Paul A. Volcker has been characterized as thoughtful and eruditetraits
that served him well as chairman of the Fed's Board of Governors
from 1979 to 1987. Volcker may best be remembered as the man who
"broke the back" of inflation, which was rampant at the time of
his appointment by President Jimmy Carter.
As testament to Volcker's non-partisan management of the Fed and
his dedication to the commonweal, he was reappointed to the chairmanship
by President Ronald Reagan.
Volcker has long fiercely defended Federal Reserve independence.
Not only does he favor its independence from political influence,
but he values the special role of the regional Reserve banks within
the larger System.
Following nearly 30 years of federal government service at the
Fed and the US Treasury, Volcker is currently chairman of James
D. Wolfensohn Incorporated, a Wall Street investment firm, and is
Frederick H. Schultz Professor of International Economic Policy
at Princeton University.
Equally at home wading in a Montana trout stream as advising presidents
on the nation's economy, Volcker shares some of his thoughts on
both topics in the following interview.
Region: Our economists at the Minneapolis bank have argued over
the last few years that deposit insurance creates a perverse incentive
to take risk with the depositor's dollar. They've concluded that the solution
requires some form of coinsurance.
Volcker: I agree, at least in a limited way. In many
cases we have had 100 percent insurance, de facto. We probably
can't retreat from that very far right at the moment. But I would
like to introduce some form of coinsurance in calmer circumstances.
How far you can introduce risk without undercutting one of the
purposes of deposit insurance, which is to avoid banking panics
and contagious banking panics, is a nice question. I think we
ought to go a little distance in that direction, recognizing that
right at the moment it's a bit difficult, to say the least.
Region: Since your days at the helm of the Federal Reserve,
some of the debate has centered on the notion of zero inflation:
not just low rates but that zero should be the ultimate goal of
the Fed. How would you weigh in on this subject?
Volcker: I don't think we can expect to be accurate down
to the last tenth of a percent or even to the last one percent.
A lot of the consumer price index is a rather artificial construction.
For instance, housing costs are measured by its rental equivalentwhich
is nice in theory but in practice depends upon an extrapolation
of very few numbers. Prices of health care services are largely
computed by indirect formulas. There are more problems in measuring
quality in those areas than others. Moreover, some service prices
will tend to go up faster than goods prices because historically
there is greater productivity increase in manufacturing. So if
we achieve stability in manufactured goods prices, which might
be reflected in an unchanged producer price index, the consumer
price index would go up a bit because of services.
I once said that we ought to be satisfied if ordinary people
and businessmen don't feel they must assume prices are going to
change when they're making their investment and spending decisions.
That may roughly accord with stability in wholesale price index.
I think Alan Greenspan cited a somewhat similar qualitative definition
Can we get there? I think we've learned it's pretty hard to
get that last mile. Not just in the United States, but in other
countries. Why that is, is an interesting question which I've
thought about a lot. How can people and nations deal with extreme
inflation and do 90 percent of the job, or do 95 percent of the
job, of getting back to price stability, while they very seldom
get all the way there, even the way I defined it. That is true
partly because in this day and age people don't really expect
a deflation. Wage earners are not going to take reductions in
wages generally, or forgo what they consider minimal increases.
They do sometimes in particular firms, of course, in extremis,
but not generally, when the economy, is growing and jobs are available.
Productivity growth has been slow, which doesn't help. In any
event, it's very hard to get down statistically that last little
bit. But I think in the United States we can come pretty close
to the general definition that I gave you.
Region: On the regulatory side at the Federal Reserve
we are working on the implementation of the Federal Deposit Insurance
Corp. Improvement Act (FDICIA). Some argue that it was the right
medicine and others say, it's a clear example of regulatory overreaction.
Most agree that it did little to change the nature of deposit
insurance. What's your reaction to this new legislation and should
it have included more reliance on market discipline?
