Last Bow for the Inflation Tamer

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Volcker's obscurity did not last long. Less than two months after he took the post, foreign fears about U.S. inflation sent the dollar into a dive. No group felt the strain more than the elite delegation of U.S. economic policymakers -- Volcker among them -- who went to Belgrade, Yugoslavia, in early October 1979 to try to restore the calm at a conference of international moneymen. As the unrest mounted, the U.S. delegates became "scared half to death," recalls one of them. When Volcker arrived late for a dinner at the U.S. ambassador's residence, he found the dejected Americans just picking at their veal and peas, too preoccupied for conversation. "This is a mess," mumbled the chairman as he sat down. "Going to do something."

Indeed he did. The next morning Volcker jetted back to Washington to launch a shock treatment for inflation. On Oct. 6 he took the highly unusual step of calling a Saturday-night press conference, and there he announced a plan that would shake the world's economy: the Fed would put a choke hold on the U.S. money supply until prices stabilized, and interest rates would be allowed to go as high as necessary to do the job. The plan impressed international moneymen and stopped the dollar's tailspin, but the domestic result was painful. The prime rate kept racing upward, hitting a record 21.5% in December 1980. As the high cost of money began to spoil sales of homes, cars and appliances, the economy went into a deep slide. Unemployment headed toward a peak of 10.7% as millions of workers were laid off.

At that point, Volcker began getting nominations for Public Enemy No. 1. As symbols of their suffering, idle home-builders sent him pieces of two-by- four lumber, and auto dealers mailed him keys from unsold cars. The cover of an issue of the Tennessee Professional Builder, a construction-trade publication, consisted of a WANTED poster of Volcker and his Fed colleagues, - accusing them of "premeditated and cold-blooded murder of millions of small businesses." At one point, a gunman reportedly upset over the prime rate was arrested outside the Fed's boardroom. Howard Baker, then majority leader of the Senate, declared that the Federal Reserve "should get its boot off the neck of the economy."

Volcker and the Fed did not ease the pressure until the summer of 1982, when inflation had been throttled. But in the meantime the hardship of high interest rates had created dangerous fissures in the financial system and hastened the arrival of the Third World debt crisis. The first eruption came in August 1982, when Mexico announced it would be unable to meet payments on its foreign debts, which totaled $80 billion. Mexican officials, seeking emergency assistance, went to Volcker for help after they had been rebuffed by Treasury Secretary Donald Regan, who was philosophically opposed to Government intervention in the problem.

Volcker, huddling with moneymen from around the world, helped persuade commercial banks, the White House and international lending agencies to give Mexico a multibillion-dollar package of new loans and easier terms. That rescue plan served as a model for successive developing-country bailouts, thus lessening the threat of major defaults and financial calamity.