Fed Chief Is Best Remembered for His Tough Action to Cut Inflation

It was the summer of 1979, and the value of the dollar had been plummeting for two years, talked down by a weakened Jimmy Carter Administration and pushed lower still by double-digit inflation.

Paul A. Volcker--hulking, cigar-puffing and an inveterate opponent of Carter policies from his perch at the New York Federal Reserve Bank--was called in to save the situation as chairman of the Federal Reserve System.

Within three years, at the cost of two sharp recessions and a humiliating election defeat for the incumbent President, the dollar stabilized and rose to unprecedented heights as inflation tumbled.

Eight years later, Volcker is leaving the Fed at a time when the dollar has been talked down for two years by the Reagan Administration and is threatened further by serious trade and debt imbalances in the national and global economies.

Indeed, the only difference appears to be that Volcker has quit cigars and severe inflation has not returned.

What, then, is his legacy? “He was brought in to help stabilize the value of the dollar,” said one economist, Lee Hoskins of Pittsburgh National Corp., a bank holding company. “Now, after record highs and a steep decline, he’s leaving the dollar in the same condition in which he found it--weak. But he saw that the major issue when he came in was inflation, and he turned it around.”

That assessment by a monetarist economist who has been critical of the wide swings in the money supply measures during Volcker’s eight-year tenure is echoed across the economic spectrum by orthodox Keynesians, supply-siders and most mainstream economists.

Tough Policy-Maker

Volcker, they said, may have failed to stabilize global exchange rates, but he was the policy-maker who, more than any other, wrung inflation out of the nation’s economy and set the economy on a new path of steady growth.

Secondly, Volcker is credited with restoring the United States to a position of leadership in international economic policies at a time when the global economic scene has grown increasingly interdependent.

As resounding as Volcker’s successes were and as large as the problems he did not conquer still loom, perhaps the most remarkable aspect of his term was his ability to ride out the crazy economic roller-coaster ride of recent years, critics and admirers agree.

Some of the extremes the economy was put through during the period are hard to believe, even at only a few years’ distance.

In 1979, when Volcker took over, inflation averaged 13.3%, measured by consumer prices. Last year, it was 1.1%. At the peak of Volcker’s anti-inflation drive, the discount rate, the basic interest rate that is set by the Fed, hit 12%. It is 5.5% now.

The prime rate, set by money-center banks, soared to an all-time high of 21.5%. It is 8.25% today. During the 1982 recession, unemployment went above 10% and averaged 9.7% for the year, the highest since the Great Depression. It was 6.2% in April.

The chairman’s flexibility was the key, many economists say.

“There was a lot of change in his policies. At first, he seemed to agree with the Reagan economic program,” which stressed combatting inflation and cutting taxes, but “he became critical later as (federal budget) deficits piled up,” said Barry P. Bosworth of the Brookings Institution.

Some still criticize Volcker for pushing the economy too deeply into recession in 1982 to bring down inflation. His measures to tighten the growth of the money supply and drive up interest rates took a sharp toll on business investment at the time.