TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/82/82pay

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                                                                                March 8, 1982 

ECONOMY & BUSINESS

Paying More for Money

Interest rates are hurting, but Volcker holds fast against
inflation


Interest rates are normally an arcane subject, thought to be of
passionate concern only to bankers and other financiers, and
not fully understood even by them. Yet one way or another
interest rates are paid by everyone who borrows money, which in
the modern credit economy means just about everyone, period.
Interest rates help to determine whether a business can hire
workers, whether a consumer can afford his or her dream house,
whether a farmer can plant seed. If they escaped the front-page
headlines and the TV news in the past, that was because rates
usually changed only slowly and by small amounts.

No more. In the past three years, interest rates have shot up
higher than anyone could have imagined earlier, and they have
suddenly become Topic A in the beleaguered American economy. The
high cost of money has crippled the Administration's economic
program and endangered President Ronald Reagan politically.
Expensive and scarce money has begun driving homebuilders, auto
dealers and businessmen from every walk of life out of business,
and in such numbers that bankruptcies around the country are
beginning to rival those of the Great Depression. The cost of
money is crimping the investment that U.S. industry needs to
make to become more productive. Sky-high rates are putting state
and local governments everywhere in a financing bind, forcing
up the cost of borrowing and driving down the ability to spend
for schools, roads, sewers and just about everything else that
people expect and need from the governments that serve them.

Worst of all, America's money miseries have become the ghoulish
flipside to the Good Life. For cash-squeezed consumers by the
millions, shopping on credit for everything from a new suit of
clothing, to cars, kitchen appliances, even a roof over one's
head, is increasingly painful. Indeed, by the common consent of
economists, towering interest rates have done more than any
other single factor to drive the U.S. into a recession that
still threatens to push unemployment to a post-World War II
high.

Now, at last, the rates are coming down--or are they?  For the
moment, the news is good. On Wall Street last week, lenders bid
down some key short-term interest rates sharply. For example,
the interest on six-month Treasury bills dropped to 12.7%, down
about 1 1/2 percentage points since mid-February. Also last week
major banks across the country chopped their prime rate on
business loans, the most important single interest rate in the
whole financial structure, by half a point, canceling an
increase posted only a week earlier. That leaves the prime at
16.5%, a full five points below its record high of 21.5% posted
in mid-December of 1980.

But no one can rejoice very much so far. For one thing, it is
anything but certain that the declines will continue. Pessimists
in the financial community still expect rates, after sliding for
a while, to turn around and march up past even their recent
peaks-- especially if the Reagan Administration and Congress
cannot trim menacing budget deficits. Moreover, some highly
important interest rates have yet to budge the slightest bit.
Standout example:  the interest rate on long-term corporate
bonds is hanging around 16%, a level that severely hinders
investment. Few corporations are willing, or indeed even able,
to commit themselves to pay such a computer-busting rate for,
say, 30 years.

Worse, even those rates that have edged down still impose costs
on borrowers that no one but a Mafia loan shark would have dared
demand in most years past. Indeed, if there is one point on
which economists of every shade of opinion agree, it is that the
U.S. cannot enjoy a vigorous recovery from the present
recession, or perhaps even much of a recovery at all, unless
interest rates fall much more sharply than they have so far. "It
would take a drop of five to six percentage points for industry
to get up on its feet," estimates Richard Peterson, senior vice
president and economist of Continental Illinois National Bank
& Trust Co. of Chicago. A comparison with history is helpful.
In 1978, the last year in which housing construction and auto
sales could be said to have boomed, both the prime rate and
interest rates on new mortgages averaged around 9%, little more
than half their present levels.

By no coincidence, 1978 was also the year before a towering (6
ft. 7 1/2 in.), burly (240 lbs.) banker named Paul Volcker
became chairman of the Board of Governors of the Federal Reserve
System. His appointment by President Jimmy Carter was almost
universally hailed because Volcker promised to be a man who had
a plan for controlling inflation, which was galloping along at
a rate of 13.3% during the year in which he took office. Also,
Volcker was seen quite rightly as a man with the toughness to
carry out his plan. The essence of his strategy:  deprive
inflation of its monetary fuel.

