The Squeeze of '79

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The financial frenzy, which also sent prices plummeting on foreign stock exchanges and set off sharp swings in the bullion markets, inevitably left many Americans wondering whether they were about to be flattened by a 50th-anniversary replay of the October 1929 Wall Street collapse. In fact, the turmoil was the direct result of some coolly deliberate steps that the men who manage the U.S.'s money had made in hopes of stabilizing the wobbly dollar and pulling down inflation, now running at a blistering annual rate of 13.1%. The author of these moves was a mild-mannered, balding bureaucrat whom most people outside the cloistered international banking fraternity have never heard of: Paul A. Volcker, 52, the U.S.'s newly appointed top central banker and, as such, the chief guardian of the dollar.

As chairman of the seven-member Board of Governors of the U.S. Federal Reserve, Volcker works in a complex and mysterious world. But last week, after less than three months in the Fed job, Volcker abruptly moved to stage center in Washington's so far faltering struggle to halt the price explosion that is sapping the nation's vitality. He committed Federal Reserve policy to a campaign not just to support the dollar but to attack inflation at its root source at home, by making money both scarce and costly, as well as by tightening up on the various procedures that the board has available to accomplish that purpose.

Volcker's self-styled brand of "pragmatic monetarism" is bound to make the nation's developing recession deeper, and thus further cloud the re-election chances of Jimmy Carter, the man who appointed him. Nonetheless, the Fed's new anti-inflation activism is one of the most hopeful signs in a decade that Washington is at last becoming serious about combatting the economy's debilitating price spiral. As much as anything, the upheavals and spasms that overtook markets everywhere last week reflected an almost panicky realization by all sorts of people, from big plungers on the commodities exchanges to working couples hoping to make a few hundred dollars on the rise of a stock, that they may no longer be able to make investment decisions based on expectations of cheap money, easy credit and endlessly climbing prices.

The message of Volckernomics is plain: interest rates will be going up, perhaps to levels that would have seemed wholly unimaginable only a few months ago. Meanwhile, the supply of money and credit to the nation's still badly overheated economy will be curbed, making it more and more difficult for people to keep fueling inflation by spending instead of saving. In short, both individuals and corporations, and indeed the nation as a whole, will simply have to settle for sharply lower growth for some time to come. In return, people ought now to begin to be able, for the first time since the mid-1960s, to look forward to a future in which a lasting decline in inflation is more than just a politician's promise.

The specific details of the Fed's new policy, which was unveiled over the weekend before the Columbus Day bank holiday, are so complex that many people might wonder whether they mean much at all. As the reaction in the money and stock markets plainly attests, they do. In brief, the Federal Reserve announced: