Hello, and welcome to Investor’s Bookshelf.In this episode, we’ll be exploring The Power of Volcker: Paul Volcker and the Financial World He Changed.
Who was Paul Volcker? From 1979 to 1987, he served as Chairman of the Federal Reserve, preceding Alan Greenspan. This book is essentially Volcker’s biography. How important was he? People called him America’s “financial giant,” partly because he stood over two meters tall—commanding attention wherever he went—but more importantly because he repeatedly turned the tide in moments of crisis, steering the United States out of danger. He is regarded as both a “hero of America” and “the greatest Fed Chairman in history.”
Since the 1970s, the United States has weathered three major economic and financial crises. The Power of Volcker recounts in detail how Volcker played a pivotal role in each, the decisions he made, and the actions he took.
The first crisis came in 1971, when the international monetary system—the Bretton Woods system—collapsed overnight. Amid global panic, Volcker, serving as President Richard Nixon’s monetary envoy, engaged in intense negotiations with European heads of government, helping to stabilize the international financial order. In the aftermath, the U.S. dollar replaced gold as the anchor of the global monetary system, ushering in the era of dollar hegemony.
The second crisis was the prolonged stagflation of the 1970s and 1980s. “Stagflation” is an economic term referring to the coexistence of economic stagnation (“stag”) and high inflation (“flation”). This was a stubborn affliction for the U.S. economy and notoriously hard to cure. After becoming Fed Chairman, Volcker successfully tamed inflation, pulling the economy out of recession and setting the stage for a 20-year period of sustained prosperity.
The third crisis was the 2007 financial meltdown. By then, Volcker was in his eighties, yet he returned to the forefront as a key figure in President Barack Obama’s efforts to stabilize the financial system.
Seen in this light, this book is not only a biography of Volcker’s career but also a chronicle of America’s most significant financial events over the past half-century. Through Volcker’s story, readers gain a deeper understanding of modern U.S. financial history.
The author, William Silber, is no ordinary writer. Silber is a professor at NYU’s Stern School of Business—and notably, a former teacher of Alan Greenspan. After leaving the Fed, Volcker himself served as a visiting professor at Stern, making him Silber’s colleague. Silber has also served as an adviser to the Federal Reserve and as an economist on the President’s Council of Economic Advisers, making him an “insider” at the highest levels of the U.S. financial world.
To write this book, Silber conducted over 100 hours of private interviews with Volcker and consulted thousands of previously unpublished documents from the U.S. Treasury and the Federal Reserve, giving the work substantial historical value.
A word of advice: this session’s discussion is slightly more challenging, as it involves a considerable amount of financial terminology. I strongly suggest you find an uninterrupted time to read and fully concentrate.
Part One
Let’s begin with the first crisis—the collapse of the Bretton Woods system.
You’ve probably heard the term “Bretton Woods system” before. It refers to the post–World War II international monetary order. Under this system, each country’s currency was pegged to the U.S. dollar at a fixed exchange rate, while the dollar itself was pegged to gold at a fixed price—US $35 per ounce. The U.S. government pledged that foreign central banks could, at any time, exchange their dollar holdings for gold at this rate.
In essence, the Bretton Woods system indirectly restored the pre–World War I gold standard by linking other currencies to gold through the U.S. dollar. Why didn’t countries simply peg their currencies directly to gold instead of going through the dollar? The answer: they couldn’t.
After World War II, roughly 75% of the world’s gold reserves had flowed into the hands of the war’s biggest victor—the United States. No other nation could credibly guarantee the ability to redeem its currency for gold at will. Thus, by pegging national currencies to the dollar and the dollar to gold, Bretton Woods simulated the effect of the gold standard. The system’s survival hinged on a single, non-negotiable promise: one ounce of gold would equal US $35.