Volcker alone did not push up interest rates, nor is he
singlehandedly keeping them high now. But by law he and the six
other governors of the board have the prime responsibility for
creating money, a power that they exercise independently of the
President. Since interest rates are essentially the price of
renting money, Volcker has his hands on one side of the
supply-demand balance that sets those rates.

The demand for money, in the form of lendable funds, is
determined by many factors:  the growth of the economy, the rate
of inflation (consumers and businessmen need to borrow
substantially more when prices are rising at a 10% rather than
a 5% pace) and, of extreme importance, how much the Federal
Government needs to borrow to cover ballooning budget deficits.
The Federal Reserve has at its command various devices that can
in effect create the money needs to meet this  And had Volcker
chosen to use them lavishly in the past few years, he might have
kept interest rates from skyrocketing as much as they have. By
the same token, if he chose to expand the nation's money supply
more rapidly now, that probably would produce lower interest
rates, at least temporarily. On the other hand, Volcker believes
that boosting the supply of money would eventually lead to more
inflation, increased demand for credit and, ultimately, higher
interest rates than ever.

That is precisely what Volcker is seeking to avoid. In his
view, previous Fed chairmen, though they tried sporadically to
keep down the growth of the money supply, erred by devoting far
more attention than they should have to smoothing out short-term
fluctuations in interest rates. That policy led them most of the
time to create too much money for the financial system to
absorb, thereby intensifying an inflationary spiral that was
already being fed less by healthy growth than by excessive past
jolts of money and credit. Shortly after taking office in August
1979, Volcker proclaimed a different policy:  he would focus on
permitting only a slow growth in the supply of money and
credit--insufficient to fuel continued rapid inflation--and let
interest rates go wherever the market would take them.

His success in following that approach has been far from
perfect, and at times the nation's money supply has swung up and
down erratically. But on the whole, Volcker proudly asserts that
he has done just about what he said he would. In the process,
however, he has become the nation's prime scapegoat for all its
economic ills. The cover of the January-February issue of the
Tennessee Professional Builder, a construction-trade
publication, consisted of a WANTED poster of Volcker and the
other six governors of the Federal Reserve (THE MALEFICENT 7),
charging them with "premeditated and cold-blooded murder of
millions of small businesses" and kidnaping (and holding for
ransom) the American dream of home ownership."  R. K. Resmondo,
who runs a cattle ranch near Kissimmee, Fla., has a simple
solution for high interest rates:  "Take a stick and run Mr.
Volcker out of the country."

The heat on Volcker has been hottest of all in Washington, which
has hardly surprised him. Members of the Reagan Administration,
chagrined because high interest rates have plunged the economy
into an unexpected recession, have been quick to blame Volcker
for their troubles. Ronald Reagan, asked at a press conference
in January whether he thought Volcker should resign, declined
to comment, on the ground that the Federal Reserve is an
independent entity. This was scarcely a pleasant augury for
Volcker, since Reagan will have to decide whether to reappoint
him as Federal Reserve chairman when his term expires a year
from August.

Reagan met with Volcker alone in the White House living quarters
on Feb. 15--the first time the two men had ever conferred
without aides, and only the fourth business meeting between them
since Inauguration Day. Three days later, the at a press
conference that the Administration and the Federal Reserve would
try to work in concert.

In reality, the rapprochement is primarily political. Reagan
knows that any open breach with the nation's central bank could
only hurt his Administration. Volcker is already making the
convincing argument that the Administration's run-away budget
deficits, which are expected to top $110 billion this year
alone, are simply driving interest rates higher. A full-blown
quarrel between the Federal Reserve and the White House would
only draw attention to Volcker's arguments.

