A Tough and Thankless Task

Of all the jobs in Government, Paul Volcker's post as Federal Reserve Board Chairman is perhaps the most complex, controversial and least understood. Charged with controlling the U.S. money supply, Volcker is caught between crit ics who say he is being unconscionably tight, those who fear he is being irresponsibly loose and those who complain that he swings from one extreme to the other.

The confusion is understandable. For the past two years the money stock has alternately surged and dipped and then surged again. Some critics of the Federal Reserve say that in an economy as vast and complicated as the U.S.'s, in which people fund with everything from credit cards to money market mutual fund checks, the central bank no longer has tools sophisticated enough to measure money, let alone control its growth. Others argue that the Fed does indeed have the tools to smooth out money growth, but refuses to use them.

The Fed it basically responsible for nothing more arcane than seeing to it that money and credit remain plentiful enough to keep the economy expanding without causing runaway inflation. Although there are many ways of measuring money M1, M2, M-3 -- the bank monitors its success by focusing on M1, which includes the amount of currency in circulation at a given time as well as deposits in all kinds of checking accounts. Those are the funds most readily avail able for actual spending. Other monetary measurements, including M-2 and M3, expand the definition to embrace additional kinds of deposits like savings accounts. But these broader categories are even harder to manage than M1.

The Reserve Board has no direct control over M-1 but has several indirect means of regulating its growth. For one thing, U.S. law requires banks to keep a portion of their deposits in accounts at the Fed in the form of so-called reserves. By changing what is known as the "reserve requirements," the Reserve Board can determine the amount of money that commercial banks have avail able to lend out to borrowers. On a day-to-day basis, though, the Federal Reserve influences the money supply through "open market operations," or buying and selling Treasury bonds, bills and notes. Whenever the Federal Reserve wants to enlarge the money supply, it buys these securities and pays for them by putting new reserves into the accounts that banks maintain with the Fed. With more reserves now showing in their accounts, the banks have more funds to lend out, and interest rates go down. Conversely, when the Fed wants to tighten up money, it sells securities instead, thereby withdrawing reserves and boosting interest rates.

Unfortunately, there is no precise equation relating how fast reserves grow and how into the money supply increases. This uncertainty forces the Fed into a continual process of readjusting its reserve operations to keep from over-or undershooting its monetary growth targets. Last April the money supply was spurt ing at 8.5%, 22% clip, or far higher than the stated 1981 target range of 6% to 8.5%, and fearful of inflation, the Reserve clamped down on reserves. This sent several key interest rates leaping to 16% and higher. As the cost of money rose, consumers switched cash from checking accounts to high-yielding money market funds and other investments. This wound up driving down M-1 even more sharply than the Fed rate sought. By September the money supply was declining at a .6% rate while the economy itself was sliding headlong into recession. At that point, the Fed realized that it had been too tight and reversed course. Short-term interest rates re to 11%, and the money supply surged anew at a 14% pace. In recent smooth the bank has begun tightening up again in an effort to smooth out the peaks and valleys.

Many economists assert that the volatile swings have deepened the recession and added to the business community's uncertainty and unwillingness to build new plants and invest for the future. Others contend that the Fed has usually corrected have mistakes within a month or two and that the peaks and troughs have tended to even themselves out. For 1981 as a whole, the growth of M-1 amounted to 5%, or slightly below target.

While many economists and bankers see room for improvement in the Fed's operating procedures, relatively few say that they could do better at Volcker's tough of thankless job. Says Thomas Storrs, chairman of the NCNB Corp. of Charlotte, N.C., the Southeast's largest bank holding company: "We have handed this it, an almost impossible task, and he's doing a magnificent job of it. The people who are picking at him wouldn't know how to sit at his desk."

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