Volcker (3 page)

Paul's reserve continued as he grew older, creating a serious handicap with the opposite sex. During high school, he was too self-conscious to ask a girl out on a date. But his shyness also had an upside, blossoming into self-reliance. He became a Brooklyn Dodgers fan simply because all his friends rooted for the Yankees or the Giants, who played just a few miles away, across the George Washington Bridge. They considered Brooklyn a foreign country, where people spoke a different language. Paul found that he liked being a contrarian.

A curious blend of insecurity and self-confidence emerged in young Paul. At times the insecurity dominated, especially when it came to report cards. He worried about his father's signature on the card. When he did well, his father would embellish the
V
in his name, as though he was signing the Declaration of Independence; when his grades fell short, a simple
PAV
flowed from his father's pen. “I always wanted the fancy ‘Volcker' on the back of the card but did not get it often enough.”
⁷

Paul Volcker Sr. graded like a headmaster: no nonsense … and no hugs or kisses either. The tension rose when Paul applied to college in
the spring of 1945. His father suggested his alma mater, Rensselaer. Paul decided to apply to Princeton, just to see if he could make it. The application form itself was intimidating—it felt like parchment when he filled it out—but two weeks later he was accepted. His father tried to persuade him not to go, with a warning: “Prep school students will do better at Princeton than a graduate from Teaneck public high. You'll find out that you're not so smart.”
⁸

Paul decided to take a chance to prove a point.

Uncle Sam almost accomplished what Paul Sr. failed to do. A formal invitation arrived in April 1945, soon after the Princeton acceptance, requesting that Paul visit his local draft board for a physical exam. The war was winding down in Europe, and Paul had been unhappy when the captain of the Teaneck varsity jumped the gun and volunteered. “We were having a championship season on the basketball court, and that derailed our prospects. When I went for the physical I thought about crouching down so that I would not exceed the maximum acceptable six-foot, six-inch height. I didn't try very hard and was rejected with a physical deferment … I've always regretted that decision, wondering whether I let myself and my country down.”
⁹

Volcker concentrated on economics and basketball at Princeton between 1945 and 1949. Much to his disappointment, he was far better at economics, despite his elongated frame. “I never got along with the coach,” Volcker complains, sounding like a benchwarmer covering up for bad footwork or bad hands, “so I didn't play much.”
¹⁰
Perhaps that is why he found refuge with Princeton's two famous German-born economists, Friedrich Lutz and Oskar Morgenstern, who had come to America after Hitler's rise to power. Lutz taught Volcker about money and banking, his lifelong preoccupation; Morgenstern taught him to worry, his lifelong compulsion.

Morgenstern is best known for his book
Theory of Games and Economic Behavior
, published in 1944 with John von Neumann, one of the most famous mathematicians of the twentieth century.
¹¹
Volcker never studied much game theory, a formal approach to strategic decision making, beyond what Morgenstern had discussed in class, but the professor left his mark by turning Paul into a professional skeptic.

Morgenstern worried about the relevance of economics. He said that “unless [economics] offers a contribution to the mastering of practical life … it is but an intellectual plaything … similar to chess.”
¹²
Morgenstern probably disliked chess because the Russians dominated it, but he really did want economics to be more than just a game and warned that “insufficiency of data is in great part responsible for the fact that economic policy is so often lacking in rationality.”
¹³
Back then, his colleagues spent most of their time thinking rather than doing.

Oskar Morgenstern would soon write
On the Accuracy of Economic Observations
, published in 1950, warning against the mistreatment of economic data. He did not mince words: “It [is] grotesque to see the
New York Times
, for example, often reporting on its front page that ‘consumer prices' have ‘risen' or ‘fallen' by 1/10 of 1 percent without any qualifying word about the significance of this change in a mere index of doubtful validity.”
¹⁴

Volcker recalls Morgenstern's shocking example of data on international gold movements, which often made front-page headlines throughout the world. “Oskar showed numerous years in which Britain's reported gold imports from the United States differed substantially from America's reported gold exports to the U.K. This logical inconsistency made a mockery of further analysis.”
¹⁵

Volcker spent most of his days at Princeton reading and playing basketball, not necessarily in that order. “I devoured Friedrich Hayek's
Road to Serfdom
.
¹⁶
His defense of free enterprise made me wary of government intervention—and proud to be an American, even though Hayek warned against our creeping socialism. As for coursework, I listened to what the professors had to say and found that I could get As by repeating their views, almost verbatim, on the exams.”
¹⁷

Princeton dealt with students who were too smart for their own good by requiring a thesis for graduation—a lengthy tome on some weighty subject that could not be written while shooting baskets. Paul responded to the looming deadline by ignoring the problem. With less than a semester left, he had done nothing.

According to Volcker, Professor Frank Graham, assigned as his thesis adviser, saved him. “I decided to write on Federal Reserve policy after World War II. It turned out more complicated than I had anticipated. Professor Graham gave me great advice: to write first and edit
later. I would submit a handwritten chapter on yellow legal-size paper on a Friday afternoon, and he would return it the following Monday with detailed comments and corrections. I was too embarrassed not to push ahead.”
¹⁸

Graham, an expert in international trade, flattered Volcker with his attention. Paul had always been too shy and insecure to meet with professors. “I thought they did not have time for me.”
¹⁹
Graham pushed his young protégé, hoping he would pursue graduate study in economics, and Paul ultimately submitted his thesis with a week to spare, graduating summa cum laude in the process. Volcker would follow this “procrastinate and flourish strategy” throughout his professional career. “I found that it worked, so I never changed.” And then he adds, “Besides, it gave me time to think and to get it right.”
²⁰

