Volcker Leadership of Fed Drew Respect of Economic, Political World

By James F. Peltz, Ap | THE JOURNAL RECORD, June 3, 1987 | Go to article overview

Volcker Leadership of Fed Drew Respect of Economic, Political World


James F. Peltz, Ap, THE JOURNAL RECORD


By James F. Peltz NEW YORK - In his eight years as the world's most powerful banker, Paul A. Volcker was a tower of strength for the ever-nervous financial markets, which constantly leaned on his anti-inflation policies for support.

The same policies also wee credited with pushing the economy into a major recession in the early 1980s, which earned Volcker heated criticism from workers, farmers, businessmen and politicians.

Since then, the economy has rebounded to produce one of the longest peacetime expansions in U.S. history with Volcker, 59, as chairman of the Federal Reserve Board for eight years until his decision not take a third term.

President Reagan said he would nominate economist Alan S. Greenspan to replace Volcker.

Like the president, a Fed chairman cannot please everyone. The job is inherently subject to praise and criticism from different corners as the Fed tries to juggle monetary policy with politicians' fiscal policy while trying to promote economic growth.

However, Volcker earned the respect of many financial, political and business leaders at home and abroad if only for his steadfastness in fighting inflation.

``The important thing is that he stuck with it and defended the policy,'' said Gordon Pye, senior vice president of Irving Trust Co., a major New York bank. ``He was being attacked from many quarters, and stood his ground.''

David Jones, a veteran Fed-watcher and economist for Aubrey G. Lanston & Co., a government securities firm, said Volcker ``became a predictable element in the markets in the best sense of the term. He did what he said he would do, which is unusual for anyone in politics.''

Volcker was first nominated to be Fed chairman by President Jimmy Carter in 1979, when Volcker was head of the Federal Reserve Bank of New York. Volcker was renominated to another four-year term in 1983 by President Reagan.

When Volcker took the helm he had two goals:

- To end the double-digit inflation wracking the economy.

- To reverse the dollar's slide.

To accomplish these goals, the Volcker-led board made an important policy change. Instead of continuing to promote economic growth by governing the level of interest raes, the Fed would concentrate on slowing the growth of money circulating in the economy.

The decision meant the Fed was prepared to let interest rates - the cost of money - change abruptly in order to push down inflation. And that's what happened.

As the Fed aggressively tightened the money supply, the cost of money shot up. On Dec. 19, 1980, the nation's banks raised their prime lending rates to a record 21.5 percent.

With rates so high, consumers cut their spending, businesses and farmers could no longer afford to borrow money, and the economy plunged into the severe recession of 1981-1982.

The high interest rates did bolster the dollar's value, but the recession lifted unemployment above 10 percent.

At the same time, however, inflation dropped as the Fed hoped.

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