Topic A in the Money World

By John S. DeMott

Will Reagan reappoint Volcker or won't he? Does he really have a choice?

It is a prime subject--probably the prime subject--of speculation among Washington politicians, Wall Street financiers and businessmen everywhere: Will Federal Reserve Board Chairman Paul A. Volcker, 55, one of the pivotal makers of U.S. economic policy, be reappointed to a new four-year term in August? Last week, for example, at a New York City luncheon for 20 top money managers held by Morgan Stanley & Co., the investment banking firm, Admiral Robert L.J. Long talked at length about the Soviet military threat. But at all the luncheon tables the topic of conversation was Volcker. At Manhattan's "21" Club, several businessmen were overheard discussing the Fed chairman. Eight blocks away at the Algonquin Hotel, Arthur Levitt Jr., chairman of the American Stock Exchange, and Jack Albertine, president of the American Business Conference, talked about who, if anyone, might succeed Volcker as they waited for their guests to arrive.

Volcker's future is also of intense concern outside the Washington-Wall Street axis. Even those businessmen who normally do not pay much attention to the arcane ways of the Fed or meetings of its powerful Open Market Committee are watching the situation closely. They are acutely aware that the actions of Volcker or his successor will have a crucial influence on interest rates and the availability of credit and that this will determine the health of the economy. "Everywhere I go in my district, people ask me about you," New Jersey Congresswoman Marge Roukema told Volcker last week. "They think it's important that you be reappointed, and so do I." Replied the chairman, noncommittally as usual: "Thank you, thank you very much."

President Reagan has until Aug. 6 to reappoint Volcker to a new term or name a successor. But experts predict that he will probably act sooner, perhaps in early June. Waiting any longer would create great uncertainty in world money markets and not allow time for a smooth transition in case Volcker does not stay. On the other hand, Wall Streeters believe Reagan is unlikely to move before the late-May meeting in Williamsburg, Va., of the leaders of the seven leading industrial powers.

But does Reagan really have that much freedom of action? Some longtime watchers of the process of naming the Federal Reserve's boss point out that a President's power is often much less than it appears. William McChesney Martin, for example, had served as chairman longer than anyone else, from 1951 until 1970, when he retired. The last two Presidents to reappoint Martin, Kennedy and Johnson, would have preferred to name their own man to the job, but they stayed with Martin because of pressure from financiers around the world. Moneymen used to quip that Martin was worth his weight in gold because he kept the dollar strong.

Indeed, Jimmy Carter did not have a lot of freedom when he appointed Volcker in 1979 to replace G. William Miller, who became Treasury Secretary during a wrenching Administration shuffle in which Carter fired four Cabinet members and then retreated to Camp David for a chaotic series of conferences about the future of his Administration. World money markets were so shaken and the dollar so weak at the moment that Carter had to turn to someone who epitomized stability and competence and inspired international confidence. Volcker, then the president of the New York Federal Reserve, was the obvious, if not preferred, choice.

Once he got into office, Volcker showed an independence from White House pressure that has pleased financiers but irritated both the Carter and Reagan Administrations. In the fall of 1979, under heavy pressure from world money markets as the dollar was falling sharply, Volcker abruptly changed the focus of the Federal Reserve's policy from manipulating interest rates to setting targets to slow the growth of money and credit. This helped push the prime rate to 21 1/2% by December 1980 and sent the economy into recession. But the payoff was a sharp drop in inflation. Prices were increasing at about 13% a year when Volcker took over. Today the U.S. inflation rate is less than 4% annually.

By early 1982, though, Volcker began coming under criticism because the tight-money policies were holding back the longed-for recovery. Many politicians were ready to declare victory over inflation and wanted to return to economic expansion. Finally last summer the Federal Reserve started allowing the money supply to grow, thus setting the stage for the present recovery.

That economic strengthening, in turn, has helped convince a number of politicians and businessmen that Volcker deserves renomination. Inflation, for example, continues its downward drift. In March, producer prices fell .1%, while industrial production rose for the third straight month. Unemployment is holding high at above 10%, but it is down from the 10.8% peak in December. Last week the Commerce Department reported that retail sales posted a .3% rise in March, the first increase since November. Detroit's carmakers are expected to report total first-quarter profits of $930 million, vs. losses of $77 million during the same period last year. That will be the first time since 1979 that the Big Three automakers have made money in the first quarter. For early April, car sales roared 32% ahead of a year ago, paced by General Motors with a 55% increase. As a result of the sales pickup, GM last week announced plans to recall 16,000 laid-offautoworkers.

