"There's no question that our policies involve a tight fit," he admits, "but if we're going to be blamed for the recession, we ought to be given credit for the inflation improvement too. The alternative course of attacking recession by providing excessive monetary growth would only feed inflationary expectations, and reinforce the reluctance of lenders to commit funds for any substantial period of time ahead. The stronger the inflationary momentum, the greater the risk that high interest rates will squeeze out housing, investment and other private activity supported by borrowing."
Volcker knows whereof he speaks. If anyone at the highest levels of the federal government has personally felt the squeeze of inflation, Volcker is that man. When he came to Washington in August 1979, he took a $58,500-a-year salary cut—from $116,000 as president of the New York Federal Reserve Bank to $57,500 (now $60,663) as chairman of the Fed itself. His wife, Barbara, and college student son, James, remained in New York while Volcker rented a one-bedroom apartment so tiny he can accommodate only one visitor at a time.
Volcker weekends in Manhattan with his family, stoically jackknifing his 6'7½" frame into a cramped seat on air-shuttle commuter flights. Once he arrives, he and Barbara rarely go out, unable to pay the up-to-$40-a-ticket it now costs to go to the Broadway theater. To help make ends meet, Barbara Volcker, 51, has rented out a room in their 11-room co-op and, despite severe arthritis, has taken a job as a part-time bookkeeper for a firm of architects. "We almost always stay home now," she says. "Friends come over to shoot the breeze, or Paul reads. He'll read anything, from my father's medical journals to my mother's women's magazines. It's one way he escapes."
Barbara Volcker suffers most from their straitened circumstances, says her husband. "She's the spender in the family," he explains. "I'm the saver." He is indeed: Volcker's niggardliness is notorious. He has a passion for cheap Antonio y Cleopatra Grenadier cigars and grumbles because they now cost 200 apiece. When well-wishers send him boxes of expensive cheroots, he hoards them for special occasions. He clings to his suits to the point that their shine surrounds him with a sort of corona. And his availability as extra man at so many Washington dinner parties, says a friend, is partly a function of his love of free meals.
At the Fed, Volcker has applied the same strictures to the U.S. economy that he applies to his personal life. Instead of trying to control inflation by tinkering with interest rates, as his predecessors had, he throttled back hard on the money supply as soon as he took office. The cost of borrowing spiraled into the stratosphere, with the prime rate actually hitting a loan-sharkish 21½ percent at one point. Businesses continue to go bankrupt, and unemployment has soared to its current level of more than 9 percent. Volcker's office has been flooded with angry letters, as well as with symbolic car keys and bricks, representing cars unsold and housing un-built. But many economists and bankers applaud his performance. "Volcker is running the only anti-inflation game around," says New York investment banker Edwin Yeo, "and he's going to stick with it. The markets are realizing that now, and it's the best news they've had in a long time."
One indication that a turning point may be at hand was the Labor Department's announcement last month that consumer prices had fallen 0.3% in March—the first actual decline in 17 years. To really guarantee an end to inflation, though, most economists—including Volcker—agree that the Reagan budget deficit will have to be drastically cut. Volcker thinks a figure of under $100 billion for 1983 would be acceptable.
Supply-siders, of course, are less concerned with the deficit, and Administration assessments of Volcker are guarded. He was, after all, an appointee of President Jimmy Carter, and his role as head of the Fed gives him enough independence to make the White House uneasy. After refusing pointedly to comment on Volcker's job performance on several occasions, President Reagan met privately with him in February and gave his blessing to Volcker's tight money policy. Even so, a residue of suspicion of Volcker remains.
At 54, Paul Adolph Volcker has spent his professional lifetime shuttling back and forth between the public and private sectors. He has served at the Federal Reserve in several capacities, at the Treasury Department during the Kennedy, Johnson and Nixon administrations, and at the Chase Manhattan Bank in New York, where he was regarded as boss David Rockefeller's favorite economist. Despite his reputation as a close man with a dollar, Volcker has never devoted himself to making his fortune. While he can hardly be called impoverished—"It's hard to claim poverty at $60,000, when so many people are getting along on less," he observes—his savings and assets have steadily dwindled, drained by the cost of commuting and maintaining two homes. He has also been faced with college tuition costs for his two children and medical bills for his wife and son. James, 23, who suffers from cerebral palsy, recently graduated from New York University and is working as a management trainee in a bank. The Volckers' daughter, Janice, 27, a registered nurse, is married to Chris Zima, a Washington, D.C. insurance agent. Paul worries about the Zimas' inability to raise enough money to buy a house and his own inability to help them. "You tell yourself it's better for them in the long run if they do it themselves, if they scratch the money together on their own," he says. "Then you realize that if I got bumped off, they're the ones who'll pay for my indulgence in pursuing a career in public service."
But public service is a Volcker tradition. Paul's father, Paul Sr., was the town manager of Teaneck, N.J. for 20 years, and Paul and his four sisters grew up "in an atmosphere where public policy questions were dinnertime conversation." At Princeton he majored in economics and held down the bench for the basketball team. "It was a major event when I got into a game," he recalls. Academically, he fared somewhat better, graduating summa cum laude. He applied to several law schools, as well as to Harvard's Graduate School of Public Administration. "The school had six fellowships worth $1,200 each, and I got one," he says. "That was twice what I could get from the law schools, and I could live on it. That's why I became an economist instead of a lawyer."
There is no incentive imaginable, however, that could have deflected Volcker from his passion for fly-fishing. "Growing up, I thought vacation meant going fishing," he says. That led to a major miscalculation 28 years ago when he scheduled a Maine bass-fishing trip for his honeymoon. "Among other things, the fishing was terrible, the accommodations were rustic, and it wasn't Barbara's idea of how to spend her vacations for the rest of her life."
Should Volcker choose, she and he could spend future vacations in comparative luxury. It seems unlikely that President Reagan will reappoint him as chairman when his term expires next year, and Frederick Schultz, who stepped down recently as Volcker's vice-chairman to take a six-figure job on Wall Street, reckons that Volcker could easily line up a position in the investment community that would pay $1 million a year. But will he? Not even Barbara Volcker knows for sure. "My daughter knows how to get my goat," she says with a sigh. "She tells me that, with my luck, he'll end up at some college teaching—for $10,000 a year."
When Congress and the White House continue their jousting this week over the biggest potential budget deficit in U.S. history—currently estimated at from $155 billion to $180 billion—they won't be pointing fingers just at each other. The biggest target outside the Reagan Administration is Paul Volcker, the penny-pinching Federal Reserve Board chairman whose stranglehold on the nation's money supply has, by his own admission, put a decided crimp in a struggling economy. But Volcker isn't apologizing.