Volcker Found Discretion the Best Guideline to Whip Inflation / 'We Didn't Reappoint Volcker. the Markets Reappointed Volcker,' Said a Reagan Official

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As the inflation that had pounded the U.S. economy for so many years receded into the sunset after 1982, Paul Volcker became a folk hero in the financial markets of the United States and in the world.

At last, they said, a Federal Reserve Board chairman had shown some guts and tenacity against the powerful forces of inflation.

With an ego as majestic as his height, Volcker carried this status nicely in his public appearances. Whenever he testified on Capitol Hill, a large press corps showed up to take down every word, and after he was finished they followed him in the corridors, peppering him with questions. ``Volcker's Army,'' some called them.

Volcker recognized the need for the Federal Reserve chairman to have power. It enhanced the status of the institution he loved. Deep down, he loved the attention and respect as well; his wife once said jokingly that he would like to be Fed chairman for life.

But as always with this reserved man, there was a reluctance to grab on to power with the complete zest that a professed politician would. Asked if he considers himself the second most powerful man in Washington, he responds with a distinct laugh, No, he says, he doesn't, and he wishes the phrase would go away.

Furthermore, he says, the phrase makes him and the Fed something of a sitting duck politically, and he wishes the press would stop using it. After Volcker had relaxed and let money grow beyond his monetary targets, the economy in 1983 began recovering from the recession, but there was no question that markets were still jittery.

The Reagan White House began focusing on an important question:

Should Volcker be appointed to a second term? (On Aug. 6, 1983, his four-year term as chairman would expire.)

Volcker's Fed term was for 14 years, but he never would have gone back to being a board member after having been chairman. First, Volcker had to debate the question with himself and his own family:

Did he want the job again?

He had his enemies within the administration. Initially, Treasury Secretary Donald Regan opposed his reappointment. Presidential adviser Edwin Meese III wanted the Fed vice chairman and a fellow Californian, Preston B. Martin, to get the job. Martin Anderson, Reagan's top domestic adviser until he resigned to go back to California, said Volcker had done a fine job but recommended that the president choose his own man as chairman of the Fed.

The White House began focusing on the reappointment question after the economic summit conference in Williamsburg, Va. The names suggested by top aides included Volcker; Martin; Alan Greenspan; Paul W. McCracken, who was chairman of President Nixon's Council of Economic Advisers; Citicorp chairman Walter Wriston; and two monetarists, Milton Friedman and Beryl Sprinkel, undersecretary of the Treasury for monetary affairs.

Volcker met with Reagan on June 6 and discussed reappointment. He made clear to the president that, if he were reappointed, he would not want to commit himself to a full four years. In spite of later reports, there was no deal for him to resign after a year or so, giving Reagan the opportunity to appoint his own man.

Volcker helped his own cause through his long associations in Washington. He had developed his own private network of friends and associates who could talk up his name in the power corridors. Some of this fed back to the White House.

The Senate majority leader, Howard Baker, who had criticized Volcker privately on occasion, had great respect for Volcker and urged his reappointment. So did the president's closest associate in Congress, Sen. Paul Laxalt (R-Nev).

More than anything else, though, there were the markets. With budget deficits in the neighborhood of $200 billion, the Reagan administration had lost credibility in the financial markets; Volcker had earned their respect. …