Every time Paul Volcker, chairman of the Federal Reserve Board, coils his 6-foot-7 frame into a congressional committee hot seat and ignites his 25-cent cigar, I rejoice that he is where he is.
There he was again last week, giving the House Banking Committee his semiannual report and, as usual, talking preventive medicine. Take a good look. If the American economy is in promising shape today you can thank Volcker for it.
In fact, the best economic policy decision Ronald Reagan has made, among many dubious ones, was to retain Volcker for four more years.
It was, for Reagan, a show of admirable political independence and instinct for American survival. The president ignored --or overruled--a ferocious guerrilla campaign against the Fed chairman. Its theme --take your pick--was that Volcker is the spoiler of what would otherwise have been a Reagan economic boom or, alternatively, a show-stealer.
As Volcker himself would be the first to admit, his role has been infinitely more modest: more like the Dutch boy with his finger in the dike. But the funny-money men have been railing at the nation's banker-in-chief since Andrew Jackson was their tribune against the Volcker of his day, Nicholas Biddle of the Bank of the United States.
It is comfort to the funny-money men that Volcker has admitted, in almost every public utterance, that the Fed's squeeze on money from October 1979 to mid-1982 was a rotten policy.
But sometimes the choice in public policy is between degrees of rot. Volcker's measures have helped produce the worst unemployment since the Great Depression. But the alternative was a price binge that was, by late 1979, in danger of tipping to something like the hyper-inflation that wrecked Weimar Germany.
The first term of art that an elementary economics student learns is ceteris paribus--"other things being equal." But "other things"--namely, the condition of the federal budget--were not equal when Volcker went to work. Reagan and Congress have devastated the nation's revenue base without reducing public spending, thus producing deficits of historic size.
Without harsh monetary restraint, this was a formula for future inflation and for present pressure on the nation's finite pool of credit. Americans are not savers. In fact, the "supply-side" measures that were supposed to enlarge the savings pool (hence, available credit) have done no such thing. Tax cuts notwithstanding, Americans are saving at lower rates today than when Reagan took office.
We have had six months of falling interest rates, nonetheless, because the Fed let up on the money supply last year. But Volcker was forced to remind the House Banking Committee that Congress has done nothing yet about the deficits--an unpleasant fact Congress would as soon ignore; and that this failure will have consequences later. Brake now or crash later, was the thrust of his message.
Volcker, unlike Congress, is a "pay now, buy later" man, willing to practice--and defend--theories of budgetary propriety that so many members of Congress preach. He has the courage of their convictions.
Yet even now Reagan is being counseled by the diehard "supply-siders" (who forget that they used to espouse Fed restraint as an indispensable complement of deep tax cuts) to attack and overbear Volcker. With an election approaching, this might be politically profitable. But Reagan, by reappointing Volcker, bought himself a policy with a man.
If a nation must choose between runaway inflation and heavy unemployment --as it may have to in the volatile modern industrial climate--bad unemployment is the lesser evil. Unemployment is a social evil. But its aftereffects are nothing to compare with the aftereffects of inflation.
If Volcker were summarizing his credo, it might go something like this: "There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
But he didn't say it. John Maynard Keynes did, in 1919. It is still true.