57. Ibid.
58. PIPAV.
59. The stock of gold rose from $20.0 billion in 1945 to $24.5 billion in 1949 and then declined back to $20.0 billion in 1958. See Historical Statistics of the United States, U.S. Bureau of the Census, Government Printing Office, Washington, D.C., 1975, p. 995. Speculators focused on deficits in America’s balance of payments that began in 1958. Also see Economic Report of the President, Council of Economic Advisers, 1961, pp. 107–108.
60. See Wall Street Journal, September 23, 1960, p. 3.
61. Ibid.
62. Ibid.
63. Wall Street Journal, October 31, 1960, p. 2.
64. Paul A. Samuelson and Robert M. Solow, “Analytical Aspects of Anti-Inflation Policy,” American Economic Review 50, no. 2 (May 1960): 177–94.
65. Schlesinger, A Thousand Days, p. 154.
66. Ibid.
67. PIPAV.
68. Volcker’s appointment appears in the New York Times, November 18, 1963, p. 22.
69. PIPAV.
2. Apprenticeship
1. This quote and those in the conversation that follows are based on the recollection of Paul Volcker.
2. PIPAV.
3. Friedrich A. Hayek, The Road to Serfdom, fiftieth anniversary edition (Chicago: University of Chicago Press, 1994), p. 227. The book was published originally in 1944 in the United Kingdom by George Routledge and Sons and in the United States by the University of Chicago Press.
4. PIPAV.
5. PIPAV. David Hume (1711–1776), a contemporary of Adam Smith, articulated the link between money and prices, known as the quantity theory of money, in “Of Interest,” in his Essays, Moral, Political, and Literary (1752). Also see Carl Wennerlind, “David Hume’s Monetary Theory Revisited: Was He Really a Quantity Theorist and an Inflationist?” Journal of Political Economy 113, no. 1 (February 2005): 223–37.
6. PIPAV.
7. Paul A. Volcker, “The Problems of Federal Reserve Policy Since World War II,” Thesis submitted to the Department of Economics, Princeton University, Princeton, NJ, Mimeograph, January 7, 1949, p. 77.
8. Ibid. pp. 233 and 235.
9. PIPAV.
10. See Peter Bernstein, The Power of Gold (New York: John Wiley, 2000), pp. 32–37.
11. A twenty-dollar Federal Reserve note could be exchanged for a double eagle, which consisted of .9675 ounces of pure gold.
12. A gold bar weighs 400 ounces, or 25 pounds. A regulation bowling ball can weigh between 6 and 16 pounds—with 12 pounds a reasonable size for most adults.
13. See William Silber, “Why Did FDR’s Bank Holiday Succeed?” Federal Reserve Bank of New York Economic Policy Review 15, no. 1 (July 2009), for a discussion of the Emergency Banking Act of 1933.
14. See Executive Order 6102, dated April 5, 1933, available at www.runto gold.com/images/EO6102.pdf.
15. See “Treasury Defied on Gold Hoarding,” New York Times, May 3, 1933, p. 1.
16. New York Times, May 3, 1933, p. 16.
17. The Gold Reserve Act of January 1934 legislated a number of regulations concerning gold: (1) Section 2 mandated that all gold coins be removed from circulation and required American citizens to turn in their gold coins in exchange for paper currency; (2) section 3 gave the secretary of the treasury the responsibility of controlling all dealings in gold; and (3) section 10 directed the secretary of the treasury to use gold bullion to settle international balances and to control the exchange value of the dollar.
18. Pooh-Bah is a character in Gilbert and Sullivan’s The Mikado. The mocking title Lord High Everything Else summarizes his puffed-up image.
19. Since there are 480 grains per ounce of fine gold, the price per ounce was set at 480/13.714, equal to $35 per ounce.
20. See Federal Reserve Report, Wall Street Journal, January 20, 1961, p. 17.
21. The Federal Reserve held $17.2 billion in gold certificates (see ibid.), which represented 37.7 percent of the required cover against total Federal Reserve liabilities. In January 1961 the gold cover requirement was 25 percent, having been lowered from 40 percent in June 1945 (see Wall Street Journal, June 13, 1945, p. 3). The 25 percent minimum cover amounted to $11.4 billion in gold. Thus, only $6 billion in gold was available to meet foreign demand.
22. Official claims of foreign central banks on the United States totaled $11.1 billion at the end of 1960 (see International Monetary Fund, Annual Report, Washington, DC, 1970, p. 18).