Volcker: I don't follow these things as closely as I
used to, so you're getting a little bit beyond where I can speak
with any authority. I do have a sense, and I have testified a
couple of times to that effect, that we do need more thoroughgoing
reform of deposit insurance. That was just left out. How many
deposits should be insured? When? How? Should there be new policies
or arrangements with respect to how we protect bank depositors
in the banking system?
I think some small change has been made, but the big issues
were left out or carried over. So I think there's still some work
to be done.
I do have a feeling in the pit of my stomach, now that I'm neither
on the giving or receiving side of regulations, that there's an
awful lot of rigidity in the new legislation: too many rules that
are bound to be arbitrary. I understand why they're there. It's
a reaction to a feeling that people didn't or couldn't act soon
enough, decisively enough, in dealing with the problems as they
emerged in the S&L and banking industries. I know that some
discretion is left, but there are so many statistical guideposts,
I think it is going to be hard for the regulators and supervisors
not to be more arbitrary than necessary or desirable. So I worry
Region: While working for the Treasury you were the principal
U.S. participant in international negotiations during the transition
from the Bretton Woods fixed exchange rate system to the more
flexible system of floating rates. After two decades of "flexible"
do you think serious consideration should be given to a return
of the fixed rate?
Volcker: I don't really think the world is ready for,
as you say, serious consideration of a return to fixed rates for
the world generally. Obviously, there is serious thinking of fixing
rates within Europe, and some particular countries want to fix
their rate to other countries. I could foresee the day when Mexico
might re-fix their rate to the dollar and perhaps even the Canadians
will, although there are political as well as economic issues.
But, when you talk about fixed rates generally, as at least in
the idealized picture of the gold standard or the early days of
the Bretton Woods system, I don't think it's going to happen for
a long while, even though I personally would think that's a good
way to ultimately organize the system.
Region: It's reported that you were initially reluctant
to accept the argument for floating rates.
Volcker: Oh, I grew up in the Bretton Woods system, and
I learned that was the best way to organize things and that those
arrangements were a great achievement in international cooperation
and organization. That's the way I was schooled. That's the way
I learned it in the Treasury, and I very much was sorry to see
the system break up. In the end I strongly advocated that we float
for a whilesuspend gold payments and float as a means of
transition to a new systembut I was worried about the instability
that might follow. I looked to an early reform of the system that
would maintain fixed "par values" as the center of gravity of
the system. That didn't work out, and, of course, we have had
a great deal more instability in floating exchange rates than
the advocates ever assumed would take place.
Region: Knowing that you are intimately involved in financial
matters of Europe, we would be curious to hear your point of view
on European monetary union. It appears to be falling apart. Should
we be concerned?
Volcker: Twenty years ago I was more than a little skeptical
about the Common Market. But my general feeling is that it's gone
so far toward integration, and the implications for greater political
cohesion are such that they ought to take the final leap toward
monetary union. I am more supportive of that than many of my European
central banking friends; I don't have to worry so much about the
position of individual countries. It seems to me that if they
really want a unified market, and if they really want to work
more toward political unity, the obvious corollary of that is
monetary union and the quicker they get there, the better.
The EMS [European Monetary System] may not be the worst of all
worlds, but it is basically flawed the way it's operating. In
concept, the E.C. members were quite determined to maintain stability,
but yet they insisted upon maintaining independent currencies.
That always left open the question that there would be changes
in relative exchange rates. When the pressure becomes great, speculation
begins and may accelerate, making it very difficult to maintain
the fixed exchange rates that they say they want. If the Europeans
really want fixed rates, then they might as well go to a common
currency, a unified central bank, and get it done, and accept
the corollary, which is a common monetary policy for all of Europe.
Now, de facto, they have tended to have a common monetary policy
dominated by one of the central banks, the Bundesbank. But at
times the tensions get very great, and the stability breaks down.
My sense is they better move forward toward a common currency
or they're going to go backward toward more instability. Of course,
in the last couple months they have gone backward.
Region: But not backward so far as that you'd say it's
Volcker: There are and will be strong pressures, but
I think it's too much to say the European exchange rate system
is falling apart since the central relationship between the mark
and the French franc has held. That was under strong attack, as
you know, but for the time being at least the pressures have been
contained and dissipated.
