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Volcker: A Portrait of the Money Man

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A fair and balanced portrait of one of the great men of the 20th century, Federal Reserve Chairman Paul Volcker. Volcker broke the back of the 1970s inflation that threatened to unravel American society. He did such a fine job that price inflation has not been a serious problem in the U.S. since (three cheers for Monetarism). This is a monumental achievement and author William Neikirk pays it deserving although critical attention.
Neikirk is a work-a-day journalist thus his analysis occasionally comes up shallow. "Mainstream" economics cant seeps in from time to time. John Maynard Keynes is rehabilitated into an anti-inflationist (p. 88, 1987 hardcover edition) yet Neikirk neglects to tell us that the selected quote from Keynes was written in 1919 and that Keynes' later embrace of deficit spending was blatantly inflationary. Our author throws darts at Supply-Side Economics without once quoting its greatest modern expositor, Robert Mundell. Had Neikirk explored Mundell's work, which started to be published around the time that Volcker began working in JFK's Treasury Department, he might have noticed the similarities between the two great men, especially their agreement on fixed exchange rates.
Mundell's work shows that "tight" money and "loose" fiscal policy are not contradictory as our author would like to believe. The contradiction was disposed of in Mundell's resolution of the Assignment Problem - monetary policy is best used for fighting inflation while tax (fiscal) policy is best suited to promoting economic growth. The record of Volcker and President Reagan should have been enough to talk Neikirk out of the "mainstream" fever swamp but he still appears marooned there at book's end.
"Volcker, Portrait of the Money Man" concludes in early 1987 with Tall Paul's departure from the Fed and his replacement by Alan Greenspan. The 1987 stock market crash isn't covered, which is unfortunate. The chapters end with Volcker taking the high road out of Washington. The former Fed chief took that road back into D.C. to advise President Obama, setting a stellar example for economists and public servants.
Neikirk digs deep into the 1981-82 recession and shows how Volcker accomplished an incredible two-fer. His bailout of Mexico increased the money supply at just the right time to work wonders with the Reagan tax incentives. The U.S. and world economies took for a major advance with low inflation thanks to Volcker's skilled hand on the spigot. Pragmatism accomplished the feat while ideology took the credit.
Another effective pragmatist, Treasury Secretary James Baker, and Volcker did vital work together showing that while ideology and emotion may win elections, pragmatism is the glue of the world. It's additional proof of the truism that while data, mathematics, and systems are important tools, economics will always chiefly be a pragmatic science. The U.S. dollar, now that it is a fiat currency, will only be as strong as the sense behind it.
Neikirk neatly draws the difference between Volcker's old-school conservatism (based upon character disposition) and the neoconservatism of Reagan and some of his advisers (conservatism mixed with free market and militarist ideologies). The fact that Reagan never submitted a balanced budget is the strongest evidence that he was a neoconservative although much more likable and prudent than today's neocons.
Yet Volcker doesn't follow old-school conservatism to its logical conclusion and that's disappointing. The Fed chief regularly warns the big banks to slow down but they don't listen. When the banks get in trouble Volcker and others bail them out. I understand the value of the bailouts from a conservative standpoint but the cycle has to be broken. Either the banks are allowed to play fast and loose then left to fail or they are tightly regulated and bailed out. But playing fast and loose amid an implicit pledge of taxpayer bailout ought to be unacceptable.
I would suggest the latter as a part of a plan to totally reform how banks do business. Banks are not going to become conservative (read: responsible) until forced to do so. Irving Fisher's "100% Money and The Public Debt" should be dusted off and implemented.
The return of stability and prudence should include Volcker and Mundell ideas on currencies. As Neikirk sagely writes "A nation that is duty-bound to defend a specific exchange rate...is careful about having irresponsible fiscal and monetary policies that would undermine it." (p. 159).
Volcker and Obama should stop their mercantilist obsession with foreign trade and start rebuilding the home market. Foreign countries use protectionism thus it's no sin for the U.S. to use it (my apologies for assaulting the household god of the theoretical economists and free traders). Potent tariffs will get the Asian countries to play straight more than 1,000 jawbonings by the U.S. president ever would. As Pat Buchanan writes, we should do onto our trading partners as they do onto us.
Our astute author stubs a toe in the final pages when he apes West German Chancellor Helmut Schmidt in saying the Reagan administration didn't pay sufficient attention to the world economy (p.204). While Schmidt's warning is important and welcome, we should not fall in with globalist ideology. Volcker and Reagan showed that pragmatic America First policies, thanks to help from G-d's invisible hand, benefit all nations.