Correspondents' Correspondence

...Correspondents' Correspondence BRIEF TAKEOUTS OF MORE THAN PERSONAL INTEREST FROM LETTERS AND OTHER COMMUNICATIONS RECEIVED BY THE EDITORS Volcker's Reward New York—Federal Reserve Board Chairman Paul Volcker has for the most part done what two Presidents wanted him to do Forced upon Jimmy Carter by the financial community, he obediently imposed credit controls in the spring of 1980 These plunged the economy into a one quarter recession, the briefest yet one of the steepest in business cycle annals Once the controls were removed, recovery but also inflation resumed The episode did nothing to damage Volcker, it of course reinforced the unfortunate Carter's reputation for maladroitness Prior to the controls fiasco, Volcker in October 1979 had significantly shifted Federal Reserve policy away from its traditional focus upon interest rates toward emphasis upon the growth of the money supply, in particular M1, the sum of checking deposits and currency in circulation This followed Milton Friedman, the inventor of monetarism, who has long preached that the way to cool inflation and restore the bloom of good health to the cheeks of any economy is simply to enlarge Ml ai an annual rate no larger than normal productivity growth, say 3 per tent As Volcker and his six colleagues at the Fed discovered, though, money gets harder and harder to define as money market funds, NOW and super-NOW accounts, and credit cards supplement old-fashioned cash and nomnterest bearing checking accounts Moreover, the same amount of money, however defined, sometimes passes from hand to hand with bewildering rapidity and on other occasions with puzzling sloth All these factors make compliance with the dictates of Milton far from simple Indeed, during the monetarist experiment the Fed missed its own growth targets about as often as it approximated them Nevertheless, the Reagan Administration began by endorsing the Fed's monetarist endeavors In the President's ecumenical fashion, he welcomed aboard newfangled supply-siders traditional budget balancers, and a band of monetarists headed b v Treasury Undersecretary Beryl Spnnkel In 1981 and the first six months of 1982, the Fed demonstrated vet again that a central bank which is sufficiently determined to tighten credit and raise interest rates will accomplish at least two things It will slow inflation and it will with equal certainty increase unemployment The minidepression ot 1981-2 should be set to the account of Federal Reserve policy and the man who presided over it By last summer, the Reagan folks began to think it possible to have too much of even so excellent a therapy as sound monetary policy Consequently, in one of those odd electoral year coincidences, the Fed last August abruptly junked monetarism As it started to loosen its grip on credit, the economy ceased to slide downward and by the end of' 82 recovery probably began If this continues into 1984, it may very well bless us with four more years of the present Washington team In central banking, personality counts for much In the summer of 1972, Arthur Burns pumped up the money supply in good time to promote his friend Richard Nixon's landslide re-election His solemn manner, center-parted grey hair, measured words, and pipe of wisdom identified a money manager of uncommon rectitude Paul Volcker stands 6' 7 ", smokes cheap cigars, lives a spartan life, and projects a similar image of rock-like integrity In point of fact, his record demonstrates the same acute political sensitivity displayed by Burns In a conservative period that began during the Carter Administration, Volcker has accurately read the public mood as, up to a point, more concerned about inflation than unemployment and the hardships of the poor When last summer small businessmen, farmers, homeowners, and middle managers began to be hurt m politically impressive numbers, the Fed speedily registered the President's and his important constituents' shifts in priorities Does Volcker deserve his reappointment'' I am among a minority who would prefer to impeach him and Ronald Reagan for violating the law of the land I mean the Humphrey-Hawkins Balanced Growth and Full Employment Act that sets the 1983 unemployment target at 4 per cent By other criteria, four more years on the job are a well-earned reward for uncommon pursuit ot establishment opinion and uncommon capacity to endure the sufferings ot our most needy citizensROBERT LEKACHMAN...