Nation: Defender of The Dollar

For Volcker, happiness is tight money and 20¢ cigars

This good gray banker is not without humor. Invited to a Halloween party in 1970, 6-ft. 7-in. Paul Volcker daubed his bald pate with green body paint, donned a pair of emerald tights and arrived as the Jolly Green Giant. Even at work, the chairman of the Federal Reserve Bank, who last week so jolted the U.S. economy, appears equally unbankerly. He is seldom without a fetid, 20¢ gold seal stogie clamped between teeth stained with nicotine. Ashes invariably litter the lapels of his rumpled, shiny suits. He likes to plop down unceremoniously in a Fed cafeteria beside a startled young staffer and grill him on economic policy during lunch.

But Paul Volcker is a maverick only in appearance and style. His reputation as a staunch defender of the dollar is as sound as the German mark, and international as well as American banking leaders were delighted when he was picked by Carter after he had been enthusiastically recommended by G. William Miller, the Federal Reserve chief who was leaving to become Secretary of the Treasury. Says Senate Banking Chairman William Proxmire: "Volcker was appointed by the President with his eyes wide open. Carter knew he was a hard-money type. That's what the market wanted. That's what the foreign business community wanted."

Since his appointment, Volcker has maintained his independence of the Administration, but did consult with both Carter and Miller before making his draconian decision. Too much was at stake not to let them know what he was planning. Said he: "No one goes into this with the happy spirit of 'right on.' But Miller and the President indicated we had their fullest support." Volcker remained confident last week about the correctness of his move despite the yaws in gold and the gyrations in the stock market. As Presidential Economic Adviser Charles Schultze put it, "It's not a question of what Volcker wants to do. What's his choice?"

Volcker's choice stems from no allegiance to one school of economic theory, monetarist or Keynesian. "His economic philosophy is purely eclectic," explains former Federal Reserve Board Member Andrew Brimmer, "although his own experience would obviously make him one who believes in the market process." Last week, after his announcement, Volcker told a convention of the American Bankers Association in New Orleans of the need for "discipline" and "stability" in handling the economy, two of his favorite words. Said he: "We can no longer blithely assume we can 'buy' prosperity with a little more inflation, because inflation itself is the greater threat to economic stability."

Son of a New Jersey city manager, Volcker hustled to a B.A. degree summa cum laude at Princeton and a master's degree in political economy from Harvard. After a few months of studying for a doctorate at the London School of Economics, Volcker quit. Says he grimly: "My lasting memory of the place is the repeated need to put shillings into a heater in a small, cold flat at night."