Other Volcker critics are hardly so restrained. Congressmen,
their ears burned by constituents' tales of woe about their
inability to pay high interest rates, seethe with helpless
frustration. Henry Gonzalez, a Democratic Representative from
Texas, has made the grandstand play of calling for impeachment
of Volcker (the only way a Fed chairman can be removed). Jim
Wright, another Texan, who is Majority Leader of the
Democrat-controlled House, last week called for punitive taxes
on lenders who charge excessive interest rates, a measure that
he knows cannot be got through Congress anyway. Howard Baker,
Majority Leader of the Republican-controlled Senate, grumbles
that the Federal Reserve "should get its boot off the neck of
the economy."

In the face of such hysteria Volcker remains unflappably
impassive. His words and manner are mild. But he argues with
quit force and conviction that the Reagan Administration has put
him in an impossible position in its rush to cut taxes and boost
defense spending to the limits and beyond. The more that
deficits increase, the greater grow the Government's borrowing
needs to cover them, and the stronger grows the demand for
money. As a result of what is looming as perhaps the biggest
deficit explosion in the nation's history, the Fed can bring
down interest rates only by stoking the economy with what might
wind up becoming the biggest new does of inflationary money and
credit yet. To Congress last week Volcker praised Reagan's
efforts to stem the tide of red ink by reducing nondefense
spending, but added mildly that "if I had my druthers," he would
reduce the deficit "even more."  If that cannot be done by
whacking away at spending, he said, then maybe Congress should
consider some tax increases--selective raises in excise (sales)
taxes, perhaps. Said Volcker with heartfelt sincerity:  "Give
us some help."

Underlying Volcker's soft-spoken style is a rock-hard confidence
in his convictions. In paraphrase, Volcker's policy is roughly
this: the Fed dares not increase money supply sharply. That
would only result in another round of inflation. Price boosts
have in fact been slowing encouragingly, and last week the Labor
Department reported that consumer prices rose at a mere 3.5%
annual rate in January, the smallest increase in a year and a
half.

The fact is, Volcker no more merits sole praise for that
progress than he deserves sold blame for high interest rates.
But many financial experts insist that the two developments must
at lest be considered together. Says Rudolph Penner, head of tax
policy studies at the American Enterprise Institute in
Washington:  "We are trying to help by slowing the growth of the
money supply."  Adds H. James Toffey, a managing director of
First Boston Corp., a New York investment firm:  "I think Paul
Volcker has done an outstanding job, even if the White House
criticizes him for not hitting his money supply targets every
week. No central bank ever does. In the meantime, no one seems
to notice that we are not talking about inflation anymore."

One person who still talks about inflation, and incessantly, is
Volcker. He fears, with considerable justification, that the
gains could all too easily be lost if money begins to flow in
torrents from the Fed, prompting a premature expansion before
inflation is more thoroughly wrung out of the economy.

By the time he became Fed chairman, Volcker told a gathering of
1,500 businessmen and bankers in Manhattan last week, "we no
longer faced a choice between a little ore inflation or a little
more unemployment. Somehow we ended up with both."  He added
that "pumping up growth in money and credit today could only
threaten the longevity of recovery" with the menace of renewed
inflation. A big expansion of money supply, he said, might not
even bring down interest rates very far for very long, because
lenders would shortly demand higher interest again to guard
against having their returns eaten up by a recurrence of rapid
price hikes. Indeed, Volcker argued that if the Fed had not
restrained the growth of money supply, "interest rates would
ultimately be still higher" than they are today, "and remain
there longer."

Thus, Volcker has made it plain that he intends to provide only
a bit more money to the economy this year than he did in 1981.
That policy will possible permit some recovery from the current
recession, but not a rebound anywhere near so vigorous as
President Reagan predicts and people everywhere are hoping for.
If the Administration and Congress want a drop in interest rates
great enough to promote faster growth. Volcker's position is
that the only way they can get it is by whacking down the
deficit. That way, the Government will no longer be driving up
interest rates by competing with private borrowers for a limited
supply of lendable funds. If the Administration and Congress
will not slash the deficit?  Well, sorry, says Chairman Volcker,
then interest rates will stay high, and growth, if any, will
remain slow. Such is the price that the nation must pay for
containing inflation. Unfortunately, the costs are climbing
daily.