Volcker continued his studies in economics while attending the Graduate School of Public Administration at Harvard in 1950 and 1951, listening to lectures by, among others, Alvin Hansen, the foremost expositor of the new Keynesian theory of activist government intervention. “Hansen was a great teacher,” Volcker recalls, “but I had cut my teeth in economics as an undergraduate at Princeton. I was very skeptical.”
²¹

Volcker received his master's degree from Harvard in 1951 and then left for the London School of Economics, armed with a Rotary Club fellowship to write his doctoral dissertation. Paul spent most of his time traveling through Europe. “I found a girlfriend who kept me busy. And when time got short, there was no Professor Graham to save my hide. I still feel bad about not completing my degree. I had also disappointed my father, who had saved the clipping from the local newspaper when I received the fellowship. He was an active member of the Rotary Club. I screwed up a good opportunity.”
²²

Paul redeemed himself by pursuing a career in public service, like his father. Paul Sr. helped by getting his son an interview at the Federal Reserve Bank of New York. The New York Fed is the most important of the twelve regional Federal Reserve Banks that serve as branches of America's central bank, headed by the Federal Reserve Board in Washington, D.C. The New York Bank, a fortress-like building in Lower
Manhattan, serves as the observation post of the Federal Reserve System, located two blocks from the New York Stock Exchange and within walking distance of the numerous government bond dealers that buy and sell securities with the Federal Reserve every day.

Robert Roosa, vice president of the Research Department at the Federal Reserve Bank of New York, molded Volcker's thinking after he was hired as an economist in 1952. Roosa drafted Volcker to help produce
Federal Reserve Operations in the Money and Government Securities Markets
, a little red booklet (107 pages long) that instructed a generation of policy makers about central bank strategy.
²³
Illinois senator Paul Douglas, chairman of the congressional Joint Economic Committee, described Roosa as “probably the foremost authority on the technical operation of the money market in Government securities.”
²⁴
He had become an expert after transferring in 1954 from the New York Bank's Research Department to the open market desk, where traders bought and sold securities for the Federal Reserve System.

Roosa's move to the practical side of the Federal Reserve was unprecedented. Economists were considered too cerebral for the instinct-driven trading business, and in the mid-1950s they were segregated in research, barely a notch above the accountants. Roosa broke further ground by putting the twenty-seven-year-old Volcker in the trading room—as an observer, of course. The experience married theory and practice in Volcker's brain and altered the trajectory of his career. If Oskar Morgenstern had convinced Paul that data were essential, but fraught with error, then Robert Roosa gave him the opportunity to examine data under a microscope—data from the heart of Wall Street.

Volcker encountered a new world when he entered the trading room at the New York Fed. Unlike modern trading facilities, decorated with computer terminals and multicolored electronic displays, the 1955 model carried the stark imprint of a black-and-white movie production. A U-shaped desk, equipped with telephone consoles for each trader, filled the entire space, while a large chalkboard hanging on the wall at the open end of the U recorded the relevant statistics, much like a primitive scoreboard at a baseball game. Prices of government bonds, which were frozen in print in the Research Department, now danced in Volcker's head during phone conversations with Wall Street's bond dealers. Shorthand words for buying and selling could make the conversations sound
like gibberish. It took a practiced ear to decipher the meaning of “9 bid, offered at 10, 100 by 100,” but Paul caught on quickly and reveled in the details, feeling as though he had been initiated into a secret fraternity.
²⁵

On Wednesdays, when commercial banks had to meet their required reserves prescribed by the Federal Reserve, Volcker would work past midnight on his weekly report for the Federal Reserve's Open Market Committee. The committee, referred to as the FOMC, is the central bank's decision-making body. It consists of the seven members of the Federal Reserve Board, appointed by the president of the United States, plus five of the twelve regional Reserve Bank presidents, who serve on the FOMC on a rotating basis.

The FOMC was run by the then chairman of the Federal Reserve Board, William McChesney Martin, who had been appointed by President Harry Truman in 1951 and would serve until 1970. Martin was a former banker, just like everyone else on the board in the mid-1950s. Perhaps the economy was a lot simpler in those days, but the absence of economists bore the chairman's imprint.
²⁶
Martin thought economists' forecasts rivaled the accuracy of fortune teller predictions, probably an insult to the fortune tellers: “If the decision were mine alone, I would dispense with [that] kind of analysis.”
²⁷
He also felt that economists lacked the practical experience needed of central bankers.

With Martin at the helm, it is not surprising that economist Paul Volcker failed to make the distribution list of those permitted to read the weekly report that he wrote. His wife, Barbara, taunted him: “You can write it but can't read it. What's wrong with these people?”
²⁸

Barbara, a pretty woman with short dark hair that she denigrated as mousey, had majored in irreverence at Pembroke College, part of Brown University. She had been married to Paul for less than two years at the time and did not appreciate his midnight scribbling. Paul knew that she was right about the Fed, as she was about most things. The rigid bureaucracy would wear him down. But he also knew that his memoranda to the FOMC mattered, even though he was a mere economist, because they came from his observer status on the open market desk. He had the credibility of an embedded reporter on the front lines. He even went to an FOMC meeting as Roosa's scribe and recalls thinking, “It would be nice to sit around the table as a member of the board.”
²⁹

Volcker's memos bristled with facts and figures: how many securities were bought or sold, at what prices, who was buying and who was selling, and perhaps most important, what the dealers expected interest rates to do in the near term. Dealers profit by anticipating whether interest rates will decrease or increase, whether bond prices rise or fall. They make money buying before prices jump and selling before they drop. Volcker paid attention to the details, especially the link between expectations and behavior, and recognized the importance of fitting the pieces together, much as he had in his boyhood hobby of building model airplanes. Every plane, made from balsa wood and paper, with a rubber band to crank the propeller, was perfectly balanced, ready to fly.