Volcker Sent Knockout Punch to Inflation / Almost Every Volcker Appearance in 1982 Resulted in Criticism
Neikirk, William R., THE JOURNAL RECORD
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, bankruptcy.
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 temperature.
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 work.
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 program.
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 policy.
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. …