Paul Volcker: Corporate Director, Public Servant.

• Author: KABACK, HOFFER

It's been 13 years since his historic chairmanship of the Fed, and Paul Volcker is now, of all things, bumping up against age limits for corporate directors. A discussion about life and issues in the global financial realm and in the public company boardroom.

ATTEMPTING TO MOBILIZE the citizenry against continuing inflation, President Gerald R. Ford held an economic summit in the mid-1970s. To symbolize his resolve, the President displayed a campaign-style button emblazoned with the letters WIN. They stood for Whip Inflation Now.

Ford didn't. Nor did his successor, Jimmy Carter. Indeed, it was during Carter's term that the phrase "misery index" (the sum of the inflation and unemployment rates) came into vogue. Oil prices were high. Inflation gave no signs of stabilizing, let alone abating. Some searched their bookshelves for dusty tomes about the German economy of the 1920s.

We live today in a far different world. The September 2000 unemployment rate was 3.9%, a 30-year low and well below the figure that, for many years, economists considered the "natural" rate. And, although the threat of inflation remains ever-present in the minds of central bankers, actual inflation has not, in recent years, been a major factor in the U.S. economy. To be sure, the September producer and consumer price indices rose significantly, even excluding energy price increases. Nor can a revisitation of stagflation -- the combination of recession and inflation -- be ruled out. (Before stagflation occurred in the 1970s, economists were of the view that that combination could not happen.) Nevertheless, if one looks back at most of the Nineties, one sees an economy where general contractors worried not about staying in business but, instead, about managing overflow business from customers renovating multimillion-dollar second homes. What President Carter diagnosed as our national "malaise" in the 1970s met amorphosed, in the 1990s, into the warmth and comfort of the wealth effect.

When, however, Carter left office 20 years ago and President Reagan took over, things looked bleak. Some view Reagan's dismissal of the striking air-traffic controllers as a watershed economic and societal event in that it generated the atmospherics necessary (but not sufficient) for breaking the back of inflation. Critical to achieving that result were the actions taken in the 1980s by the Federal Reserve System.

The two-term Chairman of the Fed from 1979 to 1987 was Paul Volcker. These things were true of Volcker then: he stood an imposing six feet, seven inches; he mumbled; and he represented the quintessence of public service. Today, at age 73, Volcker is still six-foot-seven; he still mumbles; and, though no longer (literally) a public servant, he devotes to quasi-public endeavors an effort that probably would exhaust many half his age.

A QUICK QUIZ: Before Greenspan came Volcker. Who was Fed Chairman under Nixon? Answer: Arthur F. Burns, a white-haired, pipe-smoking economist and an expert on the business cycle -- a central banker out of Central Casting. Tougher question: Who was Chairman between Burns and Volcker? Answer: G. William Miller, quondam CEO of Textron and not an economist. His appointment by President Carter was called "brilliant" by the New York Times. Yet Miller turned out not to be up to the job. As noted economist Henry Kaufman put it in his recently published memoirs, Miller's Fed was "a house divided."

Apparently having recognized that a new direction was urgently needed, Carter in late 1979 moved Miller over to Treasury Secretary and appointed Volcker as Fed Chairman. Unlike Alan Greenspan, who headed a private consulting firm, Townsend-Greenspan, before becoming Fed Chairman, Volcker had been in the government virtually all his adult life.

Volcker's Fed took action -- and it wasn't pleasant. Some referred to it as "the old-time religion." Interest rates soared. The prime rate eventually exceeded 20%. Bankruptcies increased. Much short-term pain was inflicted. Farmers, in particular, were devastated; farms owned and worked for generations were auctioned at sheriffs' sales. Volcker was blamed for this. With pain levels high, there were loud calls for the Fed to back off. For the most part, it didn't. And, in the end, the inflationary dynamic of the U.S. economy -- born, in large measure, out of President Johnson's "guns and butter" policies of the mid'60s -- was overcome.

PAUL A. VOLCKER was born in 1927 in New Jersey. (In Teaneck, a park is named for his father, a former city manager.) He received his B.A. from Princeton in 1949 and an M.A. in political economy and government from Harvard two years later, and did postgraduate work at the London School of Economics.

Volcker served in the federal government under Presidents John Kennedy to Ronald Reagan. From 1969 to 1974, he was Under Secretary of the Treasury for Monetary Affairs. Thereafter, he was President of the New York Fed until being named Fed Chairman.

Upon leaving the Fed in 1987 (before the October 1987 stock market crash), Volcker joined James Wolfensohn, today president of the World Bank, at the latter's boutique investment banking firm. (Wolfensohn's firm was subsequently acquired by Bankers Trust; Bankers Trust was, in turn, acquired by Deutsche Bank.) He also joined several corporate boards. So, Paul Volcker entered, and remains in, the private sector. But he has never become of it.

His continuing involvements in quasi-public activities include:

* North American Chairman of the Trilateral Commission

* Chairman of the Group of 30

* Chairman of the United States/Hong Kong Economic Cooperation Committee

* Co-chairman of the Financial Services Volunteer Corps

* Chairman of the board of trustees of International House

* Chairman of the board of trustees of the International Accounting Standards Committee.

In addition, he spent years heading a panel that investigated Swiss banks' liability to Holocaust victims. Along with former Sen. George Mitchell, Yale President Richard Levin, and columnist George Will, Volcker recently served on a panel that studied the economics of Major League Baseball. In mid-September, he testified before the SEC concerning auditor independence (see sidebar page 24). Thus, the breadth of matters on which Volcker is sought out.

WERE THERE TO BE auctioned a 90-minute sitdown with (a) dot-com securities analyst Henry Blodget, (b) stock market strategist Abby Joseph Cohen, (c) trader/writer James J. Cramer, and (d) Volcker, the opportunity to talk, one-on-one, with Volcker most likely would not receive the highest bid. Perhaps there would be a different outcome if the universe of bidders came solely from the AARP mailing list. But the pre-50 set simply may not appreciate who Paul Volcker is or what he did for this country.

I spoke with him in March 2000 at his midtown New York office. Questions about current Fed policy were off limits, but among the topics he did expound on were these: the stock market, foreign investment, "moral hazard," corporate governance, and the role of the IMF (which came up in the second Presidential debate on October 11, 2000). For readers, what appears below is the functional equivalent of having bid for (and won) a talk with the man on whose Federal Reserve watch inflation was wrung out of the American economy.

Transparency, corruption, and capital flows

In a December 1997 speech in honor of former Swiss central banker Fritz Leutwiler, you said that "Economic growth, open markets, and the free flow of goods and capital will encourage more broadly liberal societies with democratic values. More specifically, a premium on economic efficiency and reliance on foreign capital will lead to demands for greater transparency and less corruption."

Pretty good speech.

Not bad. [Volcker laughs.] Do you believe that this will apply to China?

Yes. A tendency helps. A tendency in that direction, yes.

China is encouraging the flow of outside capital, but we're not seeing greater transparency yet. How much of a lag effect is there?

I think you do see greater transparency relative to what you had. It may not be as fast as you would like. You still have a one-party government. But there's a lot more openness in China than there was.

Would you agree that your principle has failed, so far, in Russia in that many Western companies invested heavily there, especially in oil development, only to find out that notions like contract law did not exist?

You've given me two rough examples. I think Russia is rougher than China. These are two very big countries. I think Russia has been an extremely difficult case for a variety of reasons. And it certainly has not resulted in instantaneous transparency, rule of law, lack of corruption, and so forth. But...