Four Who Also Shaped Events: Bringing Inflation Under Control

• Share

No figure loomed larger over the world economy in 1982 than that of the 6-ft. 7-in. cigar-smoking chairman of the U.S. Federal Reserve Board, Paul A. Volcker. It was he who fought unflinchingly to bring down the U.S. consumer price spiral, but in the process he helped drive interest rates and unemployment up throughout the industrialized societies. In the U.S., his policies surprised skeptics by limiting the rise in the nation's consumer price index to roughly 5% in 1982, but his policies also helped push unemployment stunningly into double digits. By year's end joblessness was closing in on 11% of the nation's labor force, or 12 million individuals, a level that would have seemed almost unthinkable last January.

Although the Reagan Administration has been vocally committed to bringing inflation under control, waging this fight has fallen pretty much to Volcker, a 1979 appointee of Jimmy Carter's. Often erroneously characterized as a "tight money" policy, Volckernomics amounted to an ongoing effort by the Fed to slow the rate of growth of the nation's money supply, thereby choking off inflation at its monetary source.

As the economic slump that began in 1981 deepened during 1982, Volcker had to perform a delicate balancing act. The problem became how to ease up on the money supply, which the Federal Reserve had targeted to grow at a rate of about 2 ½% to 5½% during 1982, without frightening investors into thinking that the central bank was repeating an old mistake and reinflating the economy in response to political pressure.

By midsummer, business failures had escalated alarmingly, the stock market had slumped to its lowest level in more than two years and fears of international financial collapse were spreading. Against this backdrop, Volcker hinted that he was prepared to act more flexibly, to permit monetary growth "somewhat above" the announced targets. Several quick cuts by the Fed in its discount rate to member banks drove home the point. As the money supply expanded and interest rates fell, Wall Street bought Volcker's act. Beginning in August, the Dow Jones industrial average staged a 288-point rally that peaked in early November, and the bond market boomed with it.