Paul Volcker, former Chairman of the Federal
Reserve Board, delivered an entertaining and insightful address at a
sponsored by the Federal Reserve Bank of New York in April 2002.
Here are a few excerpts.
It might be of some passing interest to share the
observations I have
made over the past 50 years. If nothing else, it will give you some
that the kinds of problems you are worried about are not exactly new,
they certainly come in different packages
During the 1950s and 1960s, we did not just think about
and fiscal policy. It was monetary policy, fiscal policy, and
management. As unlikely as it sounds today, debt management was
to be an active “third leg’ of policy.
When I was in Washington in the late 1970s and early
1980s, we embarked
on some new approaches to monetary policy that depended upon control of
money by the means of quantitative control of the reserve base.
I can remember tossing and turning at night thinking
whatever we do,
the banks will try to game us. Could they use the same reserves to
our reserve requirements at the end of the day and satisfy the reserve
requirements in Asia and in England?
Since the early 1980s, I think it is fair to say that we
to a kind of approach that relies upon direct influence on the
rate and a much more fluid market situation
The 1990s, as you all know, have been regarded as the
great glory days
of monetary policy. There is a sense of conviction in the market that
can press a few monetary buttons and everything will be solved.
course, that is an illusion.
Operating monetary policy in open, liquid markets means
that the transmission
[to the economy] will inevitably be unstable: the market in effect is
with you, and the central bank will find it necessary to adjust. All of
the history I have recounted suggests that this will be a continuing
A fixed rule cannot solve the problem. I think that is the lesson of
past fifty years.
Indeed you sometimes might ask the question whether the
is driving asset prices and the exchange rate or whether the exchange
and asset prices are driving the Federal Reserve. That is an
question to ask when you are trying to run a central bank.
What is the endgame in all of this, of open markets: the
free flow of
capital around the world, a couple of hundred independent countries,
big, some small? I think the logical long-term result – extending far
my living horizon, but perhaps not yours – is a world currency.
What I have not quite figured out is what the one
bank will do, what instrument it will use, and how it will be
But I think that is the direction in which economic and financial logic
For the complete address, go to Volcker