Region: Here's a question on Fed independence and the
role of district bank presidents. Do you think the bank presidents
should be appointed by the president of the United States?
Volcker: I think the Federal Reserve is strengthened
by the fact it has this regional structure and the bank presidents
participate in monetary policy and other decisions. I think you
would lose some of the sense of independence, frankly, if the
president appointed the bank presidents as he appoints members
of the Board of Governors. You might not lose it entirely, but
certainly to some extent the tradition would be weakened. So I'd
rather it stay as it is.
We actually had a constitutional challenge, you may recall,
a few years ago, to the present arrangements, that required a
lot of attention. In the end, the challenge was turned back, at
least in district court, and the decision wasn't appealed. I hope
the matter remains a legal matter. We still have the political
question settled but Congress can always change it.
Region: And it does seem to pop up in legislative proposals.
Volcker: It does. The problem, in a way, is maybe less
a constitutional issue, which I hope has been put to bed, than
the seeming anomaly or peculiarity of private bankers or private
businessmen serving on the boards of the regional banks taking
the initiative in the appointment. I have wondered many times
whether there's any other way of doing it, but I haven't come
up with a better system. But if the present arrangements are to
be sustained, it's very important that that responsibility, as
other responsibilities at the regional level, be conducted in
a way that doesn't raise any questions about integrity, probity
or political influence.
Region: The Federal Reserve is in the process of consolidating
its mainframe computers to just a few from at least one in each
district. And in other areas, like the processing of savings bonds,
a similar consolidation process is under way. Most would agree
it's an organizational trend. Is it a good one in your estimation?
Volcker: I don't know precisely what the situation is
now, but there have always been tensions, obviously, between centralization
and regionalization. New technology, computerization and data
processing, economies of scale have, I think, increased the arguments
for centralization as a matter of efficiency. The consequence
is reduced autonomy in some areas, but if it's more efficient,
it's hard to say you shouldn't have some consolidation of these
computers. The bigger question underneath is whether, in this
day and age or if you were starting again, would you have 12 Federal
Reserve banks on either efficiency or policy grounds?
Minneapolis is an interesting case. It's the smallest of the
Federal Reserve banks. It probably has the strongest regional
roots of any of them in my experience. There's great pride in
Minneapolis in the local Federal Reserve bank, and the Federal
Reserve bank is integrated into the community better than it is
elsewhere. That kind of regional role I think is an important
element in the strength of the System. So here you have the smallest
of all the Federal Reserve districts in population, not in area,
being a strong example of the role a Federal Reserve bank can
play. When I look at the whole thing, I don't see the point in
changing the system until it's more visibly broken than it is
now, even though if we started from scratch we might not replicate
exactly what we have today.
Region: Several years ago you began an essay by saying,
"My perceptions of central banking have changed since the days
I practiced that honorable profession." How would you describe
Volcker: I'm not sure it's changed a whole lot. It is
always true that when you're outside the central bank, and being
regulated by the central bank or being regulated by anybody, you
always think there is a tendency in banking or elsewhere to regulate
too much and too arbitrarily. When you're inside the institution
you may be concerned that you don't want to regulate too much
or too arbitrarily, but the political pressure is usually to regulate
more than necessary or desirable. However, I doubt that's what
you had in mind when asking this question of me.
More broadly, interestingly enough except in the United States,
much more emphasis is being placed on the need for central bank
independence. We in the United States have one of the most independent
central banks, but the question is raised sometimes as to whether
we should curtail that independence somewhat. In most other areas
of the world there has in recent years been more consensus on
the importance of central banking independence and a tendency
to strengthen it. You see that very strongly in the construction
of the potential new central bank in Europe. There is great emphasis
on the importance of price stability as a prime objective of the
central bank, and that goes hand in hand with a strong and independent
central bank. They plan for a strong and independent European
central bank even before they have a European government, at least
a government in the sense you'd think of it in a nation. In a
way, that seems to put the cart before the horse.
