In a rare public fuss between members of the Federal Reserve's Board of Governors, Chairman Paul A. Volcker yesterday branded as "incomprehensible" and "unrealistic" several proposals by Vice Chairman Preston Martin to change U.S. policy in handling the international debt situation.
Martin broke ranks with the chairman Wednesday shortly after Volcker left on a business trip to Japan, suggesting several measures that Volcker has rejected in the past. Martin proposed a cap on interest rates on loans to financially ailing developing nations, converting some of their debt to U.S. banks into equity and having such international agencies as the World Bank buy some of the Third World debt and swap it for bonds guaranteed by the organization. Martin made his suggestions in a speech and to an invited group of reporters he met with Wednesday.
"I find his Martin's reported comments incomprehensible . . . unfortunately and unrealistically suggesting that there are unorthodox approaches to deal with the international debt problem," Volcker said in a statement he telephoned to Washington from Tokyo, where he is attending a meeting of representatives of major industrialized countries. "What is hopeful and promising is that so many countries are coming to grips with necessary and difficult adjustment efforts." He cited Argentina as an example.
A Fed spokesman said Volcker was not aware that Martin planned to make these suggestions when the chairman left for Tokyo Wednesday. His strong response was seen as an attempt to assure the debtor nations, many of whom have had to make painful economic adjustments, that the United States rejected Martin's proposals.
The political consensus in countries such as Argentina, which recently accepted new austerity conditions, is seen as shaky because of the political pain involved in accepting that only less spending and lower inflation will create conditions under which the debts can be repaid. Martin's remarks seemed to suggest an easier way.
Martin, said to have ambitions for the chairmanship of the board, was unavailable for comment yesterday, but he said through his secretary that he stood by his remarks. He declined comment on Volcker's response to his trial balloon.
The ideas Martin proposed have been floated in the past but generally have been rejected by industrialized countries, private lenders and lending organizations. Only by getting their economic houses in order, Volcker and others believe, can debtor nations improve economic growth and their balance of payments enough to service their debt.
A Treasury Department spokesman said the administration had specifically resisted suggestions to limit interest rates on bank loans to debtor nations, on the grounds that it would dry up credit to those countries.
Capping interest and converting debt to equity might require banks to write off some of their Third World loans as losses, something they have resisted so far. And an agency created to buy up debt could cost taxpayers large amounts of money, some experts have said.
"My broad reaction is that the measures he's talking about should be reserved for contingency plans at best, that the current situation shows a lot of improvement for the large debtor countries," said William R. Cline, senior fellow with the Institute for International Economics. "It would do more damage than good to apply the more radical programs at the present time."
Volcker appeared to agree. His reaction to Martin's proposal was one of the most critical public assessments ever made of one Fed member by another and an extremely unusual action for the normally discreet chairman.
Martin, who took office in March 1982, is one of two board members appointed by President Reagan. Formerly a California savings and loan association executive, he generally has advocated a looser hold over the growth of money and credit than the majority of Fed policy makers and sometimes is found on the side of supply-siders who think the Fed is holding back economic growth.