From 1944 to 1960, the Bretton Woods system ran smoothly. During that period, Europe and Japan were still struggling with postwar reconstruction and desperately needed U.S. dollars to purchase American goods and industrial equipment. Dollars were in short supply, the dollar was strong, and maintaining the fixed gold parity was easy. But from 1958 onward, the tide began to turn.
By then, European production had largely recovered, and Europe began exporting heavily to the United States. Meanwhile, U.S. products had become less competitive, and the country slipped into a balance-of-payments deficit. This meant that foreign central banks were accumulating ever-larger dollar reserves, yet were in no rush to spend them on American goods. The oversupply of dollars put downward pressure on its value.
International speculators saw the writing on the wall. They bet the U.S. government would be unable to hold the $35 per ounce peg and that the dollar would devalue. In October 1960, they launched a speculative assault, dumping dollars and hoarding gold. On October 20, the London gold fixing price soared to $40 per ounce—the first postwar dollar crisis. The U.S. government was forced to deploy its gold reserves, selling large amounts of gold to buy back dollars and force the price back to $35. The cost was a sharp reduction in America’s gold reserves.
This episode left a deep impression on Paul Volcker. At the time, the 33-year-old Volcker was working at Chase Manhattan Bank. When a colleague told him gold had shot up to $40 an ounce, he was stunned: “Impossible—you must mean $35.40.” He had no idea that barely a year later, he would join the U.S. Treasury, tasked with managing America’s gold reserves and fending off dollar crises. A storm was brewing.
Sure enough, in 1965, French President Charles de Gaulle openly challenged the rationale of the Bretton Woods system. He argued that Western Europe’s economy had recovered and its gold reserves now nearly matched those of the United States. Therefore, European currencies no longer needed to be tied to the dollar. De Gaulle ordered all 25,900 gold bars that France had stored in U.S. vaults to be shipped back to France—an event that rattled global confidence in the dollar.
Then in 1968, speculators mounted a second wave of dollar selling. This time, they doubted that even exhausting America’s entire gold reserve could keep the $35 peg intact for long. On March 15, under heavy speculative attack, President Lyndon Johnson asked Queen Elizabeth II to order an emergency two-week closure of the London gold market. During that break, central bankers agreed to a “two-tier” gold price system: central banks would continue settling transactions at $35 an ounce, but private gold prices would be left to the market.
By then, Washington knew the Bretton Woods system was unsustainable. The question was: what would replace it? The responsibility fell squarely on Volcker. In January 1969, shortly after becoming U.S. Under Secretary of the Treasury, he was personally instructed by Henry Kissinger to form a working group to study options for reform. Volcker had three choices:
- Keep fixed exchange rates against the dollar, but raise the official dollar-gold price—for example, from $35 to $70 per ounce. In effect, all currencies, including the dollar, would devalue equally against gold, reducing the pressure to maintain the peg.
- Keep the $35 gold price but revalue certain strong currencies upward against the dollar, such as the Deutsche Mark and the Japanese yen. This would make U.S. exports more competitive, shrink America’s trade deficit, and stabilize the dollar.
- Abolish fixed exchange rates entirely and adopt a floating exchange rate system, the policy advocated by monetarist Milton Friedman.
Volcker quickly dismissed the first option—raising the official gold price—arguing that it would only encourage further speculation. Doubling the gold price would also hand windfall gains to major gold producers such as the Soviet Union and South Africa, and to gold-hoarding nations like France—outcomes Washington wanted to avoid.
He was also skeptical of the third option, free-floating exchange rates. While simple in theory, he believed they carried high long-term costs. Without a fixed benchmark, exchange rates would swing wildly, inviting speculation and raising economic uncertainty.
That left only the second option: devalue the dollar against strong currencies like the Deutsche Mark and yen, curbing those countries’ exports and boosting America’s. But Volcker recognized this as a slow-acting remedy—too slow to prevent U.S. gold reserves from being depleted before it took effect. Therefore, in his report to President Nixon, he dropped a bombshell: if faced with an emergency, the United States should consider suspending the dollar’s convertibility into gold.
