Preston Martin thought otherwise. A former California mortgage banker with a salesman's disposition, Martin had designs on succeeding Volcker as Fed chairman. He found that his proposal to approve the lower rate came easily, knowing that James Baker wanted an easier monetary policy and that the treasury secretary held the keys to the appointment. “The way to get them to cut [their rates] is for us to cut.”
“There is no urgency,” Volcker said.
“Let's take a vote.”
Volcker could have tabled the discussion to defer the battle, but more than six years of unchallenged leadership lulled him forward. He allowed the vote to proceed, expecting that concern for the dollar would trump partisan politics even on the newly constituted board. Volcker miscalculated. Preston Martin, Martha Seger, Wayne Angell, and Manuel Johnson approved the decline in the discount rate. Henry Wallich and Emmett Rice, Volcker's longtime associates on the board, joined the chairman in voting against the cut, and Volcker wound up on the losing end of a 4-to-3 decision.
Martha Seger did a verbal victory lap. “[The Federal Reserve] is not supposed to be a one-person show,” she said, suggesting that the four Reagan appointees could wrest control of the board from Volcker.
13
After the vote, Volcker rose from his place at the head of the table and said, “You can do what you want from now on ⦠but without me.” He left the boardroom and slammed the door leading to his office, just in case anyone thought he might change his mind.
Volcker recalls, “It was a total breach of board custom for them to force a vote without prior notice ⦠not to mention bad policy. I could not believe they did it.”
14
He should have known, and probably didâdeep inside.
February 24, 1986, was a fight for the heart of the Federal Reserve. A week earlier, Baker had told the Senate Budget Committee he would “not be displeased” if the dollar declined further, encouraging U.S. exports.
15
Volcker contradicted Baker a day later at the House Banking and Currency Committee: “Well, I don't know, I think it's fallen enough ⦠I certainly don't think it's anything we're interested in forcing.”
16
Baker's policy called for lower U.S. interest rates to weaken the U.S. currency, a policy that only the Federal Reserve could implement. The vote to lower the discount rate signaled a takeover of the Federal Reserve Board by Treasury Secretary James Baker.
Manny Johnson had told Volcker when he joined the board that he would vote to lower interest rates at his first chance, a pledge to Baker, who had promoted his nomination. This had been Johnson's earliest opportunity to deliver. Volcker had thought he could sway his remaining colleagues on the board. Instead, the board had rejected Volcker's leadership and caused an emotional outburst usually reserved for affairs of the heartâwhich it was for Paul.
Volcker's working lunch that afternoon with Baker and Jesus Silva Herzog, the Mexican finance minister since 1982, had been scheduled beforehand. Volcker had brought along a handwritten resignation letter that he had scribbled on a yellow lined pad after his call to Barbara, but he waited until his old friend Chucho left before confronting Baker.
17
“I have a letter of resignation with me,” Volcker began.
“What are you talking about?”
“The board outvoted me on the discount rate this morning.”
“So?”
“Bill Miller was the last chairman to get outvoted.”
“Who cares about Bill Miller?”
“That's precisely my point.”
“Don't be ridiculous, Paul. You can't resign. Why don't you wait and see where this goes before doing something we'll both regret.”
Volcker recalls,
18
“I certainly did not want to leave the board that way. And I didn't think Baker wanted me to either, even though he
probably had sparked the revolt by calling for an easier monetary policy. After lunch, Wayne Angell visited my office and proposed that the board meet again that same afternoon to reconsider the decision. I still do not know for sure whether Baker orchestrated the reconciliation. Manny Johnson would have been his natural messenger, but it would be typical Baker to use Angell as cover. We agreed to table the earlier vote so that I could coordinate with the Germans and the Japanese, and that is what happened ⦠with a few wrinkles.”
19
No announcement occurred on February 24, 1986, but less than two weeks later, on Friday, March 7, 1986, a day after the Bundesbank and the Bank of Japan lowered their lending rates, the Federal Reserve announced a unanimous decision to reduce the discount rate.
20
Preston Martin hailed the dramatic development like an impresario unveiling his latest act, calling it an “unprecedented” example of international cooperation.
21
An unnamed Reagan administration official offered a different version of the victory. “The coordinated reduction in interest rates was a direct outgrowth of the international consultation process set in motion by Treasury secretary James Baker III.”
22
Volcker's history of leavening monetary policy with a combination of domestic and international ingredients went unnoticed.
The stillborn rebellion of February 24 remained secret until March 17, 1986, when the syndicated columnists Rowland Evans and Robert Novak dramatized the story with the title “Backstage at the Fed.”
23
They added another layer of Machiavellian icing: “[Volcker's] resignation would have solved a thorny problem for the White House. California Reaganite [Preston] Martin's term as vice chairman expires on March 31. He is not eager to serve four more years as second banana unless he is likely to become chairman when Volcker's second four-year term expires in August 1987. Although Martin is a strong possibility, the White House will promise nothing so far in advance. But he might well become chairman should an immediate vacancy occur.”
The failure of the boardroom coup to create an opening by unseating Volcker led to Preston Martin's resignation on Friday, March 21, 1986.
24
Volcker delivered a fitting eulogy: “Mr. Martin has brought a wide experience and background in public and private life to the nation and to the Federal Reserve. He is a man of strong and independent views as befits the Board. He has played a leadership role in many
aspects of the system's work.”
25
Volcker did not add “and I am glad he is gone,” but that is what he meant.
A poll of leading Americans had named Paul Volcker second to President Reagan as the most influential person in the United States, but the February 24 insurrection had made him wary.
26
He no longer trusted the Federal Reserve Board to rise above partisan politics to focus on the public interest.
