Two episodes from Paul Volcker’s long career in public service stand out as lessons for US President Donald Trump’s administration today. In 1971, Volcker helped end the postwar global financial order that was anchored by the price of gold in US dollars. A disruptive decade later, at the helm of the US Federal Reserve, he established a new order based on competent economic management.
Ever since, his legendary example has guided policymakers and sustained the world’s confidence in the US dollar and US Treasury securities. Now, a chaotically managed effort to restructure international trade appears to be denting that hard-won credibility.
Restoring it would not be easy, especially for a president as impulsive as Trump. Losing it would be catastrophic. It is time for a reset.
The last time a US president unilaterally disrupted the global economic system was more than 50 years ago. Then-US president Richard Nixon’s team realized that it was unsustainable to continue to honor a promise to convert foreign central banks’ dollars to gold at a rate of US$35 an ounce, set in 1945. The US simply did not have enough gold to back all the US dollars spent on postwar investments overseas.
The “Nixon shock” of Aug. 15, 1971, ended the Bretton Woods agreement. Volcker, then the US Department of Treasury’s undersecretary of monetary affairs, immediately flew around the world to meet with finance ministers and try to reassure them that the US would remain a reliable partner.
Still, the consequences of that disruption — along with the tariffs and price controls enacted to try to contain the damage — were long lasting. The dollar slid. The Fed, led by one of Nixon’s former economic advisers, failed to contain inflation exacerbated by growing budget deficits and a jump in the oil price. The credibility of US economic management teetered abroad and at home.
In 1979, Volcker became then-US president Jimmy Carter’s Fed chairman. He knew he had one job: bring down inflation. Rates soared as he turned his focus to shrinking the supply of money, with the benchmark federal funds rate nearing 20 percent. However, Volcker remained undeterred until inflation was quelled.
Instead of gold, the US’ economic success ever since has been underpinned in part by “the Volcker standard” — a reassurance that the US had competent economic managers who would do what was needed to maintain the confidence of its citizens and the rest of the world. For the past 40 years, money has rushed into the safety of Treasuries at the first sign of turmoil anywhere. Fund managers have bought US bonds even when the tumult has stemmed from declines in US markets, such as during the 2008 global financial crisis or amid uncertainty about Congress’ willingness to act to avert a default.
As a result, presidents have generally deferred to experts when economic matters got dicey. Carter mostly stayed quiet as Volcker’s anti-inflation campaign caused a recession and helped sink his re-election prospects. Former US president George W. Bush stepped back and let his then-Treasury secretary Henry Paulson, the former head of Goldman Sachs Group Inc., and then-Fed chairman Ben Bernanke work with economic leaders around the world to handle the financial crisis.
It is true that former US president Joe Biden’s excessive fiscal stimulus and the Fed’s hesitant reaction to price increases during the COVID-19 pandemic contributed to the worst bout of inflation since Volcker’s time.
However, Powell quickly drew on Volcker’s lessons, raised interest rates rapidly and made progress in repairing the damage. Those were ultimately honest miscalculations in a period of unusual upheaval.
By contrast, Trump’s “Liberation Day” disruption of the global trading system is more like the Nixon shock. It is a unilateral, radical step that seeks to address global imbalances. The difference is in the reckless implementation.
Instead of drawing on careful analysis and diplomatic communication as Nixon’s team had, Trump’s hastily constructed plan was presented with incoherent explanations and a belittling tone toward world leaders. The administration lacked a strategy for managing the fallout in financial markets.
Rather than coordinating with the central bank, the president has sought to bully the Fed into helping to clean up the mess. A 90-day pause on most of the levies last week was similarly instinctive and ill-coordinated. It is no wonder the dollar and Treasuries are losing value.
This administration, known for its showmanship, now needs to pay attention to substance. That means doing the hard work of careful analysis, listening to experts and engaging seriously with leaders of other nations with clearly defined aims. Failing to do so would continue to reduce the dollar’s buying power, and increase borrowing costs for the nation and for all Americans.
In the memoir that I helped him write at the end of his life, Volcker stressed the importance of competent government management. Policy goals change — Volcker served under six presidents, Republican and Democratic — but none succeed without public servants with the integrity and skills to sustain the nation’s credibility.
Christine Harper is a member of the editorial board covering finance and markets. Previously, she was the editor of Bloomberg Markets magazine. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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