Housing. Builders started work on a mere 1,086,000 houses and
apartment buildings last year, the slowest pace since 1946, and
annual rates in the past few months have dropped lower still.
Sales of existing homes plummeted to 2,351,000 in 1982, 40%
below the level in pre-Volcker 1978. Housing's woes are
especially maddening to builders and real estate men because
they figure that the rate at which people are marrying and
forming new families would support sales of 2 million new and
5 million used homes a year. Michael Sumichrast, chief economist
for the National Association of Home Builders, gloomily
calculates that the prime rate would have to drop to 13%, with
a corresponding decline in mortgage rates, just to maintain last
year's depressed pace of sales.

When an upturn does come, many builders may not be around to
enjoy it. Thousands have gone broke already, and many thousands
more are barely hanging on. Turkey Creek, Inc., a family-owned
contracting firm in Gainesville, Fla., was selling an average
of two new houses a month until March of 1981. In the eleven
months since then it has sold two more, total. Meanwhile, the
company is paying $14,400 a month interest on loans taken out
to put up 24 houses that are still empty. Says President Forest
Hope:  "We're having to put money back into the business that
we had invested in certificates of deposit for our children's
education, and we have cashed in all our life insurance
policies."  Hope thinks he has kept his business solvent by such
desperate measures, but, he admits, "I haven't seen a financial
statement since June 1980 because we can't pay the auditors."

Autos. Sales of U.S.-made cars plunged to 6.2 million in 1981,
the lowest level in 20 years. Signs of a vicious circle are
appearing. Interest rates on auto loans, averaging 16%,
discourage buyers, and unsold cars start piling up on dealer
lots. Meanwhile, the dealers have to borrow at rates generally
two or three percentage points above the prime to support the
bulging inventory. Not only has that burden alone helped to
drive some 3,200 dealers, or roughly one in eight, into
bankruptcy in the past 2 1/2 years, but the survivors, in order
to trim costs, have now begun ordering fewer and fewer models
for their showrooms. That cuts down the volume of walk-in trade
and reduces sales still further.

Chrysler last week reported a 1981 net loss of $475 million,
bringing combined losses of all the major U.S. automakers to
$5.5 billion over the past two years. The red ink threatens
their ability to raise the $60 billion that they need to spend
on retooling by 1985 to build smaller and more fuel-efficient
cars and meet import competition. Says Robert Stempel, general
manager of General Motors', Chevrolet division:  "If the economy
does not turn by the end of this year, it will be the beginning
of the end for the U.S. auto industry."

Investment. Economists of all schools agree that the nation
cannot in the long run enjoy noninflationary growth without a
large increase in business spending for new plants and
equipment. But Commerce Department surveys indicate that U.S.
industry generally plans to spend .5% less on capital projects
than last year, after adjustment for inflation. One major
reason, of course, is that uncertainties over the course of
inflation and recession have made it difficult to calculate
whether the products of a new factory could be sold profitably.
Indeed, persistently high interest rates have thus far seemed
to many businessmen to amount to nothing ore than a devil's
trade in which one menace, inflation, is swapped for
another--the cost of money itself.

Some economists go so far as to calculate that towering loan
charges have just about wiped out the investment-stimulating
benefits of Reagan's tax cuts to business. Moreover, companies
unwilling to shackle themselves for decades to the high rates
now charged in the long-term bond market are increasingly
turning to short-term financing as a way to raise tide-me-over
cash until long-term rates ease back. In the process, the
so-called commercial paper market, where such funds are often
raised, has grown into a wobbly mountain of debt exceeding $164
billion, up from $83 billion in 1978. Since few, if any,
companies would even consider trying to finance long- term
projects by raising short-term funds at rates that could leap
to new highs every time the debts had to be renewed, more and
more firms are simply scrapping expansion plans altogether. Last
week American Airlines joined the list, canceling an order to
buy 15 new Boeing 757 jets for $600 million and dropping options
on 15 more. By way of explanation, the company gave the bluntest
and most understandable of reasons:  no money.

