Marble is the perfect facade for the Federal Reserve Board's
Washington headquarters. It feels cold, strong and distant. If one
finds tourists trying to get into the building, it is because they
are either lost, in search of a restroom, or very unusual
sightseers. The Fed does not encourage casual visitors.
In 1982, the serenity of this place was shattered by the
cacophony of farmers, car dealers, homebuilders, small-business men,
small-town bankers and others, all seeking a letup in the high
interest rates that were pushing them toward, if not into,
Car dealers sent keys in coffins, and protesting farmers formed
a ring around the building. Members of Congress squealed and
introduced resolutions against the Fed. Some proposed impeachment,
and others simply sought to remove the Fed's power to control the
money supply or to restructure the central bank.
Paul Volcker's clampdown had done its job. The economy already
had sunk into a deep recession in the fourth quarter of 1981,
declining at an annual rate of 4.9 percent. As 1982 arrived, real
Gross National Product still was dropping at roughly the same pace,
and unemployment and bankruptcies rose along with the political
But Volcker had not wrung inflation out of the system to the
degree that he wanted. Consumer prices in 1981 climbed by a hefty
8.9 percent, although they were below double-digit levels for the
first time since 1978. Although the economy in many respects
groaned under this monetary onslaught, in his mind it was not the
time to let up.
The heat was on Volcker. Almost every Volcker appearance on
Capitol Hill in that fateful year resulted in criticism from senators
and representatives seeking a lowering of interest rates. Old
Washington hands had reason to believe that such pressure would
The record of previous administrations indicated a close
correlation between the Fed's monetary policy and the type of
monetary policy sought by the White House. Stick it to them in
public, it was believed, and the central bank would respond as it
had in the past.
In response to this, the tough Paul Volcker, the one who fights
back when backed into a corner, burst into the open. It started
when President Reagan said at a press conference in mid-January that
an upsurge in the money supply was sending ``the wrong signal'' to
money markets and might be delaying the effect of his tax-cut
When asked about calls for Volcker's resignation, Reagan gave a
neutral answer, unlike in the past when he had supported Volcker
publicly. Volcker made a speech a week later and declared there
would be no backing down. He blamed high deficits, not just monetary
policy, for high interest rates.
``The Federal Reserve has no way of offsetting the financial
market pressure associated with excessive deficits,'' he said.
As the tension between the Fed and the White House mounted, the
President and Volcker arranged a peace conference Feb. 15, at the
White House. The two men met alone. Reagan's economic advisers
prepared briefing papers urging him to tell Volcker to push for a
slow and steady growth in the money supply, but neither would say
what was discussed.
It was evident, though, that Volcker had been persuasive. Three
days later, at a press conference, Reagan had changed his tune.
``I have confidence in the announced policies of the Federal
Reserve Board,'' he said.
It was not unusual to see Volcker stand up to such pressure. He
always had a fixed idea of where he was going with the monetary
policy. The approach hinged heavily, of course, on having good
information about the course of the economy and his own monetary
If something were flawed in that policy, then it would lead to
miscalculation and possibly lack of control. There was something
flawed in that policy - and Volcker obviously was aware of it early
in 1982. …