David Warsh: Two heroes -- Volcker and Comey

Paul Volcker

James Comey

SOMERVILLE, Mass.

It’s difficult to explain heroics of the past to young leaders of the present day.  Circumstances change so swiftly, new perils mount with such sudden speed that what was required even forty years ago in terms of preparation, ingenuity, and courage may fail to impress – especially if it happens to involve monetary policy.

Former Federal Reserve Board Chairman Paul Volcker died recently at 92. In recognition of his passing, I read the superbly detailed “The Reform of October 1979: How It Happened and Why,’’ by David Lindsey, Athanasios Orphanides and Robert Rasche.  Their article was written for a conference of the Federal Reserve Bank of St. Louis on the twenty-fifth anniversary of a momentous change.

It was on a Saturday evening — Oct. 6, 1979 — that Volcker summoned reporters to the Fed, the first such press conference in the central bank’s history.  Volcker had recently been appointed to the job by President Jimmy Carter. The atmosphere in financial markets was one of crisis. A climactic meeting of the system’s policy-making Federal Open Market Committee had ended three hours before.

Volcker announced that, after decades of seeking to control inflation by manipulating the price of money, meaning the short-term interest rates it controlled itself, the Fed would henceforth begin targeting the quantity of money instead. After decades relying entirely on Keynesian doctrine, the Fed would capitulate to its monetarist critics and see what would happen. Whatever the change meant in theory, policy-makers knew that in practice they were tying their hands with respect to interest rates. Monetary stringency meant that market rates would move to heights that the FOMC never would have dared to have explicitly voted.

A crushing recession followed, complicated by much political byplay. To make a long and scary story short, market participants of all sorts gradually revised downward their expectations of future price increases. Convinced that the Fed’s governors would not relent, world markets began a financial asset boom.  By 1985 inflation had declined to 3.4 percent, from the 12 percent annual rate during Volcker’s first year on the job.

Meanwhile, the FOMC quietly gave up on the policy of seeking to manage “the money supply” and returned to targeting interest rates.  As Fed chairman Ben Bernanke would later explain, deregulation and financial innovation meant that they couldn’t get a handle on the behavior of the monetary aggregates, no matter which one they chose.

There are accounts of Volcker’s story for every taste and attention span. The best is William Silber’s narrative of his friend’s career, Volcker: The Triumph of Persistence (Bloomsbury, 2012). Stephen Axilrod’s Inside the Fed: Monetary Policy and its Management, Martin through Greenspan (MIT, 2011).  Volcker’s autobiography, Keeping at It: the Quest for Sound Money and Good Government (Public Affairs, 2018), written with Christine Harper, gives the fullest flavor of the man. For a short course, you can’t beat the obit in The New York Times.

I particularly admire The Great Inflation and Its Aftermath: The Past and Future of American Affluence, by Robert Samuelson (Random House, 2009), Samuelson covered the events of those years as a newspaper reporter and columnist, first for Newsweek, then for The Washington Post. He decided to write the book, he explained, because no one else had, or apparently would.  He began

History is what we say it is. If you asked a group of scholars to name the most important landmarks in the American story of the past half-century, they would some or all of the following: the war in Vietnam; the civil rights movement; the assassinations of John Kennedy, Robert Kennedy, and Martin Luther King, Jr.; Watergate and President Richard Nixon’s resignation; the sexual revolution; the invention of the computer chip; Ronald Reagan’s election in 1980; the end of the Cold War; the creation of the Internet; the emergence of AIDS; the terrorist attacks of September 11, 2001; and the two wars in Iraq (1991 and 2003).  Looking ahead, these scholars might include other developments: the rise of Japan as a major economic power in the 1970s and 1980s’ the emergence of China in the 1980s from its self-imposed isolation’ and the spread of nuclear weapons (to China, India, Pakistan, and others.) But missing from any list would be the rise and fall of double-digit US inflation. This would be a huge oversight.

Many of Volcker’s efforts after leaving office, in 1987 were devoted to improving the lot of public servants.  Instead, their standing has continued to degrade.  Especially striking therefore was the afterword for the paperback edition of Keeping at It, which he finished in September.  It appeared Friday as a column on the op-ed page of the Financial Times, under the headline “Paul Volcker’s Final Warning for America’’.

Increasingly, by design or not, there appears to be a movement to undermine Americans’ faith in our government and its policies and institutions. We’ve moved well beyond former President Ronald Reagan’s credo that ‘government is the problem.’ with its aim of reversing decades of government expansion.

Today we see something very different and far more sinister. Nihilistic forces are dismantling policies to protect our air, water, and climate. And they seek to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.

That brought the story forward to last week. As I listened, on a long drive, to congressional Republicans defend Donald Trump on a long drive, I thought about another civil servant, this one a hero of the present day.  It always seemed to me that Volcker’s attitude towards his job had something to do with his physical stature.  He was 6 feet 7 inches tall.  His seriousness may have derived in part from his height (and, of course, in part from his parents), but his authority stemmed from his seriousness. In the end being tall simply helped.

Similarly tall, and, as far as I can tell, similarly motivated, is former FBI Director James Comey. If Comey is not as slyly funny as was Volcker, he is at least as high-minded, or perhaps more, by as much as an inch – he is 6 feet 8 inches tall. He is also scrupulously honest (an undesirable trait in a central banker), yesterday acknowledging that the FBI had loaded the dice when they sought court permission to eavesdrop on former Trump campaign adviser Carter Page.

Today the battles of the Trump presidency present a complicated landscape.  In another forty years, though, my hunch is that it will be Comey who will be seen to have symbolically slain the dragon.

David Warsh, an economic historian and long-time columnist, is proprietor of Somerville-based economicprincipals.com, where column first appeared.