Bankruptcies. Dun & Bradstreet, the credit-reporting firm, last
year counted 17,043 business failures, barely under the
post-World War II record of 17,075 in 1961; before then, the
number had not been so high since 1933, one of the worse
Depression years. This year has started off even worse. Failures
in the first seven weeks totaled 3,065, or 50% more than a year
earlier. In the small town of Barnesville, Minn. (pop. 2,500),
Thomas Fisch, head of a building- supplies firm, counts seven
businesses that have recently gone bust in his home town.
Included are a radio-TV shop, a Ford dealership, an auto repair
shop and one of Fisch's building-supplies competitors. Fisch
worries that his own business might join them soon. Says he:
"Because of high interest rates, people can't afford to remodel
homes, and I can't afford to carry my inventory."

Some business analysts suspect that the Dun & Bradstreet
figures, grim as they are, actually understate the real business
death rate. The organization, they point out, counts only
failures that involve a loss to creditors, and for every one of
these, there are an estimated ten more businesses that just
quietly close up and quit. One belongs to Durward DeChenne, who
in 1960 started a business selling marine equipment and, later,
snowmobiles in Clarkston, Wash. By 1979 the business had grown
to a sales volume of $2 million a year. Then came the
interest-rate surge, and since many of his customers had
traditionally financed their purchases instead of paying in
cash. DeChenne's sales plunged. By 1981 his business had
shriveled to a mere $600,000, and DeChenne was paying 24%
interest to carry his inventory. Says he:  "There isn't any way
in the world you can pay that kind of interest and make it."
In November he discharged his five employees and began
liquidating his inventory, at prices so low that he has lost
almost all the money he had accumulated in 21 years in business.
Says DeChenne, 65:  "I had hoped to succeed and retire with a
reasonable income. Now I'm just trying to retire."

Consumer Buying. In the late 1970s, consumer installment debt
outstanding jumped by anywhere from $35 billion to $43 billion
annually, intensifying the decade-long inflation. But last
year, debt expanded by only $19.6 billion, a slowdown that is
itself proving disruptive. The University of Michigan's most
recent quarterly survey of consumer attitudes, conducted late
last year, leaves little doubt as to why:  exorbitant interest
rates.

Though consumers are popularly believed to have only a vague
notion of the amount of interest that they pay on credit
purchases, Survey Director Richard T. Curtin found them actually
to be quite well informed. His researchers asked those who were
postponing purchases what interest rate they thought they would
pay if they did buy. Their answers averaged 17.5%--which was
almost exactly right. How much would they be willing to pay?
Average answer:  11.9%.

Retailers glumly affirm that this wariness is holding down sales
of all sorts of goods. In Boston, Dennis Gedzuin, manager of
The Riverboat, a women's clothing store, estimates that
charge-card purchases dropped by a third at his store last year.
Partly as a result, last week The Riverboat still had some
merchandise left from 1981 and was clearing it out by offering
discounts as high as 90%. In Milwaukee, Stanley Waldheim,
president of Waldheim's Furniture Co.,complains that "time
payments for furniture are at a standstill. That has eliminated
a big segment of our business."  Unable to make enough money on
cash sales to cover its rising costs--including 18% to 20%
interest rates on inventory loans--the Waldheim store, founded
in 1892, is about to close.

