gold to honor its promise, and the system was straining at every seam.

On a weekend in August 1971, Nixon and his advisers gathered at Camp David and decided to close the gold window — to sever the dollar's last formal link to gold. Volcker was in the room. He had spent years trying to hold the old order together through negotiation, and he understood that what they were doing was historic and, in some sense, a defeat. He reportedly wept over it. The fixed-rate world he had grown up defending was gone, and currencies would now float against one another, their values set by markets rather than treaties.

The orthodox tools had been tried and had failed. Presidents had imposed wage and price controls, jawboned business leaders, and nudged interest rates up a point at a time, and inflation had only dug in deeper. Volcker concluded that the problem was as much psychological as mechanical. As long as Americans expected prices to keep rising, they behaved in ways that made the rising self-fulfilling — demanding raises, borrowing fast, spending before money lost value. Breaking inflation meant breaking the expectation, and that required a shock convincing enough to be believed.

So in October 1979 the Fed shifted its target from the price of money to the quantity of it, letting interest rates go wherever the squeeze on the money supply drove them. They drove high. The prime rate climbed past twenty percent. Mortgages became unaffordable, car loans dried up, and the economy slid into a sharp recession. Unemployment rose toward eleven percent. The pain was real and widely felt, and it fell hardest on exactly the people who could least afford it.

Step back from the interest rates and the tractors, and Volcker's life is an argument about something larger than monetary policy: it is about what makes governance trustworthy at all. His whole career turned on a single insight he never dressed up — that institutions work only when the people inside them are willing to be disliked. The Fed broke inflation not because it found a clever instrument but because its chairman was prepared to absorb years of anger without bending. Credibility, in his telling, is not a thing you announce. It is a thing you pay for.

That is why he kept returning, in his memoir, to his father and to the modest office in Teaneck. The town manager and the Fed chairman were doing the same job at different scales: running something on behalf of people who were trusting them with money, and refusing to spend that trust for short-term comfort. Volcker distrusted the idea that good outcomes could be engineered by sufficiently clever rules. Rules helped, but in the end someone had to exercise judgment and then stand behind it, and the quality of that someone mattered more than any model.

The Saturday press conference in 1979 was the moment Volcker became famous, but it was not really the point of his life. The point was the long, dull, principled stretch on either side of it — the Treasury negotiations, the recession he refused to abandon, the decades afterward spent trying to remind a country that government is something that has to be done well rather than merely talked about. He served six presidents and outlasted most of the people who had called for his head, and he never developed a taste for being celebrated.