He Promised, and He Delivered

The U.S. was on the verge of a financial crisis when Paul A. Volcker became The U.S. was on the verge of a financial crisis when Paul A. Volcker became Federal Reserve Board chairman in August 1979. Inflation was roaring ahead at an annual rate of 13%, and the dollar was sinking on international money markets. Worldwide confidence in the Government's ability to manage the American economy had seldom been lower. Today inflation has slowed to less than 4%, and the dollar has become the world's strongest currency. Many experts attribute that remarkable turnaround largely to Volcker. Says Harvard Economist Otto Eckstein: "Volcker will go down as a giant in history." Concurs Henry Kaufman, chief economist at Salomon Brothers: "Volcker has demonstrated an extraordinary capacity as a defender of the integrity of our currency."

The new chairman declared all-out war against inflation within weeks of his appointment by President Carter. Just two months after Volcker took office, the Federal Reserve announced that it would seek to halt price increases at their source by curbing the growth of the money supply. Previously the Federal Reserve had eased tight-money policies when interest rates climbed too high, but Volcker vowed to stay firm until inflation had been wrung out of the economy. One result: the prime rate reached an unheard-of 21 1/2% in December 1980.

Although Volcker has seesawed at times, he has generally kept on course so well that many critics blame his tight-money policies for the sharpest U.S. business slump since the Great Depression. "By mid-1981 inflation was under control," says Michael Evans, a Washington-based economic consultant. "But Volcker overstayed his welcome. He didn't ease up until mid-1982, and that turned a moderate recession into the worst one ever."

The Federal Reserve finally relented last summer and allowed money to expand faster. The prime, which stood at 16 1/2% at the time, tumbled to 10 1/2% earlier this year and has remained there while the economic recovery has picked up steam. Some experts argue that Volcker had no choice but to let up; others give him high marks for good sense and good timing. Says Irwin Kellner, chief economist for Manufacturers Hanover Trust: "He squeezed the daylights out of the economy until it really hurt, but he was wise enough to know when to let go."

Volcker also played a key role in containing the international debt crisis last August. "Aside from saving international banking, I can't think of anything he's done," quips Economist Donald Ratajczak of Georgia State University. By easing up on the U.S. money supply, Volcker ensured that cash would be available for loans to troubled borrowers like Mexico, which was near default. Moreover, Volcker was the leader in arranging a $5 billion rescue package that kept Mexico financially afloat.

Like any other person in public life, Volcker has his detractors. He has been faulted for going along with Carter's disastrous fling with credit controls in early 1980 and for sometimes permitting the money supply to swing wildly. Asserts Nobel Laureate Milton Friedman, who maintains that steady and predictable money growth is the key to economic health: "There has been more volatility in the money supply in the past three years than in any previous three-year period."

But the most common assessment of Volcker's nearly four years as Federal Reserve chairman is highly positive. "Volcker's track record is a proven one," sums up John Paulus, chief economist for Morgan Stanley. "He promised, and he delivered." One of Volcker's strengths in seeking reappointment has been that kind of overwhelming support from moneymen in the U.S. and abroad. This file is automatically generated by a robot program, so viewer discretion is required.