An unprecedented public squabble broke out Thursday at the Federal Reserve Board as Chairman Paul A. Volcker denounced as “incomprehensible” the call by Vice Chairman Preston Martin for better ways to solve the international debt crisis.
An angry Volcker, who was attending a trade conference in Tokyo, telephoned the Federal Reserve press office to repudiate Martin’s remarks, which had appeared in Thursday’s editions of the Wall Street Journal.
Martin, discussing how to help some Third World countries deal with their massive bank debts, had praised such “innovative” suggestions as proposals to put a cap on debtor nations’ interest payments. But Volcker strongly maintained that the financial problem is already being managed effectively.
Volcker moved quickly to disavow his vice chairman’s remarks, apparently fearful that the financial markets could view them as a major policy shift.
Many of the nation’s major banks have made extensive foreign loans, and the suggestions discussed by Martin could limit their debt collections or disrupt the fragile network of international agreements under which banks are now being repaid.
Veteran officials at the Fed, where disagreements are usually settled in the board’s closed-door meetings, said they could not recall any other occasion on which the chairman had so forcefully rebuked another board member in public.
Martin’s comments, Volcker said, are “unfortunately and unrealistically suggesting that there are unorthodox approaches to deal with the international debt problem.”
The orthodox method favored by Volcker often involves financial help from the International Monetary Fund to countries that agree to reduce government spending, cut imports and increase exports so that they can raise money to repay foreign bank loans.
With the IMF behind them, financially strapped Third World nations typically find it easier both to impose the necessary economic austerity at home and to persuade their bank creditors to extend old loans or grant new ones.
“What is hopeful and promising is that so many countries are coming to grips with necessary and difficult adjustment efforts,” Volcker said in his statement Thursday. “One example is the highly promising effort currently under way in Argentina,” which has decided in negotiations with the IMF to impose an economic austerity policy.
Martin has had other differences with Volcker since his appointment as Fed vice chairman by President Reagan. He generally has been less alarmed than Volcker about the threat of renewed U.S. inflation and supported somewhat faster growth of the nation’s money supply than the Fed chairman.
These differences pale, however, in comparison with the dispute over the international debt problem, an issue on which Martin ventured far from official Fed policy.
In his “plea” for consideration of new approaches, Martin cited a proposal for banks to convert some of their loans to Third World nations into shares of government-owned enterprises or private businesses in the debtor countries.
He also discussed a proposal for the World Bank, an international foreign aid donor, to take over some of the bank debts of developing nations in return for bonds guaranteed by the World Bank.