Meanwhile on Wall Street, the Dow Jones industrials closed last week at a record 1,171.34, a 46.63 jump for the week. It was Volcker who helped launch the latest running of the bull market with a statement that interest rates would not remain high. He also told the House Banking Committee last week that he expected interest rates to come down and the economy to continue recovering.

The improving economic news provides Reagan with an excellent reason to reappoint Volcker. But in a White House that highly values its chosen team players, Volcker is clearly not a Reagan man. The two men had never met before Reagan became President, and have had only half a dozen meetings since then, never alone.

Volcker has been transmitting mixed signals as to whether he wants to stay in the job. He is being cordial and responsive to critics. When Congressman Jack Kemp and six Representatives and Senators last month criticized Volcker's support of greater U.S. participation in the International Monetary Fund, the chairman's response was a polite, thoughtful and detailed letter explaining that the $8.5 billion increase was justified in view of international banking troubles.

Yet at the same time, Volcker has repeatedly refused to say whether he would accept reappointment to another term. At last week's House Banking Committee hearing, New York Democrat John LaFalce asked him pointblank: "Are you seeking reappointment?" Replied Volcker: "I don't want to get into that."

Silence from the White House about a successor and noncommittal answers from Volcker have naturally led to speculation about another, successor. The most frequently mentioned candidate is Alan Greenspan, 57, former chairman of the Council of Economic Advisers, consultant to the Reagan White House and most recently head of the commission on Social Security reform.* Greenspan supports Volcker's reappointment, saying, "I think he has done a fine job and deserves it." But Greenspan has lots of support in the White House because of past service to the Administration. Says one admirer: "He's an independent but on the Reagan team nonetheless, a perfect compromise choice." He is also a popular candidate among moneymen. Says Barton Biggs, the chief investment officer of Morgan Stanley: "If they pick Greenspan, they will pick the second best guy to Volcker."

Another candidate who pops up frequently is Preston Martin, 59, vice chairman of the Federal Reserve, whose economic views are close to Volcker's. Though Martin is a Californian and a friend of the Reagan White House, his chances seem slimmer than they once did. His critics are starting to come out, a sure sign of weakening support. Says one: "Martin just isn't impressive."

Other names sometimes mentioned: Martin Feldstein, 43, the current chairman of the Council of Economic Advisers, and Citicorp Chairman Walter Wriston, 63, probably the wittiest of all the candidates. Last month Wriston took himself out of the running by saying that he did not think that a former banker should head the Federal Reserve, which oversees the nation's banks. But then he explained, "Actually, no one ever offered me the job." Also mentioned, but only as long shots: Treasury Secretary Donald Regan, 64, and Treasury Under Secretary for Monetary Affairs Beryl Sprinkel, 59, an ardent monetarist.

On Wall Street and in the business community generally, Volcker is clearly the preferred candidate. Says Walter Shipley, president of New York's Chemical Bank: "He has done a marvelous job. The best thing that could happen would be his reappointment." Western European businessmen and finance ministers agree. They respect Volcker for warning of the growing problem of international debt and for his tough anti-inflation stand. Former Federal Reserve Chairman Arthur Burns, who is now serving as Ambassador to West Germany, recently visited Vice President George Bush to make a plea to keep Volcker on the job. Burns based his case on the need for respected leadership in the ongoing international financial crunch. Said another Volcker fan: "These are dicey times. It's not the moment to bring in a neophyte."

But it is possible that Paul Volcker has had his fill of running American money policy and may now want to make a little more money himself. The $69,800 he earns annually as Fed chairman pales in comparison with the $500,000 or so he could command in the private sector. Not that megabucks or family problems have ever swayed him. "With him," says a friend, "the job is the thing, and people like that don't change." While Volcker's term as a member of the Federal Reserve Board runs until 1992 and he could remain even under another chairman, no one expects that to happen.

Volcker's wife Barbara seems to think her husband's Washington career will end soon. Last week at the Harvard Club, where Volcker got an award, it was suggested to her that it would be a relief for her to have her husband back in August. Said she: "Yes, it certainly will be." There was a pause. "But of course," she quickly added, "I'm only talking out loud." --By John S. DeMott. Reported by David Beckwith/Washington and Frederick Ungeheuer/New York

* Greenspan is also one of six members of TIME'S Board of Economists.

With reporting by David Beckwith/Washington and Frederick Ungeheuer/New York This file is automatically generated by a robot program, so viewer discretion is required.