23. Public law 93-373, which went into effect on December 31, 1974, made it legal to invest in gold in the United States.
24. Letter dated November 4, 1965, Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 4, Folder 68 (Chronological File, 1965, 1).
25. The following conversation is based on Volcker’s recollection.
26. According to Roosa (The Dollar and World Liquidity [New York: Random House, 1967], p. 23), “The Treasury, again acting through the Federal Reserve Bank of New York, … set in motion the informal ‘pool’ through which seven other countries had initially joined with the United States on an ad hoc basis in November 1960 to help stabilize the London gold market.” Charles A. Coombs, The Arena of International Finance (New York: John Wiley, 1976), p. 63, mentions November 1961 as the formal beginning of the Gold Pool. Roosa (The Dollar and World Liquidity, p. 119) evaluated the continued operation of the pool two years later: “The operations in the London gold market, all conducted by the Bank of England, have been a model of informal cooperation, renewed through frequent consultation … The speculative fever has largely been removed from transactions in gold.”
27. Timothy Naftali, ed., John F. Kennedy: The Great Crises, vol. I (New York: W. W. Norton, 2001), pp. 464 and 492.
28. Ibid., p. 495.
29. Ibid., p. 496.
30. Roosa, The Dollar and World Liquidity, p. 44.
31. Naftali, John F. Kennedy, p. 496.
32. See Reduction in Reserve Ratio for Federal Reserve Notes and Deposits: Hearing Before Senate Committee on Banking and Currency, 79th Congress, 1st Sess., February 20, 1945, pp. 3–54. The bill was signed into law by President Truman on June 12, 1945 (see Wall Street Journal, June 13, 1945, p. 3).
33. Volcker’s memorandum, entitled “To Establish a Committee to Study the Gold Reserve Requirement,” dated February 8, 1962 (Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 11, Folder 179, Gold Cover Committee), was designed “to deflect criticism of changing the gold cover.” To avoid appearing to stack the deck, Volcker included two alternative names to Sproul as chairman: John J. McCloy, former chairman of the Chase Manhattan Bank, and Henry C. Alexander, former chairman of J.P. Morgan and Company.
34. “Address to the 75th Annual Convention of the American Bankers Association,” November 2, 1949, reprinted in Lawrence Ritter, ed., Selected Papers of Allan Sproul, Federal Reserve Bank of New York, December 1980, p. 217.
35. Memorandum to Volcker from Roosa dated February 13, 1962 (Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 11, Folder 179, Gold Cover Committee).
36. See Timothy Naftali, John F. Kennedy, p. 492, for Dillon explaining to President Kennedy why the gold cover legislation is controversial.
37. New York Times, February 5, 1965, p. 12.
38. Ibid.
39. Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 42, and New York Times, January 7, 1965.
40. New York Times, March 2, 1965, p. 45.
41. France completed its withdrawal from NATO on March 14, 1967. See New York Times, March 15, 1967, p. 1.
42. Repealing Certain Legislation Relating to Reserves Against Deposits in Federal Reserve Banks: Hearings Before the House Committee on Banking and Currency, 89th Congress, 1st Sess., February 1, 1965, Washington, DC.
43. For the exact numbers on free gold, s
ee the Federal Reserve Report, Wall Street Journal, January 8, 1965, p. 10. Official claims of foreign central banks on the United States totaled $15.4 billion at the end of 1964 (see International Monetary Fund, Annual Report, 1970, p. 18).
44. New York Times, January 7, 1965, p. 30.
45. New York Times, March 5, 1965, p. 45.
46. PIPAV.
47. Ibid.
48. Interview with Jimmy Volcker.
49. PIPAV.
50. Ibid.
51. According to the Member Bank Reserve Report of the Federal Reserve System, dated January 10, 1968 (Wall Street Journal, January 12, 1968, p. 19), the gold stock equaled 27.1 percent of Federal Reserve notes outstanding on January 3, 1968, implying that of the $11.98 billion in gold, only $1 billion was available to cover foreign obligations.
52. International Monetary Fund, Annual Report, 1969, p. 18.
53. See Geoffrey Bell, The Eurodollar Market and the International Financial System (Hoboken, NJ: John Wiley, 1973), p. 20. Eurodollars were not all held by foreigners, so the $25 billion overstates the total claims by non–U.S. residents. However, the Wall Street Journal, January 4, 1968, p. 1, reports “an estimated $30.5 billion greenbacks that foreigners hold” could also have been turned in for gold.
