Seems like old times.

ZHOU Xiaochuan probably didn't have Paul Volcker on his mind when he engineered China's first interest-rate increase since 1995. Yet if anyone knows what China's central bank governor is going through these days, it's the former Federal Reserve chairman.

In October 1979, Paul Volcker launched one of modern history's riskiest inflation fights. With consumer prices surging 14 percent and bond yields at 15 percent, Volcker launched a rate-increase campaign that drove the federal funds rate to 14 percent. Global prosperity hung in the balance.

It's hard not to hold out hope that Zhou will pay close attention to the lessons from Volcker's battle. Who knows, China could even offer the 77-year-old a consulting job as it struggles to get its own money supply under control.

Officials in Beijing are stuck with a pegged currency, capital controls and a monetary policy that's anything but autonomous. Its major banks aren't banks so much as financing arms of the government. And China's economic boom is largely the product of powerful and unpredictable inflows of foreign capital.

Yet the Fed circa 1979 and People's Bank of China circa 2004 have something in common: both lost control of the money supply.

Volcker found his remedy in monetarism. While he wasn't really a monetarist, targeting money was the economic equivalent of a Trojan Horse. Embracing the idea that one could control an economy by closely regulating the supply of money gave Volcker political cover to drive short-term rates to unthinkable levels and, as he put it, "break the back of inflation."

The results weren't pretty at first. Volcker's hawkish money polices sent the U.S. into recession and unemployment above 10 percent. By the time Volcker handed the keys to Alan Greenspan in 1987 the money supply was under control, inflation was 4 percent and the U.S. was poised for the economic boom years of the 1990s.

Zhou shouldn't necessarily jump on the monetarist bandwagon. But the nature of China's 9 percent growth raises questions about whether interest rates alone will avoid overheating. Just as Volcker did 25 years ago, Zhou needs to bring fresh thinking and employ unconventional strategies to cool inflation before it devastates China's economy.

"The flow of foreign money into the country is what is really causing the inflation problems," said Cad Weinberg, chief global economist at High Frequency Economics in Valhalla, New York. "Foreign currency inflows are bloating the money supply."

In fact, one wonders if higher borrowing costs may only encourage companies to finance investment overseas and bring the funds into the country, exacerbating the problem. That's why along with higher interest rates, China needs more aggressive administrative steps to slow the inflow of foreign funds.

As if that weren't challenge enough, Chinese central bank head Zhou also needs to establish credibility for an entity that has little. It isn't unlike what Volcker had to do in the late 1970s and early 1980s.

The eyes of the world are on Zhou to see if China's central bank has the power--and the slightest bit of autonomy--to get things under control. Central banking is as much about winning the trust of markets as adjusting interest rates. And if Zhou is going to try to control the capital flows at the root of China's boom, he may need to cross Communist Party bigwigs.

Zhou attended last month's Group of Seven meeting, though it's not clear how much he's consulting with the world's leading monetary authorities. There's no harm in him doing just that. In fact, given how much the global economy has riding on stability and prosperity in the world's most populous nation, it's advisable.

--William Pesek, Bloomberg News