The Money Czar Survives a Coup

By Stephen Koepp.

Paul Volcker, 6 ft. 7 in., has a reputation for towering over his adversaries, even tough ones like inflation and political pressure. Last week the Federal Reserve Board chairman came out on top again, this time in a policy struggle with his colleagues on the board. Early in the week it was revealed that the group had outvoted him 4 to 3 on a key decision to lower interest rates, an indicator that Volcker's control over the board might be slipping. But only a few days later Volcker's most powerful sparring mate on the board, Vice Chairman Preston Martin, who has made no secret of his desire to succeed the chairman, suddenly announced plans to resign. In the end, the episode seemed to confirm Volcker's Herculean status.

Until this year, the board was dominated by governors who supported Volcker's strategy of maintaining relatively tight credit to keep inflation at bay. The Volckerites held sway over two members appointed by President Reagan --Martin and Martha Seger--who often wanted to push the economy faster. But in January Reagan named two more members: Wayne Angell, a Kansas banker and economics professor, and Manuel Johnson, a former Assistant Treasury Secretary. That put the Reagan appointees, whom economists dubbed the "Gang of Four," in the majority.

A rift opened Feb. 24, when Martin and Seger pressed the board to vote on a proposal to cut the discount rate, the interest that the Federal Reserve charges member banks for loans, from 7.5% to 7%. Volcker urged the board to postpone the cut because he was trying to persuade other industrial countries to drop their interest rates first. He feared that if American rates fell too fast, foreign investors would pull money out of the U.S. and send the dollar into a free fall.

When the board voted to make the cut anyway, many Federal Reserve staffers thought that Volcker might resign. But Newcomer Angell went to the chairman's office a few hours later and suggested a compromise. By the end of the day, the board assembled again at its dark mahogany table and suspended the rate cut so that Volcker could have more time to confer with foreign officials. Less than two weeks later, after West Germany and other countries had reduced their interest charges, the board unanimously voted to lower the discount rate.

At first the skirmish prompted a bit of anxiety among moneymen, especially when Seger declared that the board was no longer Volcker's "one-man show." Financiers feared that the Reagan appointees might lower the Federal Reserve's guard against inflation and bend too much to the Administration's eagerness to expand the economy. Said Norman Robertson, chief economist at Pittsburgh's Mellon Bank: "Any pretense of the Fed being nonpolitical is now gone."

The spotlight then shifted to Martin, whose term as vice chairman was to expire next week. Instead of deciding to seek reappointment, Martin bowed out in a brief press conference. A former mortgage-insurance-company executive, he said he wanted to return to private business. But some Fed watchers suspected that Martin left because his chances of getting the chairman's job had faded.

His departure means that the board will get another new Reagan appointee, but Volcker's power seems secure for now. Even though the chairman's importance as an inflation fighter has ebbed, the White House considers his expertise almost indispensable in handling such situations as the falling dollar and the Third World debt crisis.

With reporting by Jay Branegan/Washington and Thomas McCarroll/New York