This was nothing short of tearing up the Bretton Woods agreement unilaterally—an act akin to dismantling a fortress from within. Its impact on America was unpredictable. Then-Fed Chairman Arthur Burns vehemently opposed it, and Nixon himself hesitated. But Volcker was convinced that ending gold convertibility would not destroy the dollar’s reserve-currency status. In his view, that status ultimately rested on America’s economic and political power. As long as the United States remained strong, central banks would have no choice but to hold dollars as reserves. Nixon was ultimately persuaded.
It must be said that for other members of the Bretton Woods system, Volcker’s proposal was unfair. Their vast dollar holdings would no longer be redeemable for gold, exposing them to heavy losses. Yet history unfolded as Volcker predicted: rather than revolt, other countries quietly accepted the new reality.
All that remained was to wait for the right moment. In May 1971, a third wave of speculation against the dollar erupted, sending shockwaves through global financial markets. Several European countries shut down their foreign exchange markets entirely. This was the “emergency” Volcker had warned about. Nixon seized the opportunity. On August 15, he decisively announced the suspension of dollar-gold convertibility.
At once, Volcker—acting as Nixon’s monetary envoy—rushed through Europe’s capitals to reassure leaders and calm markets, preventing deeper turmoil.
The result was a spectacular success: after the Bretton Woods system collapsed, the dollar’s position was not only unchallenged but actually strengthened. The dollar replaced gold as the world’s de facto reserve currency. From then on, the United States could run persistent trade deficits without fear of exhausting its gold reserves. On this achievement alone, Volcker earned his title as “America’s hero.”
Part Two
Paul Volcker’s second great rescue came eight years later, in 1979. That year, President Jimmy Carter appointed the 52-year-old Volcker as Chairman of the Federal Reserve. On the surface, it was a promotion, but at the time the Fed chairmanship was a political hot seat. The monetarist Milton Friedman is said to have sent Volcker a “condolence” letter upon his appointment—an expression of sympathy for the ordeal he was about to face. Why?
Since the early 1970s, U.S. inflation had been spiraling out of control. By the time Volcker took office in 1979, the inflation rate had reached a staggering 12%. For comparison, U.S. inflation over the past decade has hovered around 2%—illustrating just how alarming the situation was. Combating inflation was widely viewed as the Fed’s primary responsibility. Volcker’s two immediate predecessors had tried and failed; inflation kept climbing. Many were waiting to see Volcker stumble.
You might wonder: is fighting inflation really so difficult? Even without advanced economics training, most people could reason that raising interest rates, tightening monetary policy, encouraging saving, and discouraging spending should tame inflation. The problem was that this wasn’t just inflation—it was stagflation: high inflation coupled with stagnant economic growth and high unemployment.
For a president worried about re-election, the instinct was to pressure the Fed into keeping interest rates low to stimulate growth. This created a dilemma: tighten monetary policy, and you might control inflation—but at the cost of a short-term recession and higher unemployment, damaging the president’s approval ratings. Loosen policy, and you might boost growth in the short run—but at the cost of worsening inflation and undermining long-term economic health.
Volcker’s predecessors had both buckled under White House pressure. They would publicly commit to tightening, only to reverse course, and inflation would climb even higher.
Now the ball was in Volcker’s court. The world was watching. A staunch inflation fighter, Volcker never doubted the need for tighter money. The question was how to do it while minimizing political resistance.
At first, Volcker tried a gentle approach: he proposed raising the Fed’s discount rate by 0.5 percentage points to 11%. The discount rate is the rate at which the Fed lends to commercial banks. By his reckoning, it was a modest hike. But of the seven Fed governors voting, three opposed it. In other words, his proposal nearly failed. The dissenters argued that the discount rate was already at a historic high, and further hikes might deepen the recession without curbing inflation.
The press cast the vote as a challenge to the new chairman and a sign of division within the Fed. If Volcker pushed for more rate hikes, he risked outright defeat internally. With the direct path blocked, he began planning a bolder move.
