Chairman of the US Federal Reserve Board in the 1980s who saw off inflation and later criticised financial deregulation

Paul Volcker, who has died aged 92, was the most eminent financial statesman of his generation, the sworn enemy of the abuse of finance in any of its manifestations. That could be indulging inflation as the financial outcome of governments and society living beyond their means, or investment banks deluding themselves they had uncovered the alchemy of risk-free lending through the issuance of ever more complex financial derivatives.

His twin mantras were that finance should be the servant not the master of economy and society. And that good government is an indispensable component of a good society, in particular keeping the temptations of clever-clever finance at bay. Sound money and good government went hand in hand. He practised what he preached, seizing the opportunity to embody his beliefs when the moment arrived.

Standing over 6ft 7in, and a lover of over-sized cigars and fly-fishing, he represented the best of New England liberalism – genial, good humoured and steely. From August 1979 to August 1987 he was chairman of the US Federal Reserve, the US’s central bank, appointed by Democrat President Jimmy Carter and and reappointed by Republican President Ronald Reagan. In the early part of that period he crushed inflation out of the US economy.

Just 18 months after he was appointed he had the courage to raise interest rates to 20% – a rate never seen before – prompting mass protests as the US economy plunged into recession. But he held firm and succeeded, inflation peaking at 14.8% before falling back to 3% by 1983. The foundations had been laid for sustained economic recovery and in the process warranting the principle that central bank independence is a crucial precondition for robust monetary policy.

Facebook Twitter Pinterest Paul Volcker attending a Washington meeting to discuss public sector salaries, 1989. Photograph: Rick Maiman

It was one of the defining moments in US monetary policy history, winning him plaudits not only for his resilience in the face of near universal criticism but also from the small but fast growing influential band of free market, “monetarist” economists who believed that control of the money supply using high interest rates was the sole means to curb inflation – not any kind of government interference into the market processes for setting wages and prices. Volcker temporarily was their hero.

But they misjudged the man. Volcker never bought the proposition that the market was magical or that there could be a systematic relationship between the growth of the money supply and inflation. Rather he was intuitively suspicious of the short term and predatory instincts of most financial market participants, which lead to volatile and unpredictable market movements, and intuitively suspicious of the mania for dismantling the New Deal rules and regulations that restrained their worst types of behaviours that “free market“ economists said were inhibiting the efficiency of the US financial system.

His willingness to be austere in raising interest rates so high was because he knew dear money worked reliably in squeezing inflation – not because he was an advocate of a hyper-free-market economy. He would be equally austere in resisting the siren calls to deregulate finance in the name of freeing up the market. It would come to no good.

Nor did it. Volcker was a critic of successive rounds of financial deregulation after he left office, saying that the only useful financial innovation he had encountered was the invention of the ATM – cash dispensing machines.

Facebook Twitter Pinterest Paul Volcker leaving the the United Nations headquarters in New York as head of the independent inquiry committee investigating the UN Oil for Food scheme in Iraq, 2005. Photograph: Mario Tama/Getty Images

Even before the 2008-09 financial crisis he was warning that the invention of mortgage backed securities and credit default swaps were inherently unstable, in effect transferring risk to the Federal Reserve, which would be compelled to underwrite the financial system if the markets ever lost confidence in them. So it proved as the financial crisis broke for precisely the reasons about which he had warned – unlike his successor Alan Greenspan, who had enthusiastically and uncritically embraced financial deregulation.

President Obama appointed him head of the president’s economic advisory board in 2009 in the midst of the crisis. There he argued that the emergence of banks that were too big to fail, so forcing central bank rescues, was morally and economically insupportable and they should be broken up. If that was politically impossible then at least commercial banks who took deposits from the ordinary public should be banned from trading in high-risk financial derivatives on their own account – the so-called Volcker rule.

Obama adopted the proposal and it became section 619 of the 2010 Dodd Frank Wall Street Reform Act; banks cannot own, invest in or sponsor hedge funds, private equity funds or other trading operations for their own use.

Volcker had once again made an indelible mark on the US financial system, and influenced British thinking in the legal obligation to ringfence commercial and investment bank operations.

Born in Cape May, on the southern tip of New Jersey, Paul Jr was the son of Paul Volcker, a civil engineer, and his wife, Alma (nee Klippel); his grandparents were all German immigrants. He grew up in the conventional world of 1930s and 40s America – going to high school, attending the local Lutheran church, but already showing an interest in public affairs and a precocious intelligence .

He gained a degree in history, economics and political science at Princeton University (1949), and went on to do a master’s in political economy and government at Harvard, and to study at the London school of Economics. In 1952 he joined the New York Federal Reserve as an economist. A career alternating between Wall Street and the US Treasury in ever more responsible jobs then followed before fatefully he caught the eye of President Carter in 1979.

Facebook Twitter Pinterest Paul Volcker being interviewed by Christine Romans of CNN on banking regulation

He was a convinced believer in international collaboration, helping to fashion the Plaza accords in 1986 when Germany and Japan agreed to allow their currencies to appreciate, so limiting their trade imbalances with the US. This vital adjustment, he knew, would not come from market forces spontaneously but from intergovernmental collaboration.

He was a founder of the Trilateral Commission, to foster relations between Japan, western Europe and north America, and regular attender at the Bilderberg meetings of leaders and experts from Europe and north America, believing that the key international players had to understand each other better.

Towards the end of his life this believer in the power, capacity and importance of good government became increasingly concerned about the collapse of trust in government, founding the Volcker Alliance to advance the understanding of – and education for – careers in public service.

In 1954 he married Barbara Bahnson; she died in 1998. In 2010 he married Anke Dening, and she survives him, along with James and Janice, the children of his first marriage.

• Paul Adolph Volcker, central banker and economist, born 5 September 1927; died 8 December 2019