Wary though they are about taking on more debt, a growing number
of consumers seem to be unable to pay off the debts that they
already have. Personal as well as business bankruptcies are
rising sharply. High interest rates, of course, are far from the
only factor. Also important is a general relaxation of federal
bankruptcy laws. Moreover, the recession itself, by forcing up
unemployment, is also adding to the bankruptcy rolls.
Nonetheless, in Oakland, Calif., Bankruptcy Expert Steven
Flander argues that excessive mortgage payments have become a
whole new menace that is forcing more and more people into
insolvency. He adds that while his clients used to be primarily
lower-or lower-middle income, "now there is really no
classification. We see doctors, attorneys, real estate people."

Local Government Financing. States, cities and counties
traditionally raise much money for public works by selling
bonds. The costs of doing so are becoming staggering. One index
of interest rates on such municipal bonds shows them averaging
around 13%, almost exactly double the rate in 1979. That is a
truly astonishing rate, because the interest on these bonds is
exempt from federal income taxes; for a buyer in the 50% tax
bracket, a 13% municipal-bond yield is equivalent to a 26% yield
on a corporate bond. Moreover, states and cities are incurring
these costs at a time when the recession is crimping tax
receipts and the Reagan Administration's budget-cutting efforts
are curbing the flow of federal grants-in-aid.

Unwilling, or even unable, to pay the towering bond market
rates, many localities, like corporations, have begun borrowing
in the short-term market. Now, however, some are reaching the
limit of their ability to do so. Dade County, Fla., which
encompasses Miami, has run up $200 million in short-term debt,
and county commissioners believe that is about as much as the
county's taxpayers can afford. As a result, if rates do not ease
back to more tolerable levels, the commissioners may wind up
having to pick and choose among a long list of public projects,
from seaport and airport expansion to water and sewer projects
and roads, deciding which to shelve and which to go ahead with.
Says Stacey Hornstein, the county's capital improvements
coordinator:  "I can't tell you we won't stop any project."

Agriculture. Farmers traditionally borrow heavily in order,
among other things, to finance planting and machinery purchases,
paying off the loans when they sell their crops. For some, the
costs are becoming ruinous. In northwest Wisconsin, Walter
Betzel grossed $100,000 last year from his 350 acres of corn and
oats and his 30 milk cows. Some $19,000 of the amount went right
off the top for interest payments. After his interest and other
operating expenses, Betzel had $5,000 left to spend on his wife
and three children. Says he:  "We're sick of it. We don't go out
to any movies, we don't go out to eat."

Interest costs have set off a kind of chain reaction in the
farm lands. Food processors rely on short-term financing to
stock up on the raw goods that they package, can and otherwise
process into food. But to hold down interest costs, the
processors are now slashing inventories and buying less from
their farmer-suppliers. Those cutbacks are coming precisely when
the farmers need every penny to pay their interest charges. The
squeeze on the farmers is forcing more and more of them to try
to cut back on their interest burdens, and many are doing so by
postponing the purchase of tractors, combines and other farm
equipment. The retrenching simply passes the interest-rate
misery on to the farm-equipment manufacturers, which are
starting to buckle under their own swelling inventories.

Giant International Harvester Co., hurt by slumping sales and
high interest costs of its own, has lost $800 million in the
past two fiscal years and almost $300 million more in the first
quarter of fiscal 1982. The company announced last week that it
would sell its 50% interest in a profitable Japanese company,
a move that some analysts interpreted as a desperate measure to
raise cash.

The prospects that interest rates will soon come down, and stay
down, are dubious at best. Some financial experts do look for
further declines. Leif Olsen, head of the economic policy
committee of Citibank, believes that the recession will soon dry
up corporate demand for credit, relieving the borrowing
pressure. Secretary of the Treasury Donald Regan argues that the
second stage of the Reagan tax cuts, a 10% slash in income tax
rates taking effect July 1, will prompt much more savings by
individuals, thereby increasing the supply of lendable funds and
relieving pressure on interest in yet another way.

