The man responsible for the Volcker Shock has died.
The man responsible for the Volcker Shock has died. Mario Tama/Getty Images

History has two components. One, the men/women who are its face; and two, the men/women who make it. An example of a historical face is, of course, Martin Luther King Jr., but the man who made the civil rights movement is arguably,
Bayard Rustin. In 1963, he organized the massive March on Washington for Jobs and Freedom, an event that made King an American icon and launched the movement into the mainstream of history. It was Rustin's genius that made the complicated march a logistical success rather than a nightmare. Paul Volcker is another maker of history, this time in economics.

The face of the tax revolt by the rich after decades of pro-labor New Deal economics was Ronald Reagan, but the man who made it happen was Paul Volcker, the Chairman of the Federal Reserve between 1979 and 1987. He was a Democrat and placed in the chair by a Democratic president, Jimmy Carter. Without Volcker, the New Deal world—which boomers mistake for American capitalism (also known as the Golden Age of Capitalism—1947 to 1971), when it was in fact American socialism (high wages, wage escalators, job security, government investment in suburban mortgages and infrastructure)—would not have collapsed so spectacularly. The way you think about money, consumer loans, mortgages, government deficits, bail-outs and the like only reveals how your mind and experience of the world was made by Volcker. This how we become Volckerians.

The 12th head of the Federal Reserve changed the American economy by shocking it with stunningly high interest rates in March 1980, at the end of Carter's presidency. At that time, the Fed funds rate was already high, 10.25 percent. He doubled it just like that; and he pretty much kept the rates above 16 percent until May 1981 (today, it's only 1.74 percent). Here is how the mainstream describes the shocker: "Paul A. Volcker, Fed Chairman Who Waged War on Inflation, Is Dead at 92" (New York Times); "Remembering Paul Volcker, the man who tamed inflation" (The Hill); "Paul Volcker Was Inflation’s Worst Enemy" (Wall Street Journal). As you can see, this man was not unloved, at least by the mainstream, which speaks for the establishment that, in our age, is dominated by a sector the Volcker Shock (as it is called) empowered: finance.

But not everyone loves Volcker. Many will remember him as a general for the owner classes in a class war between the rich and the working classes. Here is how the author of the superb but underappreciated 1997 book Wall Street: How it Works and for Whom, Doug Henwood, put it in a December 9 tweet...


Volcker's ferocious attack on a type of inflation, that of commodity prices, was paid for by a deep recession that, with the concrete of unemployment, broke the back of labor. Before the Volcker Shock, rising wages were blamed for rising prices, though there were many other factors, such as political instability in resource regions, and the costs of war. After the shock, it was not just inflation that was tamed, but also wages. Both have grown slowly ever since. But there is also inflation in stock market shares, and the inflation of home values. These forms inflation have never met a Volcker.

An explanation of the trickle-down revolution as an ideology and policy success is not possible without Volcker, who was returned to the chair by Carter's successor, Ronald Reagan. Nor is the current hegemony of the financial sector at all understandable without the Volcker Shock. His nomination in 1979 signaled the US's transition to a post-industrial society that's described by academics on the left as neoliberalism (a process that eroded New Deal regulations on banks). His shock also explains the liberation of the Japanese economy in the 1980s, and the Third World debt crisis that led to the IMF's infamous Structural Adjustment Programs and the Washington Consensus—basically the financialization of developing countries whose economies were once protected by capital controls (for more on this, read Ha-Joon Chang's 2002 report, Kicking Away the Ladder).

Though the Volcker Shock stabilized prices and wages, it made financial markets much more unstable. After Volcker left the Chair in 1987, his replacement, Alan Greenspan, began his long career of putting out financial fire after financial fire with tax-payer cash and, ultimately, transforming the Fed into a socialist institution that bailed out, not banks per se, but their creditors.

Volcker, by the way, was not an accident of history, a man who happened to be in the right place at the right time. He pretty much ran the Treasury under Richard Nixon and was responsible for another shock that happened in 1971 and is now called the Nixon Shock.

What happened is this: From 1969 to 1971, Volcker, then the undersecretary for Nixon's treasury secretary John Connally (both Connally and Volcker were Democrats), was "for all purposes... the Treasury." Volcker was young (in his early 40s), and had a thing about gold (he did not like it). And at the time, the US dollar was pinned to gold. This meant that anyone in the world with American money could convert it to gold. This arrangement emerged from a major conference that took place at Bretton Woods, New Hampshire, a year before the end of World War II. What was clear to all of the delegates at this conference was the status of a post-war US. It would replace Europe and, more specifically, the British Empire, as the center of capitalism. The US would anchor the new global economy because it was a surplus nation, and its war economy was booming, and it had lots of gold. (For more details about the conference, the monetary system it established, and the rise of American capitalism, please read Leo Panitch's and Sam Gindin's The Making of Global Capitalism: The Political Economy Of American Empire)

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But by the late 1960s, the US was no longer a surplus nation. It was running huge deficits, and its industrial sector faced stiff competition from Japan and Germany, the new surplus nations. Also, there was the ever-rising costs of war, both hot and cold. The convertibility of gold made the US vulnerable and restricted its policy options. Nixon, under the guidance of young Volcker, closed the gold window and shocked the global economy. Currencies around the world were suddenly blown from the ancient ground of gold and began floating "about the Earth in an orbital rondo." This economic atmosphere excited speculation and also opened the way for the US to do something that no other capitalist power had ever done before: run twin deficits (trade and domestic).

The first shock (1971) began the process of financializing the world. The second one (1980) completed the process. As a consequence, full employment is not a primary concern for the Fed—this was the case during the New Deal period. Inflation is, and so is supporting the value of shares owned by financial institutions that are in fact insolvent. Remove the political power of Wall Street, and most banks in the US would be what they are in effect, nationalized. This is all "Too Big Fail" means. You are allowed to make profits as if you are what you are not, a solvent concern. And then there is the sad story of the euro.

Yanis Varoufakis, the former finance minister of Greece (27 January 2015 – 6 July 2015) wrote an excellent book in 2016, And the Weak Suffer What They Must, about the consequences of the first Volcker shock for post-war Europe. Indeed, he believes that Europe has yet to recover from it. The euro and all of its problems has Volcker as its father, and so does the fact that you, as an American, must now rent your wages (in the form of debt) rather own them outright (as would be the case if wages were permitted to rise). When you see your debt bills, think of the ghost of Volcker. He was a tall man.