St. Louis Fed President Plays Hardball on Inflation

Thomas C. Melzer is the only central banker who played for a No. 1-ranked college baseball team.

The Federal Reserve Bank of St. Louis president, however, has become as devoted to eradicating inflation as he was in 1965 to conquering the curve ball as a third baseman on Stanford University's team.

"Inflation tends to distort economic decision-making," he said. "That is why the central bank ought to focus on wringing inflation out of the economy. Inflation impedes the economy from reaching its full potential."

Take sweep accounts. Banks spend millions hiring experts to devise ways to use sweep accounts to avoid reserve requirements. In a zero-inflation environment, the bank would not have to worry that its cash was losing value by sitting in the Fed's vault. Instead it could use consultants to create new business and consumer credit programs to boost employment and spur economic growth.

Smart cards also lose their luster without inflation, he said. One reason for issuing these cards is so banks may invest the balances before paying claims. Eliminating inflation would lower the spread and force banks to raise fees, cut costs, or accept a loss on the product.

"Inflation creates an economic incentive that is a bit of a mirage," he said. "When you look at these products you need to understand what is really driving them."

Mr. Melzer's anti-inflation views shouldn't be a surprise. The St. Louis Fed historically serves as the country's inflation hawk, pushing other members of the Federal Open Market Committee to focus on price stability.

That's about all Mr. Melzer had in common with the city before becoming president in 1985. He grew up outside of Pasadena, Calif., did his undergraduate and graduate work at Stanford University, and worked at Morgan Stanley in New York.

Life at Stanford was particularly tough. He was a walk-on to the baseball team, which meant he had to beat out a player on scholarship for a roster slot. He played 60 games a year while earning a degree in electrical engineering.

"I had to bear down and do a lot of studying and cramming at the last minute," he said. "I was fortunate to get it done."

Teammates say he was unflappable on the field. "I'd like to be able to say that Tom was a rabble-rouser," said Richard M. Kovacevich, a starting pitcher on the 1965 team and current chairman and chief executive of Norwest Corp. "But that was not the case. He wasn't a beer-drinking rowdy who skipped curfew at night."

"A good team man and hustler," says the bio in the Stanford athletic department's 1966 media guide. "Tom has a fine pair of hands and an adequate arm. His major challenge will be to hit more consistently." (Mr. Melzer's lifetime batting average is an unimpressive .208.)

After graduation, he briefly considered becoming a professional ballplayer. "I thought about it, but I don't think the minor leagues ever thought about me," he said.

Still Mr. Kovacevich said he had no idea Mr. Melzer would enter the banking business. "The last thing I ever would have guessed is that Tom Melzer would become a president of a Federal Reserve bank," he said. "Banking back then was a dull business."

Instead of becoming a ballplayer, Mr. Melzer remained at Stanford to earn his MBA. "I decided I could make a greater contribution if I paired up my technical training with management training," he said.

He got hooked on finance classes and even traveled to New York during Christmas break his second year to learn about the securities business. He met folks from Morgan Stanley & Co. and eventually became the second Stanford graduate to work for what was then a small, 175-person investment bank.

"They looked at my resume and said, 'You've been in California for 13 years, so why would you want to come to New York?"' he said.

New York, however, was the heart of the securities trading world and Mr. Melzer said he couldn't imagine working anywhere else. During his 16 years at Morgan Stanley, he rose to the top of its U.S. government securities department and was slated to become director of fixed-income syndications. But he quit in 1984, upset with a reorganization plan that was going to combine all of the fixed-asset trading groups into a single unit.

Rather than fight a hopeless battle against the plan, he decided to live off his considerable savings and look for a new job. He met with Paul A. Volcker, who was then Fed chairman, and Gerald E. Corrigan, then the New York Fed president; both suggested he apply for the vacant presidencies at the reserve banks in St. Louis and Minneapolis.

The St. Louis Fed's board offered him the job, and he took over in June 1985. Although he had more lucrative offers, he said he wanted to join the Fed to help Mr. Volcker battle inflation. "I viewed the job as a challenge that would really matter," he said.

He seems well liked by Fed employees. "I have never met anybody who knows more people," said Michelle Clark Neely, a St. Louis Fed economist. "It is an inside joke that he knows the name of every employee." Several employees said he sent them handwritten notes of condolence when relatives died.

Mr. Melzer has given up baseball these days. He had coached his son's teams until the young man entered college, but he decided to skip the bank's softball team. He hasn't given up all sports, however; recently he traveled to Scotland to play golf, and he has become an avid Cardinals fan and attended World Series games in 1985 and 1987.

He spends much of his day working either on monetary policy or payment system issues. As a member of the so-called Rivlin Committee reviewing the Fed's future role in the retail payment system, he has had to attend scores of meetings and policy briefings.

Although he declined to discuss the committee's work, he did say the Fed always will have a role in the payment system. "In a fundamental sense, the central bank is always going to be in the payment business," he said. "Final settlement occurs through the use of our liabilities."

Mr. Melzer, as chairman of the Fed's Financial Services Policy Committee, is protective of the payment system. Only banking organizations should have access to Fed Wire and other payment systems, he said. Allowing nonbanks direct access would either threaten the stability of the payment system or require the government to impose significant safety-and-soundness regulations on nonbanks.

Another worry is the continuing consolidation of the banking, insurance, and securities businesses. "One of the big challenges as these activities come together is to avoid a situation where the safety net that surrounds depository institutions is unwittingly extended to other financial services providers," he said.

Mr. Melzer is wary of endorsing any particular financial reform proposal. "I'm not sure what the best way to go is," he said. "Maybe the legislators and regulators ought to follow the markets rather than lead them."

Mr. Melzer's own district has been losing banks to acquisitions. For instance, NationsBank Corp. recently bought Boatmen's Bancshares. But Mr. Melzer said he expects community banks to flourish.

"The marketplace is saying there will be some very important roles for community banks," he said. "They can find their niches to compete."

Bankers appear to genuinely respect him. "He is a very astute person," said Robert L. Levin, president and chairman of Normandy Bank, Northwoods, Mo., and a golfing buddy of Mr. Melzer's. "Not only is he highly educated and cultured, but he is very practical."

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