When four governors of the Federal Reserve Board got together and outvoted Chairman Paul A. Volcker and two of his supporters on Feb. 24 -- even though they changed their minds the same day -- they seriously damaged Volcker, discounting the image of the cigar-smoking economist as the "second most powerful man in America."
But it is too early to assume that the Volcker era -- which began in 1979 and is supposed to run at least until August 1987 -- is at an end. For one thing, Vice Chairman Preston Martin, who led the revolt against Volcker, resigned on Friday, presumably because the White House would not promise to give him Volcker's job next year.
"If there are no repeats of this situation, the damage to Volcker will recede into the background," said a former high Fed official. There already are indications that two of the four who voted for an immediate drop in the discount rate -- new members Wayne Angell and Manuel Johnson -- do not seek to precipitate another confrontation with Volcker that would force him to resign.
And Volcker still controls a solid majority of the votes on the 19-member Federal Open Market Committee, which establishes overall monetary policy. He also has the strong support of Treasury Secretary James A. Baker III. Senior Treasury officials privately decry the anti-Volcker strategy of the four-member majority, blaming Martin and Governor Martha Seger for having precipitated a crisis that threatens worldwide confidence in the Fed.
For the moment, Volcker survives in a tense and somewhat awkward situation. Martin's replacement on the board will be "someone of the same persuasion," according to the White House, meaning that the potential for an opposing bloc of four still will be there.
Yet, Volcker could call most of the key plays through mid-year 1987, provided there are some tactical changes in his own approach to his board of governors. Volcker must do a better selling job on his concerns about a potential crash of the dollar (the only other member of the board experienced in international affairs is Henry Wallich, who has had a serious and debilitating illness).
And it will take a willingness on the part of Angell and Johnson to continue to shun a rigid "Gang of Four" alliance with Seger and Martin's replacement, even while pressing, as they have a right to do, for an easier or a different money policy than advocated by Volcker.
These unprecedented developments present a whole new ball game for foreign central bankers and domestic financial markets that for the past seven years could assume that Volcker could call the shots for the U.S. central bank.
An unanswered question is what happens if even other board seats are vacated -- for example, if Wallich is unable to finish out his term, which runs to 1988. Many Wall Street supporters of the president argue that White House Chief of Staff Donald T. Regan -- who reportedly has been seeking to circumvent Volcker's authority by recommending prospective governors known to hold different views -- should abandon what appears to be a vendetta in the interest of preserving confidence in the Fed.
If Regan keeps gunning for Volcker, some say, it may trigger a battle between Regan and Baker, who understands that public discord at the Fed doesn't do the central bank or the country any good.
Martin had scarcely made a secret of his ambition to get Volcker's job at the end of the chairman's current term. But his role in the Feb. 24 brouhaha may have diminished support for him in some administration circles. The White House was willing to have him stay on as vice chairman, but balked at a commitment on the chairmanship.
His exit in April may ease some of the tensions at the Fed. Nonetheless, it is clear that Volcker misjudged the determination not only of Martin, but also of three other governors to move more promptly to get going on lower interest rates to bolster the U.S. economy. None of the four was as preoccupied as Volcker with international considerations, and that could continue to be a problem for him.
Reagan administration officials suspect that there may have been an element of "getting even" in the pressure from Martin for a vote. In a rare public fuss last June, Volcker branded Martin's proposal on the Third World debt problem "incomprehensible," the sort of language one governor almost never publicly uses against another.
Says a former high official at the Fed: "Paul [Volcker] tends to get quite arrogant in private, and dismisses the views of other people sometimes. My guess is that, at that February meeting, he wouldn't or couldn't give the kind of commitment on when the Japanese and Germans would move on interest rates -- at least the kind of assurance that satisfied Martin and Seger."
The situation was patched up when Angell -- having had second thoughts -- asked for another meeting and withdrew his vote, which in effect voided the earlier 4-to-3 decision. That gave Volcker time to try to arrange a coordinated move of the kind Baker had hoped would develop from a January meeting of the Group of Five finance ministers and central bankers in London.
Parenthetically, it should be observed that Seger's comment that the Fed "is not supposed to be a one-person show" is at best an immature, self-serving observation. The Fed has been most influential when led by a strong chairman who inspires confidence in the United States. That has been true under Marriner Eccles, William McChesney Martin, Arthur Burns and Volcker. Each had more clout than likely with seven Martha Segers.