(Bloomberg Opinion) -- With the passing of Paul Volcker, a true public servant has departed. Mentor and role model to so many, Paul exhibited wisdom and longevity in equal measure. His contributions to central banking, and economic policy-making more generally, were truly extraordinary.
I first met Paul in 1991 just after I joined the Bank of England. During one of his frequent visits to London (where he’d studied at the London School of Economics) he asked Marjorie Deane of The Economist to arrange a dinner. At the end of the evening Paul, as host, was determined to pay the bill. But he carried neither cash nor cards, only a check book — and dollar checks at that. Unfortunately, the restaurant wouldn’t accept a dollar payment, so I paid with a sterling credit card and Paul gave me a U.S. check. This suited me fine because as a new recruit I’d just applied for an account at the Bank of England and been asked, rather sniffily, how I intended to open it. What better way than by depositing a check from the celebrated former chairman of the Federal Reserve?
I luxuriated in this coup for two weeks. Then I received a letter from the chief cashier’s office saying the check had bounced. It turned out that Paul had forgotten to date it. Should I write — to Paul Volcker, for heaven’s sake — pointing out that his check had bounced, or just accept the loss? After some thought, I hit upon the solution, and sufficient time has passed, I hope, for me to say what it was without fear of prosecution. I dated the check myself and returned it to the Bank of England, where it was accepted without question. The episode taught me a lifelong lesson: To be effective, regulation should focus on substance not form.
As a bank regulator, Paul showed that personal authority and moral courage were far more valuable than any number of sophisticated calculations of capital requirements. He was deeply skeptical of sophistry, and this served him and the U.S. well. For as long as I can remember he pointed to the fragmentation of the U.S. regulatory system, which enables banks to play off one regulator against another and undermines the authorities’ ability to shame institutions into behaving properly. He bemoaned this fragmentation to the end. An appropriate memorial would be a presidential and congressional alliance to unify the U.S. regulatory structure.
As Paul described in his memoir, Keeping At It, personal friendships in the international monetary arena greatly facilitated the system’s operation — something I came to see for myself. For Paul, the dismantling of the Bretton Woods system of fixed exchange rates (an inevitable break-up, given the differences between the domestic policies of participating nations) was a “searing experience.” America’s unilateral action put friendships abroad under strain, but behind the scenes during those dark days of tariffs and wage and price controls, Paul maintained relationships that soothed the feelings of betrayal.
The Smithsonian Agreement of December 1971 tried to substitute a dollar standard for the gold standard. It didn’t last long. In March 1973 exchange rates were floated. The following decade was one of high and volatile inflation, which ended with the adoption of policies to limit domestic monetary growth. Volcker established his reputation at the Fed as an inflation fighter between 1979 and 1983, when short-term interest rates rose to more than 20% and double-digit inflation was conquered. That episode did more than anything to convince people of the need for the Fed’s independence. And it proved how vital it is for central bank heads, in particular, to resist political pressure, often from the very top. Few have been able to withstand the kind of pressure that Paul shrugged off in his successful battle against inflation.
Volcker’s life after the Fed gave new meaning to the phrase “portfolio career.” Rarely can one person have had more commissions and committees named after him. The Independent Committee of Eminent Persons investigation into how Swiss banks handled funds of Holocaust victims was challenge enough. But it was followed by the investigation into alleged corruption in the United Nations’ Oil-for-Food program, and the chairmanship of the independent review into the World Bank’s Department of Institutional Integrity (which was tasked to weed out corruption in the use of Bank funds). He led the Trilateral Commission and the G30 group of senior monetary and finance officials. Throw in his work on accounting standards and numerous charities, and you see why Paul had too little time to indulge his fondness for fly-fishing.
In 2008 President Barack Obama brought him back into government to advise on reform of financial regulation. Paul’s deep belief that banks shouldn’t speculate with other people’s money led to the proposal to separate proprietary trading from commercial banking — the “Volcker rule.” The lobbyists got to work immediately, but the spirit of the rule will survive and, I predict, will return in full after the next crisis.
In his final years, Paul returned to the central theme of his career and set up the Volcker Alliance to foster better management in government. There’s no worthier cause: The prevailing paralysis in both Britain and America testify to the need not just for better political leadership, but also for greater competence and wisdom in the civil service.
Integrity was the watchword of Paul’s career. Toward the end of his life, he wrote that Washington had become “dominated by wealth and lobbyists who are joined at the hip with the Congress and too many officials. I stay away.” Few in the public arena are as committed as he was to resist the temptations afforded when finance meets politics.
Paul Volcker’s integrity and courage should stand as an inspiration to central bankers and public servants everywhere.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Mervyn King is a Bloomberg Opinion columnist. He is a member of the U.K. House of Lords, and a professor of economics and law at New York University. He was governor of the Bank of England from 2003 to 2013.
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