On October 6, 1979—exactly two months into his term—the Fed held an emergency press conference to announce a major shift in monetary policy. In short, the Fed would stop targeting interest rates to influence the money supply. Instead, it would directly target the growth of the money supply, letting short-term rates fluctuate within a broad range.
The logic was straightforward. A monopoly can raise prices directly and draw criticism—or it can quietly restrict supply, letting scarcity drive prices higher. Similarly, by capping money supply growth and creating scarcity, the Fed could let market forces push interest rates up, sparing Volcker the political cost of calling for overt rate hikes. Crucially, Volcker secured unanimous backing for this plan by consulting every Fed governor in advance.
The abrupt policy shift shocked the media. The New York Times dubbed it “Mr. Volcker’s Verdun,” invoking the World War I battle where French commander Philippe Pétain held the line at the cost of 350,000 casualties—suggesting Volcker’s credit squeeze might inflict similar economic pain. Others called it “a deal with the devil.” Volcker’s own reply: “Sometimes you have to deal with the devil.”
Criticism rained down—not just from the press but from Capitol Hill. Some lawmakers even talked of impeaching him. After Carter lost his re-election bid, he reportedly blamed Volcker’s tight-money policies for his defeat, calling Volcker’s appointment his biggest mistake.
But Volcker remained convinced he was right. Tight money was bitter medicine, but the cure required persistence. What he didn’t anticipate was that Ronald Reagan’s presidency would pose an even greater challenge.
Determined to revive the economy, Reagan pushed through his celebrated tax cuts, slashing personal income tax rates—a move wildly popular with the public. The problem: tax cuts meant lower federal revenues. At the same time, Reagan ramped up defense spending, producing yawning deficits and forcing the government to issue large amounts of new debt. That, in turn, risked rekindling inflation.
In essence, Reagan’s fiscal expansion conflicted with Volcker’s anti-inflation goals. Volcker faced two options. One: accommodate the president by having the Fed buy up the new Treasury debt—a process known as monetizing the deficit—which would expand the money supply and push inflation higher. Two: refuse to monetize the deficit, knowing it could cost him his job.
He chose the second. Volcker told the White House: cut taxes if you wish, but match them with spending cuts to keep the budget balanced. He knew this was politically impossible. Indeed, during Reagan’s tenure, the federal deficit surged from over $70 billion to $200 billion. Volcker held firm: issue bonds if you must, but the Fed won’t fund them—go borrow from abroad. The administration turned to Europe and Asia, and from that point U.S. external debt began its long climb.
Under these conditions, Reagan’s tax cuts were unsustainable. A little over a year later, he was forced to raise taxes to stem the worsening deficit. He seethed at Volcker, vowing to replace him when his first term ended. But by then, Volcker’s campaign against inflation was paying off: by mid-1983, the annual inflation rate had fallen by two-thirds, to just 4%, and the economy was emerging from recession.
Volcker’s first term as Fed Chairman ended at this moment of success. Public support was strong; polls ranked him as the most influential American after Reagan. For the president, forcing him out risked derailing the recovery and hurting his own re-election prospects.
After much weighing of the political costs, Reagan grudgingly reappointed Volcker. One telling detail reveals his reluctance: instead of the usual formal White House ceremony for such appointments, Reagan slipped the announcement into a routine radio address while vacationing at Camp David. Volcker understood the slight, but with his anti-inflation mission unfinished, he chose to stay and consolidate the gains.
Part Three
In this final part, we turn to Paul Volcker’s departure from the Fed and the 2007 financial crisis. Although these events were separated by two decades, an invisible thread connects them.
First, why did Volcker choose to step down immediately after his second term as Fed Chairman ended? As mentioned earlier, the Federal Reserve Board has seven governors, each appointed by the president for a 14-year term. These terms are staggered so that any one president can appoint only two governors per term. Reagan, having served two terms, was able to appoint four governors. That meant a majority of the Board’s seven members were Reagan appointees—enough to challenge Volcker’s authority.
