On history's blackboard, most public figures -- the politicians and bureaucrats who dominate daily headlines -- leave barely a mark. They are too powerless or purposeless to make a difference. They are mainly swept along by the sea of events, shouting loudly as they go to convince themselves and everyone else that they matter. It's a deception and a fraud. Paul A. Volcker was not one of these. He shaped history as well as being shaped by it.
The business of the Federal Reserve -- managing interest rates, money flows and credit availability -- is so technical and remote that the true scope of Volcker's achievement may not be appreciated. No one disputes his main accomplishment: subduing the most stubborn peacetime inflation in U.S. history. But Volcker's triumph extends beyond this. He presided over the economy during the period of its greatest stress and danger since World War II, and no great calamity occurred on his watch.
No one can say what might have happened if Volcker had not been there. The grim possibilities exist only by way of analogy. The last time the U.S. economy experienced comparable uncertainty was in the late 1920s. Many economists believe that, with better Federal Reserve leadership, the Great Depression might have been averted. Facing unprecedented problems, the Federal Reserve of the early 1930s couldn't cope. It permitted a banking crisis that cascaded into an economic collapse. Volcker faced equally unfamiliar problems. The absence of crisis measures his skill.
More is involved than a feat of economic management. Mastering inflation has restored confidence in our capacity to govern. The accelerating inflation of the Carter presidency touched everyone and corroded Americans' optimism. The antidote wasn't subtle. In the 1981-1982 recession, unemployment reached a peak of 12.1 million and the factory utilization rate dropped to 69.5 percent. But Volcker's success disproved all the elaborate excuses (higher oil prices, indexed wages, etc.) of why government couldn't contain inflation. And the subsequent recovery has quieted the argument that inflation's cure would be worse than the disease.
To say this is not to say Volcker has created a state of economic bliss. Everyone knows today's problems. Agriculture remains depressed. Banks are overburdened with dubious loans to farmers, developing countries, oil drillers and real estate developers. The U.S. trade deficit is the largest ever, and some manufacturers haven't revived from the recession and import competition. But many of these problems are the aftershocks of high inflation, and they have -- so far -- remained isolated. They didn't coalesce into a general economic collapse and haven't kept the recovery from entering its fifth year.
Nor, obviously, did Volcker singlehandedly conduct the crusade against inflation. The alliance between Volcker and Ronald Reagan was a happy accident: neither could have done so well without the other. Although Reagan opposed inflation (who didn't?), he had no forethought of savagely stamping it out. But once Volcker started the job, the president supported him. Criticism from Congress grew. Home builders, auto dealers and real estate agents mailed thousands of keys to Volcker as symbols of unsold houses and cars and threatened bankruptcies. But Reagan didn't wave Volcker off.
The episode underlines the ambiguous relationship between the White House and the Federal Reserve. Technically "independent," the Federal Reserve has huge latitude to run its interest-rate and credit policies on a daily basis. But it cannot maintain a truly independent economic policy in defiance of the White House. What bonded Volcker and Reagan -- who spoke rarely and have little personal rapport -- was patience and a conviction that uncontrolled inflation endangers a productive and democratic society. Reagan's patience was richly rewarded. Inflation's decline remains his greatest accomplishment and assured his reelection.
Volcker has become what most public figures yearn for and never attain: a legend in his time. The reputation is deserved and yet distorts reality. He had luck. The economy has its own rhythms and recuperative powers. Moreover, there was much that Volcker failed to predict: the severity of the 1981-1982 recession; the sharpness of inflation's fall; the huge rise in the dollar's exchange rate between 1980 and 1985, and the extent of the international debt crisis. But if Volcker didn't control events, neither did he allow himself to be controlled by them. As an economic tactician, he had two great virtues.
First, he had a better grasp than most U.S. officials or economists of the importance of the international economy. In 1982 Volcker helped defuse the international debt crisis. Had that been left to Donald Regan's Treasury, it's hard to know what might have happened.
Second, he could see through the veil of economic statistics and theory to the real world. After the recession, neither interest rates nor money supply statistics provided an accurate guide to Federal Reserve policy. High interest rates implied credit was tight, while a rapidly expanding money supply indicated it was easy. Volcker became a slave to neither.
What emerged was an acute sense of timing. He knew when to change emphasis, as in 1982 when he shifted from suppressing inflation to promoting growth. But to call Volcker a "pragmatist" (as is often done) is wrong. All his flexibility and attention to detail were ultimately directed toward fulfilling strongly held beliefs about what's vital for preserving a democratic society and a healthy economy. Chief among these values was the importance of regaining price stability -- a goal he almost attained.
His legacy is blurred, because his achievement can be so easily undone. Avoiding inflation's long-term hazards involves periodically accepting the temporary hardships of recessions. Otherwise, inflation gradually rises until it becomes so strong that it can be controlled only at a brutal social cost, or not at all. That dilemma should never recur if anything has been learned from Volcker's experience. He's been a giant among midgets, but only time will tell whether Americans have the discipline and wisdom to grasp the meaning of what he did.