Remembering Paul A. Volcker

Speech delivered at the Cosmos Club

February 10, 2020

Paul Volcker did not rush to decide important questions if he could avoid doing so. He saw them as 51–49 propositions. He had to decide where the 51 percent lay.  Meanwhile, you waited. (You normally also waited to brief him in the morning until he had finished the New York Times crossword puzzle.)

He was careful with facts.  I once brought him a computer printout with a projection of the financing needs of a group of developing countries. My colleagues had written an analytical program that generated the projections.  Paul looked at them and said, "I never trust a number unless I can see that it has been erased and corrected and then erased and corrected again."

He was meticulous in his writing and proud of his skill. He would take your draft and completely rewrite it, which was depressing the first time it happened.  You then learned that he took his rewritten draft and completely rewrote it again, and often again and again.

Volcker was very generous in his praise and affection.  He spoke eloquently and insightfully at many memorial services.  I remember those for Lyle Widman, Henry Wallich, Arthur Burns, and Bob Solomon. I spoke at two of these services, which was an intimidating experience.

In the remainder of my remarks, I focus on two areas in which I collaborated with Paul: the global debt crisis of the 1980s and reform of the international monetary system.

The Global Debt Crisis

After his death, Volcker's leadership in containing the outbreak of the global debt crisis of 1982–89 was overlooked in many of the assessments of his contributions.

The crisis unfolded as follows:

In May 1982, Paul warned the other G-10 central bank governors at the Bank for International Settlements of the high probability of a Mexican financial crisis. He added that Mexico's crisis most likely would be followed by others.  

In mid-August during the Mexican weekend, we called those central bankers.  Many were surprised, and some were unsure that their banks were all that involved, which they all were.

In collaboration with Jacques de Larosière and with the support of the US administration, Paul formulated an approach to addressing the crisis that had already swept up Mexico and Argentina and threatened Brazil, the Philippines, Yugoslavia and, eventually, about a dozen other countries in Latin America and elsewhere.

Volcker's plan contained several key elements:

  • agreement by the country's bankers to a suspension of principal payments coming due pending their rescheduling,
  • multilateral official loans bridging to financing that would become available principally from the International Monetary Fund, and
  • proportionate participation by creditor banks in new loans to the countries—an early form of what became known as private sector involvement.

None of these elements was completely novel, but combined they formed a forceful approach.  They built on an exceptional degree of multilateral and private-public cooperation.

Volcker's plan contained the immediate crisis, but it was many years before the crisis was fully resolved.  The Baker and Brady Plans were needed for that.

International Monetary System Reform

In the wake of the collapse of the Bretton Woods system to which Bruce MacLaury [and Fred Bergsten] referred, the US government put forward a first "Volcker Plan" for consideration by the Committee of Twenty.  The C-20 was charged with reform of the international monetary system.  The plan's key feature was the use of the accumulation of reserves by a country with a persistent current account surplus to trigger adjustment action by that country.

In the spring of 1973, I was seconded to work with Bob Solomon. He chaired a technical group to examine the Volcker Plan and some competing, less well formulated, ideas.  Bob induced Paul, who was a very close friend, to meet with the group to explain further his plan.  The challenge was to keep Paul there for as long as possible.  Solution: Send Truman to get a cigar from Bob's desk.

In September 1973, the C-20 deputies met in Paris.  Our delegation gathered in the US embassy the afternoon before the meeting.  As dinner time approached, Paul said to Don McGrew, the legendary, long-time Treasury attaché, that he would like to take the group to dinner, preferably to a restaurant where one could have a good lamb dinner for less than $3 a head. (Sam Cross will correct me if I have this wrong.) Don found one, and we had a memorable dinner.

However, the C-20 effort was already essentially dead—the French had rejected the US proposal because we would not agree to their demands concerning what was called asset settlement.  Therefore, the de facto regime of floating rates among the major currencies that the market had forced on the authorities in March 1973 continued. 

For the record, and contrary to many commentaries after Paul's death, Volcker was not a promoter of floating exchange rates, quite the opposite.  He drafted the face-saving verbal formula that the C-20 adopted: "the exchange rate regime should be based on stable but adjustable par values. It also was recognized that floating rates could provide a useful technique in particular situations." Paul favored a more disciplined system. 

In 2011, I served with Paul on the Palais Royal Initiative on reform of the international monetary system, chaired by Michel Camdessus. (Jack Borman was the quarterback of the team.)  The initiative was intended to influence the French presidency of the G-20 to think big on this perennial topic.  Unfortunately, the French declined to embrace any of our suggestions, and the G-20 summit in Cannes was overwhelmed by the Greek and Italian crises.

Volcker's last essay was for the Bretton Woods Committee last fall.  In this valedictory, Paul outlined the challenge ahead. 

First, he stated that we:

  • won't restore fixed exchange rates,
  • won't forever want a national currency at the center of the system, and
  • won't need to provide the same volume of official development assistance as in the past.

He continued that we will:

  • need to recognize that some elements of "good behavior" are necessary if the system is to flourish,
  • need to recognize that exchange rate practices are inherently international,
  • need international standards,
  • need to avoid discrimination in trade in both services and goods,
  • need to recognize that corruption is a bleeding scar on the system as well as a cancer on development, and
  • need the leadership of, and ample financial resources for, the International Monetary Fund and the World Bank.  

He concluded:

"The growing challenge of 'my country first and only' in a world in which the fortunes of all nations are irretrievably tied together needs to be recognized with a clear response."

Paul Volcker was a supportive friend to many around the world, an exemplary teacher, and a great financial statesman who it was my privilege to have worked with. 

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Edwin M. Truman Senior Research Staff