Alan Greenspan: The New Mr. Dollar

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To ordinary Americans, much of the fuss about the appointment may have seemed puzzling. Significant as the Fed chairman's actions have often been in U.S. monetary history, the management of the nation's central banking system is shrouded in obscurity. The chairman of the Board of Governors of the Federal Reserve System is one of seven presidential appointees who as a group oversee 25 branches of the central bank, which is organized into twelve districts nationwide.* Ordinary governors serve 14-year terms, while the , chairman is chosen for four years. One purpose of the board is to regulate the behavior of large bank holding companies. Numerically, those concerns make up only about 45% of all U.S. banks, but they account for more than 90% of all bank deposits.

By far the Fed's most important mission is to manage the supply of money and credit in the banking system. By controlling the amount of cash available to banks, the Board of Governors affects interest rates and ultimately influences the level of inflation. The discreet actions of the Fed chairman and his colleagues have an impact on everything from the price of bread to the interest rate on a home mortgage.

In Federal Reserve decision making the chairman's vote theoretically counts equally with those of the other governors. But in practice the board has traditionally tended to follow the lead of the chairman. In the past, figures like William McChesney Martin Jr. (chairman from 1951 to 1970) and Arthur Burns (1970 to 1978) have become nationally renowned monetary policymakers. Volcker may have earned an even mightier reputation for bringing the inflation rate down from 13.3% in 1979, the year he was appointed, to 1.1% in 1986. He consistently managed to persuade the other Fed governors to go along with tough and often unpopular policies. His skills with the board, the public and politicians inspired Economist Jack Albertine, vice chairman of Chicago-based Farley Industries, to call Volcker the "shrewdest bureaucrat in Washington since J. Edgar Hoover."

Another reason for Volcker's status, though, was the absence of any coherent U.S. fiscal policy during most of his tenure. While he presided at the Fed, the U.S. growing budget deficit steadily ballooned, eventually reaching a record $221 billion last year. This year the deficit is expected to shrink only to a still terrifying $175 billion. Volcker's great contribution has been to ensure that the Fed did not crank up the U.S. money supply -- and thus fuel inflation -- to accommodate the budget gap. Instead, the deficits have increasingly been financed by foreigners, chiefly Japanese, who in turn have looked to Volcker's continuing presence as a guarantee of the stability of their investments. From the Fed chairman's point of view, the loose budget policy of the White House and Congress put the job of inflation fighting squarely on his shoulders.