Region: It's an interesting thought. If you make it independent
before you form the government, from what is it independent?
Volcker: I think the answer is they want to make it independent
of the individual governments and the political pressures within
those governments. In the design, they have tried to make the
proposed central bank independent two or three times over. The
heads of the national central banks will participate in policymaking
as the regional Reserve bank presidents do in the United States,
but the national central banks must themselves be independent
of protections for the central body being independent. So you
get independence built on independence.
Region: You have been working with the Russians to help
them through the transition to a market economy. What role have
Volcker: Working with the Russians is an exaggeration.
I have an official title as advisor to the Russians, but it's
been limited. I go over there once in a while and have good opportunities
to consult with their leaders. In substance, if I've been helpful
at all, it's been mostly in the area of their external debt and
the problems of negotiating or renegotiating the terms of their
debt. Otherwise I really can't say I'm deeply enough involved
to claim any really significant contribution.
Region: In addition to your chairmanship of James D.
Wolfensohn Incorporated, your current list of activities is long
and impressive. You serve as chairman of the North American Committee
of the Trilateral Commission, the Group of 30, the Advisory Boards
for the Center for Strategic and International Studies, and the
Arthritis Foundation. And that's not to mention the organizations
for which you co-chair or serve as a director. Which of these
has been the most engaging?
Volcker: Even with that list, you have left out a few
things, which illustrates the problem. I try to do too many of
these things, probably more than I can do effectively. I ought
to cut down, but I don t seem to be disciplined enough to say
no, enough is enough.
Region: In high office you served under five presidents.
With whom did you have the greatest rapport?
Volcker: I was in quite different positions with the
five presidents. I was a young man initially and had no real contact
with President Kennedy. I did see President Johnson in action
in a number of meetings, but there was no opportunity for personal
rapport. As under secretary of the Treasury, I did at times have
to deal with President Nixon, but I certainly wasn't close. The
one I saw the most of in a substantive way, but for a limited
period of time, was President Carter. The election oratory implying
that everything that happened during the Carter years was bad
irritates me a bit. The implication that Carter was a failed and
ineffective president strikes me as overdone.
Region: Words commonly used to describe you are discreet,
honest broker and pragmatist. What would be your self-characterization?
Volcker: One's impression of oneself may always differ
from other people's impressions. I do think that I am discreet.
I certainly am a pragmatist at times; I try to find a consensus
solution or a way for people who may disagree to proceed. But
I also think on some basic points that you better not be a compromiser.
These may range from the importance of the central bank working
toward price stability to the importance of government institutionscertainly
including the Federal Reserve Systemof maintaining integrity
on a personal basis. There is no room for partisan political judgments
in the decisions or operations of the Federal Reserve System in
my opinion; if that kind of ethic breaks down in the regional
banks, you're in trouble.
Region: When reading your biographical material, one
comes across "little mysteries." One of them is about your studies
at the London School of Economics when you were researching postwar
British monetary policy for a doctoral dissertation. It's reported
that instead of completing the research, you "found things other
than economic research to do in London." For a man so dedicated
to economics, what could have possibly have drawn your attention
away from study?
Volcker: There's no great secret. I didn't make any trips
to Moscow! I did make a few trips around Europe. But London was
and is a huge, wonderful city. It was the first time I lived outside
the United States. I guess it was the first time I'd been outside
the United States other than Canada. I found a big world out there.
I got interested in participating in student and other life in
and around London. I didn't work as hard as I should have on my
thesis. It remains undone. Maybe someday!
Region: Nothing particular, it was just exploring a new
Volcker: I've never terribly regretted that. I guess
the lack of a Ph.D. hasn't interfered with my career all that
much. But it made a lasting impression to be put in another culture
as a young man. Obviously the British culture (or language!) isn't
180 degrees different from the United States. I could have gone
to much more different places than London or even the continent
of Europe. But Britain was different, and did give me a new perspective.
I know it's a cliche, but it does makes you appreciate the values
and achievements of the United States more when you live abroad.
