Volcker by William L. Silber

Author:William L. Silber
Language: eng
Format: epub
Tags: The Triumph of Persistence
Publisher: Bloomsbury Press
Published: 2012-03-21T16:00:00+00:00

The collision between Volcker’s tight monetary policy and Reagan’s budget deficit resembled cold war brinksmanship, like Kennedy confronting Khrushchev over missiles in Cuba.38 The stakes were not nearly as ominous as world conflict, but the fallout of high interest rates clouded America’s economic landscape. The press reported that Alan Greenspan, at the time a member of Ronald Reagan’s outside economic advisers, contends that “if the Administration doesn’t act to convince the markets that the deficit will be down to around $80 billion by 1984, the resulting rise in interest rates will make the Reagan economic recovery ‘feeble.’”39 An $80 billion deficit violated Reagan’s campaign promise to balance the budget but would divert Wall Street from thinking about instability worse than Italy’s.

Robert Lucas, the future Nobel Laureate in economics at the University of Chicago, turned the confrontation between Volcker and Reagan, and the deficit-increasing tax cut of 1981, into a moral conflict in a New York Times essay: “Can a resolutely ‘monetarist’ central bank, restraining monetary growth no matter what else is happening, insulate the economy from the effects of this fiscal dishonesty? The [Reagan] Administration has boldly wagered all of Paul Volcker’s chips on this possibility, but it is buying only time … it is not within the abilities of any central bank to make things work out right in a society that insists that the real resources spent by its government can exceed, on a sustained basis, the resources that government extracts from the private sector via taxes.”40

Who would fold his cards first, Volcker or Reagan?

The first meeting of the Federal Open Market Committee in 1982 began at 2:30 on Monday afternoon, February 1. Before joining the group, Volcker had sat in his office staring at a fifty-dollar box of Partagas cigars perched at the edge of his desk. Treasury Secretary Donald Regan had sent these exquisite Dominican exports as a peace offering, having denigrated Volcker’s “erratic” money growth and addiction to “cheap” cigars a week earlier.41 Paul could not smoke them. His father would turn over in his grave if he knew his son was inhaling a two-dollar cigar, and besides, they were far too rich for his taste. He would offer one to Henry Wallich’s more refined palate after the meeting, depending on how it went.

Credibility dominated the discussion. A jump of 15 percent in the money supply since December surprised just about everyone, considering that the deep recession that began in mid-1981 should have withered the demand for cash.42 Regulatory changes allowing banks to pay interest on checkable deposits had reduced the reliability of these numbers, making it possible to discount the increase as an aberration.43 But the Fed’s reputation remained fragile to many of those seated around the table, and they worried about appearing soft.

Gerald Corrigan, a voting member of the FOMC as president of the Federal Reserve Bank of Minneapolis, who had served as Volcker’s special assistant when Paul first arrived at the board, emphasized history: “The message that seems to be coming through

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