The Volcker Way
AUSTAN GOOLSBEE is Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business. He served as Chair of the U.S. Council of Economic Advisers in 2010-11. Follow him on Twitter @Austan_Goolsbee.See more by this author
The global economy was not the only casualty of the 2008 financial collapse. The crisis also soiled the reputations of many in the financial industry and of the regulators, political leaders, and media outlets that were supposed to keep them in check. So William Silber's new biography of Paul Volcker, one of the last remaining heroes of modern finance, could not have come at a better time.
Silber, an economist at New York University, uses his book to walk the reader through some of the important episodes in Volcker's long and storied career, during which he served in five U.S. administrations. These episodes include his stint as undersecretary for monetary affairs at the Treasury Department, from 1969 to 1974, when the United States abandoned the convertibility of the dollar into gold; his successful crusade against inflation as chair of the U.S. Federal Reserve in the 1980s; and his work following the recent financial crisis, when he backed the provision now called "the Volcker rule," which bars commercial banks from engaging in proprietary trading (investments that banks make for their own profits, not on behalf of clients).
By focusing on these moments, Silber's meticulously researched book offers useful insights into recent American economic history and the life of one of its most fascinating figures. Although the details of these episodes may seem distant, Volcker reminds readers just how precarious the circumstances were -- and how policymakers might confront similar crises in the future.
PRESENT AT THE INFLATION
The book's first major episode begins with Volcker in the Kennedy administration's Treasury Department and follows him over several years as he became the central character in a crisis of the international monetary system. The Bretton Woods arrangements, set in place following World War II, had pegged the value of the U.S. dollar to gold and the value of other currencies to the dollar at fixed exchange rates. The system survived with only occasional hiccups for roughly two decades, but as the Vietnam War escalated, the U.S. economy began to overheat and experience inflation. Without faster productivity growth or the ability to devalue its currency, the United States saw its exports grow increasingly uncompetitive, and investors began fleeing the dollar in favor of other currencies or gold.