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Suppose you were told that you were privileged to meet the second most important man in America. Who – if you're a schoolmaster, whom – do you think you'd be going to meet?

It's an interesting quiz and I tried it out long ago on an eager pack of visiting foreign students, students of politics. The automatic first guess is the vice president. Oh dear, no! Power is something the vice president can only get by accident in the sense old H. L. Mencken implied when he said, 'The vice president is a man who sits in an outer office at the White House hoping to hear the president sneeze.'

The vice president is not a deputy president. By his office, he's actually removed from all power except for a bone or two that the president might care to toss his way. He has the theoretical duty to preside over the Senate and it's a duty that he very rarely exercises. He's mostly, in spite of the protests from all sitting vice presidents, he's mostly a ceremonial figure for he does represent the president at all the best funerals. He is, for the term of his office, sidelined to the shallows of power until the death of the president sweeps him into the main current.

So, how about the Secretary of State? That's a good guess. In many countries, the foreign minister is the second man in line for the succession though, in Britain, the Chancellor of the Exchequer is usually picked as the heir apparent to the top job. Some shrewd, unfooled student, precociously aware that money can mean power, may recall the days around the turn of the century when the robber barons owned the railroads, the oil, the steel, the copper, the iron industries and when, at one time, it could truly be said that J. P. Morgan was the second most powerful man in the country until President Teddy Roosevelt, with the Supreme Court on his side, knocked him off his pins and told him to go back to his mansion and the collecting of Old Masters and medieval manuscripts.

One bright and knowledgable student even suggested the mayor of New York City, which is nothing like as wild as it sounds, since the mayor of New York, chief executive head of the most powerful city in the country has an administrative job second in scope only to that of the presidency and when Fiorello H. LaGuardia was mayor for 12 crackling years after 1933 – we are, by the way, celebrating the hundredth anniversary of his birth – in him we had an indomitable and cocky little figure whose energy, and most of all whose absolute incorruptibility cleaned out the stables of machine politics so alarmingly and introduced to city government so many reforms that his example fired not only other mayors, but many governors and congressmen. But such excellent power as he had was exercised by osmosis flowing out from New York by example.

Patience! Let's go and visit the second most important American in his house, his home. Perhaps that will give a clue. He lives, as you might expect, in Washington. What you would not expect is the flat he lives in which looks like the very camped quarters inhabited in a rooming-house by an impecunious college student. It has a living room, kitchenette, bathroom. That's it. It's known as his garret. Sherlock Holmes, I suspect, would spot a prime clue that Dr Watson wouldn't notice – a small, black and white television set.

Now this usually means you are in the living quarters of a bookish type or of a countryman or of what I like to call a media snob, the type who, at first, scorned a radio set and then he got a radio, but no television. And then succumbed to television but deigned to have a colour set. Rather like the intellectuals of the early 1930s who made a point for some years of seeing only silent films, since silent films were suddenly called art, whereas sound films, the talkies, were fit only for the mob.

There's another clue to his type in a dark closet. He has a slender forest of fly-fishing rods, not by any means squeaky clean since they go too long unused – the man doesn't get to use them as often as he'd like. Why? Because, well, because he's the second most important man in America and lives, day and night, in the knowledge that more, even than the president, he can produce panic and paroxysms in the governments of Britain, France and Germany, Japan, of any industrial power.

I will tease you no longer. His name is Paul Volcker. He is the chairman of the Federal Reserve Board. He is responsible – alone, for his job is independent of the administration, of any administration in power, even though the president appoints him – he is responsible for saying how much paper money is available, should be available, to all of us. 'Us' being you and me and 12 Federal Reserve banks and about 7,000 member banks throughout the country, but since, as somebody said long ago, 'If Wall Street sneezes, Europe catches a cold', Mr Volcker's decisions can immediately and profoundly affect the banking systems and the economies of many other countries.