In February 1986, during a vote on the discount rate, the Board rejected Volcker’s recommendation by a 3–4 margin. The press dubbed this an “internal coup,” signaling that Volcker had lost control of the Board. Then in May 1987, the governors again disregarded his position, this time voting to loosen bank regulations—a decision with far-reaching consequences. This was the breaking point that prompted Volcker’s resignation.
What exactly did that May vote decide? Some background: in 1933, amid the Great Depression, President Franklin D. Roosevelt signed the Glass–Steagall Act, which required a strict separation of banking activities. A financial institution could either operate as a commercial bank, taking deposits and making loans, or as an investment bank, trading and underwriting securities—but not both. For more than half a century after Glass–Steagall’s enactment, the United States avoided any Depression-scale financial collapse.
The May 1987 vote effectively chipped away at Glass–Steagall by allowing firms such as Citibank and J.P. Morgan to underwrite securities. Volcker strongly opposed the move, foreseeing the risks of deregulation. But as a minority voice on the Board, his objections carried no weight. Disillusioned, he submitted his resignation.
Thus ended the Volcker era. But the legacy he left America was only beginning to be felt. Through resolute action, he had slain the inflationary beast that had plagued the U.S. economy for more than a decade. In the 20 years after his departure, the United States entered a period of high growth and low inflation—the so-called “Great Moderation.”
Yet two decades of prosperity lulled Americans into believing they had conquered the business cycle, that no major crisis could return. Under Alan Greenspan, the Fed reverted to easy-money policies and further loosened financial regulations. Subprime lending ran rampant—until it exploded into the 2007 financial crisis.
When Barack Obama inherited the wreckage, his first move was to ask the octogenarian Volcker to return as chairman of the President’s Economic Recovery Advisory Board. Obama understood that simply having Volcker’s towering figure back in the public eye could calm market fears and reassure the public.
Over the next two years, Volcker worked tirelessly, shuttling between Washington and Wall Street, pushing for financial reform in a tangled political environment. Hoping to make amends for the unfinished business that had driven his resignation, he sought to restore stronger regulatory safeguards. He proposed a rule: commercial banks could broker securities transactions for clients, but could not trade for their own accounts or engage in other high-risk proprietary investments. Obama endorsed the idea, and it became known as the “Volcker Rule,” later written into the landmark financial reform legislation.
Yet when the rule was announced, Volcker felt a pang of disappointment. His true preference had been for a far stricter overhaul—ideally, a full reinstatement of Glass–Steagall’s separation of commercial and investment banking. But Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers opposed him at every turn. In the end, only the more technical, limited “Volcker Rule” survived. The deeper structural flaws in America’s financial regulatory system remained unpatched.
Conclusion
And so, we come to the end of the book’s main narrative. Paul Volcker turned the tide in three major crises: he safeguarded the dollar’s position during the collapse of the Bretton Woods system in the 1970s; he tamed America’s runaway inflation in the 1980s; and, in the wake of the 2007 financial crisis, he championed new rules for financial regulation.
The foreword to this biography features endorsements from several heavyweight figures in the world of finance. Strikingly, they all note that their deepest respect for Volcker stemmed not just from his accomplishments, but from his extraordinary moral character. Volcker devoted his life to public service. He was willing to shoulder responsibility, steadfast in his professional ethics, and unfailingly placed duty above personal interest.
This brings to mind a figure from Chinese history—Ji Wenzi of the State of Lu in the Spring and Autumn period. Ji Wenzi served as chief minister under three successive rulers, overseeing the affairs of state and the military for decades. Throughout, he remained self-disciplined, conscientious, and frugal. This, too, is an apt portrait of Volcker’s life.
On December 8, 2019, the financial giant Paul Volcker passed away at the age of 92.
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