The demand curve, a core element of microeconomic theory, helps explain the decision that Paul Volcker MC/MPA 1951 made to enroll in Harvard’s Graduate School of Public Administration in 1949. At the time, Volcker was a Princeton graduate considering further studies in law, economics, or public administration.
The theory posits that demand is inversely related to price. Harvard offered Volcker a fellowship that covered his educational expenses. The price was right for a man whom six presidents would hire or appoint to posts that included chairman of the Federal Reserve Board from 1979 to 1987.
He also became chairman of the investment bank James P. Wolfensohn, Inc.; chaired the Corruption Oversight Commission at the World Bank; headed a commission that dug up dormant Swiss bank accounts for Jewish Holocaust victims or their families; and investigated Iraq’s oil-for-food program for the United Nations.
“The school offered a limited number of fellowships, and I got one,” recalls Volcker “And ‘fellowship’ sounded better than ‘scholarship.’ It sounds like you actually deserve it.”
There were other factors at work as well. His father was town manager of Teaneck, New Jersey, so Volcker was raised in a home where the issues of public administration were fodder for dinnertime conversation. The fact that many of Harvard’s most esteemed economists taught at the school was an added draw.
Volcker delved deeply into economic theory at GSPA, taking several classes with renowned Keynesian economist Alvin Hansen, who embraced the need for government intervention during times of recession.
“I thought Professor Hansen was wrong in the precision with which he analyzed the economy, but was very logical and persuasive in his presentations,” recalls Volcker, who concentrated in political economy. “I didn’t think the world was quite that orderly. On the other hand, Professor Hansen had a lot of insights. And obviously Keynes was a genius.”
Volcker’s career in public administration began in 1952, after he returned to the United States from a year at the London School of Economics. He was an economist at the Federal Reserve Bank of New York for five years, and then worked at Chase Manhattan Bank before becoming director of financial analysis at the U.S. Treasury Department and deputy under secretary from 1962 to 1965. After another stint at Chase, he returned to Treasury in 1969 and played an important role in crafting the policy that ended the convertibility of U.S. dollars to gold.
He became president of the Federal Reserve Bank of New York in 1975, and was elevated to the Fed’s chairmanship in 1979. That was a time of stagflation — high inflation and low economic growth. Volcker took strong measures to get inflation under control. The policy was unpopular in the construction and farming sectors, which were sent reeling by the high interest rates. But inflation came down, and the nation’s economy recovered.
“Volcker is credited with singlehandedly slaying the dragon of inflation, which had been terrorizing the country for 10 years,” says economist and Kennedy School professor Jeffrey Frankel.
Volcker says government had to act to beat down inflation, and strong control of the money supply was an option that he believed could succeed. “I don’t know if it took courage — I was scared to do anything different,” he says. “I didn’t want to be a failure. The country was in an unhappy time, which was overlaid by a concern with inflation and a not-so-satisfactory business climate. We were having trouble getting a handle on inflation and the economy, and I believed it was time to move aggressively.”
Volcker’s most recent contribution to national economic policy came through his chairmanship of the Economic Recovery Advisory Board under President Barack Obama, from February 2009 to January 2011. With the global financial sector still digging out from the subprime mortgage meltdown, President Obama turned to Volcker as he assumed office.
His contribution included what Obama dubbed the “Volcker Rule,” which became part of the financial reform package passed by Congress. The rule prohibits banks from engaging in proprietary trading and from investing in hedge funds and certain private-equity funds. Volcker says it’s important to restore the bright line between commercial banks, which provide the payment system and issue credit to homeowners and businesses, and Wall Street traders, who engage in risky speculation.
He believes that the subprime market imploded because it was based on the unreasonable assumption that people with little money could repay the mortgages they’d obtained.
“It got all mixed up with financial engineering,” he says, “and the theory that if you bunched enough of the weaker loans together in securities, some portion of them would be good, and that could repay the debt. They misjudged the situation, to say the least.”
Volcker recalls serving in government in the 1960s during the Kennedy and Johnson administrations, when there was optimism about the role that the U.S. public sector could play in making the world a better place. But the ideological arguments against big government have taken a toll, he says, and the United States’ foreign entanglements in Vietnam and Iraq didn’t help.
Against that backdrop, Volcker says, studying public administration is even more essential in the 21st century. “You may not like a program ideologically, but if we have it, we need to make sure that it’s well run,” he says. “We won’t have decent health care unless people know enough about public administration to manage it correctly. You can say the same thing about fighting wars too.”