Perhaps so, but powerful forces other than tight money alone
will be working to keep interest rates high, no matter what
Volcker does. In large part, the jump in interest rates over the
past few years represents a belated catchup by the price of
money with the rise of all other prices since the mid-1960s.
Through years of high inflation, many interest rates--on
mortgages, consumer loans, bank savings deposits--were held down
by federal or state controls. Most of these controls have been
dismantled.

Interest rates have now caught up with inflation, and with a
vengeance. With inflation dropping, the "real" return on many
loans-- the amount by which the interest rate exceeds the
expected rate of inflation, thus representing a genuine gain to
the lender--averages around 8%. That figure amazes many
financiers:  it is just about double what had been considered
the historic real return.

The trend, of course, is benefiting many people. The same
consumer who pays high interest on a mortgage or auto loan may
well be collecting high interest on a certificate of deposit or
an investment in a money market mutual fund. Those who can avoid
borrowing and have dollars to lend are reaping a bonanza.

For all that, the extraordinary rise in real return would seem
to leave room for a drop in rates that would help many more
people than it would hurt. Yet it would be most unwise to bet
on such a chancy prospect. For one thing, uncertainties over the
size of the federal deficit are themselves acting as a prop
against steep rate declines. Adding "off-budget"  financing by
federal credit agencies to the stated deficit, the Federal
Government borrows about 35% of all the lendable funds in the
country. Henry Kaufman, chief economist of the investment
banking firm of Salomon Bros., predicts that as a rising deficit
bumps up against he borrowing demands of businesses and
individuals, "the downward trend of interest rates will
probably reverse before midyear, and in the second half,
long-term rates will once again threaten their peaks of 1981."
  Worse, there are widespread fears that the actual deficit will
soar beyond Reagan's projections of $98.6 billion this fiscal
year and $91.5 billion in fiscal 1983. Alice Rivlin,
Congressional Budget Office director, last week revealed grim
new estimates projecting steadily increasing deficits reaching
nearly $140 billion in 1985, even after the unlikely passage of
all of Reagan's spending and revenue reforms.

A few Fed watchers suspect that Volcker himself might eventually
cave in to pressure and pump more money into the economy in an
effort to bring down interest rates--especially if today's high
rates seem to be thrusting the economy into an ever deepening
recession, with no end in sight. If the economy continues to
spiral down, says one financier, "by election time every
politician in the country will be running against Volcker."

But Volcker's stand nevertheless has impressive support in the
business, financial and academic communities. Members of TIME's
Board of Economists wish that Volcker, while continuing to hold
down the growth of money supply, would try a mite harder to
prevent interest rates from gyrating so much. But in general
they give the chairman of the Federal Reserve a strong and
well-deserved vote of confidence.

Says Alan Greenspan, a Republican and non-Government advisor to
President Reagan:  "I think Volcker is doing as well as anyone
could, given the current economic environment."  Adds Otto
Eckstein, who served on the Council of Economic Advisers under
Lyndon Johnson: "Volcker is the strongest Federal Reserve
chairman in history."

Even in Congress, Volcker has strong champions. Says Colorado
Republican William Armstrong, a member of the Senate Banking
Committee:  "People think that every morning when he shaves,
Paul Volcker decides what interest rates are going to be that
day. It's a myth. There is nothing the Fed can do about it with
the massive deficits we are rolling up."  Adds New Mexico
Republican Harrison Schmitt, another member of the Senate
Banking Committee:  "You can yell and scream at him, but in your
heart of hearts you don't want him to back down."

In all of public life, no one has put his career and his
energies more wholeheartedly into a more thankless task than has
Volcker. In his search for long-term and lasting relief from the
debilitating inflation that has racked the economy for more than
a decade. Volcker has angered many people and baffled many more.
Yet with grinding certainty he is reaching his goal of bringing
inflation to heel. By common consent of all who know him, Paul
Volcker is an exceedingly steadfast man, and one who seems
determined to continue on his course.

--By George J. Church.

Reported by David Beckwith and Gisela Bolte/Washington, with
other U.S. bureaus