Region: A little bit about your book, Changing
Fortunes. The reviews I read seemed quite favorable.
Volcker: I hope it's available in Minneapolis.
Region: It sure is. We have a copy in our library.
Volcker: One copy?
Region: In our bank library, that is.
Volcker: You tell Gary Stern the bank should buy more
than one copy.
Region: Yes sir ... How did that book come about?
Volcker: The question of writing a book had come up lots
of times from friends, but I've never had any driving desire to
write a book. But this arose quite by accident in the sense that
Toyoo Gyohten, my co-author, was spending a year at Princeton
after he left the Japanese Finance Ministry. I had known Toyoo
for some time, and we were asked to give some lectures together
basically reviewing post-war international monetary developments
from the Japanese and American perspectives. I got the idea that
if we were going to give the lectures, we might as well put a
tape recorder in the room and record all these thoughtful words,
put it together, and we'd have an easy book. So we did it. But
of course if wasn't nearly as easy as my little illusion suggested.
Toyoo was much more coherent than I, but the transcript needed
a lot of revision. All the questions and answers were worked back
into the lecture with the help of our editor. I realized it didn't
read very well, so I put the whole thing aside for six months.
The publisher finally got after me. I did a quick rewriting of
the lectures. And that's the book.
I hope it provides some insights into what went on in the post-war
period. Obviously the publisher wants to sell the book, but we
were hoping that it might be used in courses in international
finance at universities. I think it will be out in paperback shortly.
So if it has a life in universities over the next few years, it
will have served its purpose. But I must confess the reviews were
Region: And the reaction to the book itself has been the
Volcker: I got some letters from friends that said they
were delighted to read the book. I'm not much of a judge of these
things, but I'm told it has sold well for a book of this sort.
It was not heavily promoted, but it has sold up to the expectations
of the publisher or beyond so far.
The main reaction I got was that I wasn't forceful enough in
making my points in the book, and that I should have gotten more
gossipy and more critical of people. I didn't perceive it as that
kind of a book.
Region: During your career you were lured away several
times from public service by Chase Manhattan Bank, but always
returned. For some time now you have been in the private sector.
Should we expect that you might soon be returning to the world
of public policy?
Volcker: Public service? No, other than as an avocation.
There are all these other things I get involved in.
Region: At the very end of most of your biographical
information, your three grandchildren are mentioned. Tell us about
Volcker: On my three grandchildren, I'll say what you
expect. But in this case it happens to be true! They're all sons
of my daughter. The oldest one is now 9, and the youngest is 1.
Their father is quite an athlete, and my daughter is interested
in it, too, so they spend a lot of timesoccer, tennis, swimming
and that kind of thing. The oldest one is obviously brilliant
and the second is coming along!
Region: Do they get some quality time with grandpa every
once in a while?
Volcker: Well, I'm not in Washington any more, so I see
less of them and the 1-year-old is a bit of a strangerhe
still doesn't feel very at home with grandpa. Leave him alone
with grandpa, he's apt to cry, (Chuckle) But he's terrific. They
all obviously have some of my genes, and they are well on the
way to being a basketball team.
Region: It's reported that one change you've made since
your days as the Fed chairman has been a serious upgrade of your
fly fishing tackle. That must mean that fishing is still a great
passion of yours?
Volcker: Well, I did more salmon fishing for a variety
of accidental reasons than I've ever done in my life, including
a week in Russia. They've just opened up some Atlantic salmon
fishing in the Kola Peninsula, which is up between the White Sea
and the Barents Sea, north of the Arctic Circle. It's the second
year for a fishing camp built out of nowhere. It was an interesting
experience to be out there in the wilds of Russia.
The salmon are a little bigger than the trout I occasionally
catch in Montana. My connections with the Ninth Federal Reserve
District were deepened by the fact that you've got the best trout
fishing in the United States. I regret I no longer have a district
Federal Reserve bank or branch to go visit, and just incidentally
try to catch a fish or two.
Region: Thank you Mr. Volcker.