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In the face of such hysteria Volcker remains unflappably impassive. His words and manner are mild. But he argues with quiet 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 hi 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 dose 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 sole blame for high interest rates. But many financial experts insist that the two developments must at least be considered together. Says Rudolph Penner, head of tax policy studies at the American Enterprise Institute in Washington: "We are trying to switch from an inflationary society to one with lower rates of price increases, and the Federal Reserve has been 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 more 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