Fed Chairman Drew Admiration, Criticism During Tenure
JAMES F. PELTZ
Jun. 02, 1987
NEW YORK (AP) _ 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 were credited with pushing the economy into a major recession in the early 1980s, which earned Volcker heated criticism from workers, farmers, businessmen and politicians.
But since then, the economy has rebounded to produce one of the longest peacetime expansions in U.S. history and Volcker, 59, announced Tuesday he would not take a third term as chairman of the Federal Reserve Board, the U.S. central bank.
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.
But 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 and 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. And by the summer of 1982, the Fed decided it could relax its grip on the money supply without reigniting inflation.
Interest rates began dropping sharply, which helped restimulate economic growth and triggered the stock market's historic rally.
With the help of collapsing oil prices, inflation since then has remained relatively subdued and the economy has maintained steady, if modest, growth. Inflation and interest rates have edged up lately, but remain half as high as six years ago. The dollar, however, recently suffered a sharp decline following an effort by the United States and its major trading partners to push the currency lower to help the nation's trade deficit.
Volcker occasionally drew criticism, even from the White House, for not pursuing faster economic growth by pumping more money into the economy. But to Volcker, keeping inflation down was more important.
Volcker also found himself at odds with the administration over the future of banking - the White House supported rapid deregulation, Volcker backed a go-slow policy.
''He was never swayed by politics or the pressures of the moment,'' Jones said. While newly appointed members of the Fed's seven-member board increasingly disagreed with Volcker in recent years, the chairman ''was able to gain the respect of others on the board by arguing persuasively in favor of his position,'' Jones said.
Paul Adolph Volcker was born in Cape May, N.J., on Sept. 5, 1927. He grew up in Teaneck, N.J., where his father served as city manager for more than 20 years.
The younger Volcker earned a bachelor's degree from Princeton University in 1949 and a master's degree in political economy and government from Harvard University in 1951, after which he joined the Treasury Department.
Over the next 28 years, Volcker gained the experience that made him Carter's choice in 1979 - three tours of duty at the Treasury, two stints as economist and long-range planner at Chase Manhattan Bank in New York, and three Federal Reserve posts.
He also had established strong ties to the international financial community, which enhanced his stature among foreign central bankers.
At 6-foot-7, Volcker's physical stature needed no enhancing, and the balding chairman also was known for his ever-present cigar, his fondness for fishing, a spartan lifestyle, and his ability to protect the Fed's independence by giving vague descriptions of Fed policy to congressional panels.
Volcker also was known for his reverence for public service, as evidenced by his willingness to sacrifice financial gain for the Fed chairmanship.
When he took the job in 1979, his annual salary dropped to $57,500 from the $116,000 he earned at the New York Fed. The Fed chairman's salary has since risen to $89,500 a year, but that remains well below what many people half Volcker's age collect on Wall Street or elsewhere in the private sector.