27
The White House tried to soothe the wounds with favorable comments on reappointing Volcker to a third term. Donald Regan, the president's current chief of staff and Volcker's least-favorite treasury secretary (although Baker now offered competition), said, “We'll have to talk to [him] about what he wants to do.”
28
Volcker loved his job and had trained for it like a chess prodigy. John Carlock, a friend of Volcker's from his Treasury days, had written to Paul when he was first appointed chairman in August 1979, “I am absolutely delighted ⦠for you, but especially for the Republic. I'm glad for you because you told me once that this was the only job you really wanted.”
29
Volcker had reddened at evidence of his unbridled ambition, even though it was in service of his country, and had responded to Car-lock, “I refuse to acknowledge the conversation but I must confess ⦠that the vaunted Fed insulation looks more and more attractive.”
30
The independence of the Federal Reserve matched Volcker's character, but he had also mastered the power of compromise necessary for success. Lawrence Roos, the former monetarist president of the Federal Reserve Bank of St. Louis and a frequent dissenter at the Fed, had penned the following note after he retired, when Volcker's second term began in 1983: “I cannot describe how pleased all [of us] are at your reappointment. Having served under your leadership I am especially aware of your qualifications for the chairmanship.” Roos then added what everyone knew but few could say with such authority: “But more impressive than the knowledge and experience you bring to the position, is your willingness to continue to serve your nation at considerable financial and personal sacrifice on your part.”
31
The sacrifice had taken its toll on Paul, but even more on his family. Barbara's crippling arthritis had limited her to part-time work for an architectural firm. She told reporters, “Before Paul took the job, you could say that we held on to our pennies. Now they just slip through.”
32
And Paul knew he had cause for concern: “How much of a lurch am I
leaving my family in?”
33
He dismissed considering a third term but felt the palace revolt of February 24, 1986, had foreclosed the early exit he had promised Barbara. “Leaving would give the impression that I had been pushed.”
34
It was a poor excuse, a reflection of the insecurity buried deep inside a man whom few would consider as lacking self-confidence. His intellect and professional achievements dominated in public, but his youthful doubtsâsuch as believing that his professors had no time for himâdescribe a vulnerability that had never disappeared. Barbara knew it all, of course, which is probably why she acquiesced.
A year later Volcker dribbled hints of his departure like the fabled trail of bread crumbs, but the marketplace registered surprise and disappointment when the actual announcement came.
In March 1987 the
New York Times
teased, “The chairman made a major change in his policy that has gone little noticed. He abandoned his trademark Antonio y Cleopatra Grenadier cigars.”
35
Volcker claims, “I got tired of hearing my doctor's lectures, so I stopped.”
36
But a few days before burying his lifelong habit, a letter to the editor in the
Washington Post
from Annette Penney rebuked him with “I would like to know why the [Federal Reserve] chairman is allowed to pollute the air of the Senate Banking Committee room ⦠why not put a stop to it all ⦠For years I have felt sorry for those who have to be around him.”
37
Shortly after Penney's missive to the
Post
, George Muller rose to Volcker's defense with the following response: “As chairman of the Federal Reserve Board, Volcker has one of the most demanding, high-pressure jobs in the country, one that affects the economic well-being not only of the American people but, indirectly, of the free world ⦠Volcker is no doubt wedded to his cigar as was Winston Churchill. If it relaxes him to puff ⦠while giving testimony ⦠I say let those who take offense assume similar responsibilities.”
38
Muller flattered Volcker with Churchill's name, and Volcker returned the favor by renouncing cigars before his excuse expired, or so it seems.
Volcker's dissent from a far-reaching Federal Reserve Board regulatory decision on May 1, 1987, should have telegraphed his plan to resign. A majority of the board approved applications by three bank holding
companiesâCiticorp, Bankers Trust Company, and J.P. Morgan and Companyâto underwrite certain debt securities that had been outlawed by the Glass-Steagall legislation of 1933.
39
Volcker dissented for two reasons. He supported a limited rollback of the prohibitions enacted during the Great Depression but thought that congressional legislation rather than regulatory fiat should lead the way. He also wanted to minimize conflicts of interest by preventing the underwriting subsidiaries of a commercial bank holding company from carrying names similar to the bank itself.
40
Volcker's battle against unrestrained deregulation would turn into all-out war during the twenty-first century, but the contemporaneous press drew immediate political implications: “The vote ⦠represents a rare defeat for the august Mr. Volcker by a majority of the Fed governors appointed by President Reagan. It shows that in regulatory matters the more free-market-oriented Reagan appointees are prepared to vote the chairman down.”
41
To downplay the conflict, however, Fed sources denied “that the disagreement was as sharp as one in February 1986 ⦠In the current dispute Mr. Volcker did not threaten to give up his post.”
42
And that is because he had already decided to leave.
Less than a month later, Volcker asked the president's new chief of staff, former Tennessee senator Howard Baker (no relation to the Texas Baker), to meet in his office at the Fed on Tuesday, May 26, 1987. Speculation that Volcker would be offered a third term as chairman had increased ever since Baker replaced Donald Regan a few months earlier. Baker had complimented Volcker with a smile, saying that he and the president had “great admiration” for the Fed chairman and that Volcker had done “an extraordinary job.”
43
Volcker came straight to the point in their meeting.
44
“It's time for me to step down. I do not want to be considered for a third term.”
Baker objected: “Why don't you think it over carefully and let me know for sure on Monday.”
“You'll hear from me bright and early.”
“By the way, who would you recommend?”
“Either Alan Greenspan or John Whitehead.”
“Okay, but think about it till Monday.”
“I'll be prepared.”
Baker reported the conversation to the president, who made the following entry in his diary a day later: “Paul Volcker's term winding upâto re-appoint or not. Well, he told Howard Baker he wants to leave. So we put a list of possible replacements together.”
45