54. Wall Street Journal, January 4, 1968, p. 1.
55. New York Times, January 18, 1968, p. 1.
56. New York Times, February 2, 1968, p. 47.
57. On March 20, 1968, the Federal Reserve reported the gold stock at $10.87 billion (Wall Street Journal, March 22, 1968, p. 23), compared with $11.88 billion on February 28, 1968 (Wall Street Journal, March 1, 1968, p. 25). During the first quarter of 1968 the U.S. gold stock declined by $1.3 billion, surpassing the total decline for 1967 (see International Monetary Fund Annual Report, 1968, p. 89). The U.S. gold stock during 1967 declined from $13.2 billion at the end of 1966 to $12.0 billion at the end of 1967 (Council of Economic Advisers, Economic Report of the President, 1970, Washington, DC, p. 282).
58. Washington Post, March 14, 1968, p. A1. As an aside, here are the physical characteristics of a ton of gold. A gold bar weighs 27 pounds and measures slightly smaller than a building brick: 1½ inches high, inches long, and 3½ inches wide (New York Times, March 2, 1965, p. 45). A ton of gold, therefore, consists of seventy-four bars, which could fit comfortably on an office bookshelf (but would probably cause the bookshelf to collapse).
59. New York Times, March 9, 1968, p. 1.
60. New York Times, March 5, 1968, p. 51 continued.
61. For all quotes in this and the next two paragraphs, see The Congressional Record, vol. 114, pt. 5, 90th Congress, 2nd Sess., March 6, 1968–March 15, 1968, pp. 6596–98.
62. Washington Post, March 15, 1968, p. A1.
63. New York Times, January 18, 1968, p. 1.
64. New York Times, March 15, 1968, p. 1.
65. New York Times, March 17, 1968, p. E3.
66. The continuing members were Belgium, Italy, the Netherlands, Switzerland, the United Kingdom, the United States, and West Germany. France had withdrawn in mid-1967 (New York Times, March 31, 1968, p. SM32).
67. New York Times, March 18, 1968, p. 70. The managing director of the International Monetary Fund and the general manager of the Bank for International Settlements, along with the seven central bankers, attended the meeting.
68. New York Times, March 16, 1968, p. 39.
69. Ibid.
70. See Friedman’s testimony in Gold Cover: Hearings Before the Committee on Banking and Currency, U.S. Senate, 90th Congress, 2nd Sess., February 1, 1968, p. 153.
71. New York Times, January 18, 1968, p. 1 continued.
72. See Robert P. Bremner, Chairman of the Fed: William McChesney Martin Jr. and the Creation of the Modern American Financial System (New Haven, CT: Yale University Press, 2004), pp. 73–81, for a detailed description of Martin’s role in the accord.
73. PIPAV.
74. Volcker and Gyohten, Changing Fortunes, p. 45.
75. The London gold market reopened on April 1, 1968. Beginning with that session, two prices were recorded for each day, the morning fixing and the afternoon fixing. The price of thirty-eight dollars is the morning fixing on April l. On March 15, 1968, when Queen Elizabeth closed the London market, the much smaller Paris market remained open. According to the New York Times (March 16, 1968, p. 1 continued), “There was more frantic buying with the price of gold driven up to almost $45 an ounce.” The “almost $45” price in Paris occurred prior to the beginning of the “two-tier market” established by the communiqué from the Gold Pool that weekend.
76. A twenty-dollar double eagle sold for fifty-five dollars before March 15 and for seventy dollars on March 18 (Wall Street Journal, March 18, 1968, p. 6).
77. According to the International Monetary Fund, Annual Report, Washington, DC, 1969, p. 121, “The crisis of March 1968 … arose largely because of widespread expectation of a change in the official price of gold.” The free-market price of gold reflects supply and demand from all sources. Aside from speculators, the main source of supply is newly mined gold, primarily from South Africa. The main source of demand is the jewelry industry. Table 37 in the International Monetary Fund, Annual Report, 1970, p. 125, shows that these two components are much less volatile over time than “hoarding,” a residual category that includes speculation. Thus speculative demand dominates the price movement of free-market gold. As a practical matter, thirty-five dollars per ounce served as a floor because central bankers were buyers at that level to replace inventory lost to speculators. (The March communiqué did not preclude central bank buying in the free market.)