I ought to say, as simply as possible, why and how the Federal Reserve system was set up and how it works. It was set up as an independent arm of government in 1913 by the Congress after it recognised that in every financial panic and business depression since anyone could remember, the first people to go to the wall were flocks of banks around the country. Congress felt that something had to be done to tide over responsible banks and to save ordinary people from losing their savings if their money happened to be in sound banks that had the bad luck to suffer from a run of withdrawals.

The new system, the Federal Reserve, stopped privately owned banks issuing bank notes. That can be done now only by Federal Reserve banks which, because the Congress was suspicious of centralised power, were instituted all around the country in 12 federal districts, allied to member banks which owned stock in their district bank.

The way the Federal Reserve system works is pretty simple, but in the sense that the way the commander-in-chief of a military theatre works is simple. His commands are unquestioned and can, however, lead to the disaster of Waterloo or the triumph of the Battle of Trafalgar. The word 'reserve' is the key. The Fed, as it's called, dictates the reserves of all its member banks, that's to say, it, alone – 'it' being generally the chairman, Mr Volcker – says how much money, what percentage of a bank's deposit, must be held in the vaults to support the loans made to borrowers.

This is the central decision, a judgement that Mr Volcker ponders from dawn to dusk and often beyond, because he has to say, any day, any month, according to how he senses the economy's going, what trouble Germany or Saudi Arabia or some other country's in. He has to decide just how much money those 12 district banks and their 7,000 satellites must keep on hand. If he lowers the percentage, the banks can lend more money. If he raises it, they can lend less.

So, he's directly responsible for interest rates, for saying we're going to hold back the supply of money or release floods or dribbles of it. The Fed can reduce the reserves of all its banks by selling bonds to its satellites and to the public. It can increase the banks' reserves by buying bonds from the satellites or the public. Or it can lend money directly to shore up the banks' reserves.

All this power would be much smaller if the Federal Reserve system was run only for its member banks but the Fed is the chief agent, the financial agent, of the national government. It holds most of the government's money and Mr Volcker, more than anybody, has to decide how much of the nation's paper money ought to be issued, which it does in the form of notes to be banked by a stated percentage of gold certificates, also by government bonds and various securities.

Now, whether or not the public grasps the power and delicacy of these interlocking mechanisms, what it does know is that the Fed, in the person of its chairman, is responsible for setting prime interest rates and so, by further trickling or flowing down, the interest rate you have to pay your bank for a loan or the mortgage rate you're going to have to pay on a new house. Everybody says the interest rates are too high. Every different school of economists says it. The French say that, more than anything else, the American rate is responsible for their economic troubles. The Democrats are saying it now with wounded, a sort of wounded, air, though under Carter the rates were just about double what they are today.

Mr Volcker, by the way, was appointed by Mr Carter and very soon was blamed by the Reaganites for the recession, but inflation came tumbling down and the Reaganites thought again. They still hound him to bring the interest rate down on his own and he quietly insists that they are not coming down much unless the administration, itself, acts to reduce its huge budget deficits. To relax his tight money policy now, he believes, would refloat a soaring inflation.

Well, the time came this month to appoint a new chairman. Mr Volcker's four-year term was up. Mr Reagan was persuasively advised to replace him but the president's closest advisers and a legion of financial experts on the outside said that nobody had a firmer grasp of the main, the most urgent international situation, namely the international debt situation and the plight of the allied nations, and, anyway, the American economic recovery is well on the way.

Last week, the president reappointed him. So, he can hole up again in his garret – he's paid less than a congressman and appears to have few other assets – he can watch the news in black and white. He can gaze wistfully at his dusty fishing rods, he can smoke his cheap cigars, his only luxury and resume his role as the dean of the world's central bankers.

A huge, six foot, seven inch, 17-stone man, the odd refreshing figure of the giant of international finance who, for himself, has no interest in money.

This transcript was typed from a recording of the original ´óÏó´«Ã½ broadcast (© ´óÏó´«Ã½) and not copied from an original script. Because of the risk of mishearing, the ´óÏó´«Ã½ cannot vouch for its complete accuracy.

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