78. New York Times, March 18, 1968, p. 1 continued.
3. Battle Plan
1. PIPAV.
2. Recall from chapter 1 the quote from George Washington: “I earnestly recommend to you to be circumspect in your choice of officers … Do not suffer your good nature, when application is made, to say yes when you ought to say no; remember that it is a public not a private cause that is to be injured or benefited by your choice.”
3. See “Nixon Terms Adlai Unfit for Presidency,” Washington Post, September 7, 1952, p. M6.
4. Quote DB—Interactive Database of Famous Quotations.
5. New York Times, October 21, 1956, p. 193.
6. The letter is dated January 29, 1969, Federal Reserve Bank of New York Archives, Box 0108476.
7. The letter is dated January 28, 1969 (Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 2, Folder 113).
8. The memorandum (Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 13, Folder 184), dated January 21, 1969, is addressed to the secretary of the treasury, secretary of state, chairman of the Council of Economic Advisers, and chairman of the Federal Reserve Board. Volcker recalls that Treasury Secretary David Kennedy gave him the memorandum.
9. PIPAV.
10. New York Times, July 24, 1962, p. 12.
11. Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 61.
12. Ibid., p. 36.
13. Memorandum from Volcker to Kennedy (Paul Volcker, Undersecretary for Monetary Affairs, National Archives II, College Park, MD, Record Group 56, Box 13, Folder 184), dated January 23, 1969.
14. President Johnson had established the study group chaired by Frederick Deming, who was the undersecretary of the treasury for monetary affairs in his administration. The group was then known as the Deming Group. Kissinger’s memo confirmed that the study group would continue in the new administration. See Robert Solomon, The International Monetary System, 1945–1981 (New York: Harper & Row, 1982), p. 82.
15. Irish Times, February 13, 1969, p. 14.
16. A version of this story appears in Volcker and Gyohten, Changing Fortunes, p. 68.
17. Milton Friedman and Robert Roosa, The Balance of Payments
: Free Versus Fixed Exchange Rates (Washington, DC: American Enterprise Institute, 1967).
18. Ibid., p. 16.
19. Ibid., p. 38.
20. Washington Post, February 14, 1969, p. C5.
21. Ibid.
22. See Memorandum to the Secretary [David Kennedy], copy to Paul Volcker, from Undersecretary Charls Walker, February 13, 1969, Federal Reserve Bank of New York Archives, Box 108473.
23. Volcker’s teachers supported floating rates as well. See Friedrich A. Lutz, “The Case for Flexible Exchange Rates,” Banca Nazionale del Lavoro Quarterly Review 7, no. 31 (December 1954); Frank Graham and Charles R. Whittlesey, “Fluctuating Exchange Rates, Foreign Trade, the Price Level,” American Economic Review 24 (1934): 410–16.
24. Lawrence Ritter, The Glory of Their Times: The Story of the Early Days of Baseball Told by the Men Who Played It (New York: Macmillan, 1966); and Money, coauthored with William Silber (New York: Basic Books, 1970).
25. PIPAV.
26. Ibid.
27. Friedman and Roosa, The Balance of Payments, pp. 47, 87.
28. In 1969 most academics dismissed destabilizing speculation as an unwarranted bogeyman, but this changed after the Bretton Woods System broke down in 1973 and the world experienced the instability of floating rates. A simple exposition of why free markets in foreign exchange can be unstable is Neil Wallace, “Why Markets in Foreign Exchange Are Different from Other Markets,” Federal Reserve Bank of Minneapolis Quarterly Review 14, no. 1 (January 1979): 12–18. A review of the instability during the first fifteen years of floating rates is Rudiger Dornbusch and Jeffrey Frankel, “The Flexible Exchange Rate System: Experience and Alternatives,” National Bureau of Economic Research Working Paper No. 2464, 1989.
29. PIPAV.
30. The London gold fixing never was below forty-three dollars during March, April, and May.
31. New York Times, April 28, 1969, p. 1.
32. Ibid., p. 1 continued.
33. See “Talking Paper Prepared in the Department of the Treasury, February 19, 1969,” in Foreign Economic Policy, 1969–1972; International Monetary Policy, 1969–1972, vol. 3, Bruce F. Duncombe, ed. (Washington, DC: Government Printing Office, 2002), p. 305.
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