Volcker

by William L. Silber

  50. New York Times, February 12, 1973, p. 40.

  51. Ibid.

  52. The following quotes are from “Informal Notes on a Meeting in the Finance Ministry,” February 10, 1973, Edward Hermberg, Financial Attaché, Personal Papers of Paul Volcker.

  53. New York Times, February 13, 1973, p. 45.

  54. New York Times, February 13, 1973, p. 1; Washington Post, February 13, 1973, p. 1; and the Times (London), February 14, 1973, p. 1.

  55. See New York Times, February 14, 1973, p. 55. Also see Transcript, Press Briefing with Paul Volcker, February 13, 1973, p. 3, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108476.

  56. Data on the yen are from the New York Times, February 14, 1973, p. 1 continued. Data on the German mark are from Datastream.

  57. Tanaka is quoted in the New York Times, February 15, 1973, p. 89, and Schmidt is quoted in the Washington Post, February 14, 1973, p. A17.

  58. New York Times, February 12, 1973, p. 40.

  59. New York Times, February 17, 1973, p. 41.

  60. Ibid.

  61. New York Times, February 18, 1973, p. 209.

  62. New York Times, March 4, 1973, p. 1.

  63. According to the New York Times (March 6, 1973, p. 1), “When the major European governments announced that the international currency markets would be closed this simply meant that the government broker—who sets the official daily fixing of currency values—would not be in business.”

  64. The Washington Post, March 10, 1973, p. A1, reports that Canada, Indonesia (representing the “poorer nations”), Japan, Sweden, and Switzerland were also invited.

  65. See Volcker and Gyohten, Changing Fortunes, p. 112.

  66. This conversation is based on the recollection of Paul Volcker.

  67. From the testimony of Arthur Burns, To Amend the Par Value Modification Act of 1972: Hearings Before the Subcommittee on International Finance of the Committee on Banking and Currency, House of Representatives, 93rd Congress, 1st Sess., March 6, 1973, p. 119.

  68. Volcker and Gyohten, Changing Fortunes, p. 113.

  69. See New York Times, March 13, 1973, p. 49, for the floating arrangements, and New York Times, March 17, 1973, pp. 1 and 41, for the final communiqué.

  70. See Volcker and Gyohten, Changing Fortunes, p. 113.

  71. Ibid. The New York Times, March 17, 1973, p. 1, quotes Burns as saying, “whatever happens to the discount rate is decided in Washington, not in Eu rope.”

  72. PIPAV.

  73. See New York Times, April 3, 1974, for Simon’s political struggles.

  74. Letter from Rumsfeld to Volcker, April 9, 1974, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473.

  75. The ministers and central bank governors of the ten countries in the Group of Ten, sometimes called the G-10, met in Paris on March 16, 1973, under the chairmanship of Valéry Giscard d’Estaing (see www.ena.lu). Giscard d’Estaing was elected president of France on May 19, 1974.

  76. This conversation was reported on the day after Volcker’s resignation. See the Washington Post, April 9, 1974, p. D11.

  77. International Herald Tribune, February 14, 1973.

  78. Transcript, press conference, February 13, 1973, Personal Papers of Paul Volcker.

  7. Prelude

  1. For more details, see Lawrence Ritter, William Silber, and Gregory Udell, Principles of Money, Banking and Financial Markets, 12th ed. (Boston: Addison-Wesley, 2009).

  2. PIPAV.

  3. Burns would say later (see page 132) that he knew Volcker would not be a “rubber stamp,” but he also disparaged Volcker in his diary (see the previous chapter).

  4. PIPAV.

  5. Details on the battle between Sproul and Martin appear in 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. 99–102.

  6. New York Times, May 12, 1970, p. 57.

  7. See William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987), p. 341.

  8. New York Times, May 22, 1972, p. 53.

  9. Burns questioned the travel budget in February 1970, ostensibly justifying a shift in international responsibilities from the New York bank to the board. See Allan Meltzer, A History of the Federal Reserve System, vol. 2, book 1 (Chicago: University of Chicago Press, 2009), p. 585n.

  10. Letter from Russell Reynolds, chairman of Russell Reynolds and Associates, November 23, 1973, Personal Papers of Paul Volcker.

  11. See New York Times, January 5, 1973, p. 23, and New York Times, January 9, 1975. Hunter disclosed that his annual salary was $150,000 but he signed a “pay package” worth $3.75 million over five years, which works out to $750,000 per year.

  12. PIPAV.

  13. New York Times, April 9, 1974, p. 55.

  14. This information comes from Paul Volcker.

  15. Volcker waited until June 1974 before leaving the Treasury, because he wanted to attend a Committee of Twenty meeting to promote a statement supporting “surveillance of the floating rate system … that takes international as well as national interests into account.” The Committee of Twenty was set up by the International Monetary Fund in 1972 to discuss monetary reform. See Washington Post, June 14, 1974, p. A1.

  16. This conversation is based on the recollection of Paul Volcker.

  17. The chairman of the Board of Governors receives the same salary as a member of the president’s cabinet, but bank presidents are paid at the discretion of each bank’s board of directors, with the approval of the Board of Governors.

  18. The 81 percent figure reflected the survey taken in October 1974, as reported in the New York Times, August 3, 1975, p. 36. See New York Times, July 14, 1974, p. 1, for the 15 percent number.

  19. This quote and the remaining quotes in this paragraph are from the New York Times, July 14, 1974, p. 1 continued.

  20. The Consumer Price Index rose by 12.1 percent from December 1973 through December 1974.

  21. Venezuela increased the price of a barrel of crude oil to $14.08 on December 28, 1973. According to the New York Times (December 29, 1973, p. 31), “The new posted price is 400 percent larger than the price last January 1.”

  22. Between 1955 and 1964 the Consumer Price Index increased at an annual compounded rate of 1.65 percent, and between 1965 and 1974 it increased at a 5.09 annual rate. These data are from Lawrence H. Officer and Samuel H. Williamson, available at www.measuringworth.com/inflation.

  23. See “The Great Inflation: Lessons for Monetary Policy,” monthly bulletin, European Central Bank, May 2010. Also see the forthcoming volume edited by Michael Bordo and Athanasios Orphanides, The Great Inflation (Chicago: University of Chicago Press), and especially the article in that volume by Andrew Levin and John B. Taylor, “Falling Behind the Curve: A Positive Analysis of Stop-Start Monetary Policies and the Great Inflation.”

  24. Narrow money supply (defined as currency plus demand deposits) grew at a 2.4 percent annual growth rate in the early period (December 1955 through December 1965) compared with an annual growth rate of 5.4 percent in the second period (December 1965 through December 1975). These are the annual geometric growth rates in the M1 data series labeled M1SL, available at research.stlouisfed.org/aggreg/.

  25. New York Times, March 5, 1965, p. 45. Also see chapter 2 for an extensive discussion. Robert Barro suggested that the break with the past was signaled by the removal of silver from most American coins in 1964. See Barro, “United States Inflation and the Choice of Monetary Standard,” in Robert Hall, Inflation: Causes and Effects (Chicago: University of Chicago Press, 1982), p. 104. Barro is correct with respect to circulating coins, but the removal of the gold cover seems more directly related to the Federal Reserve’s discretionary control over the money supply.

  26. See New York Times, June 19, 1974, p. 61, “House Unit Passes Gold Amendment,” for the earliest indication that the purch
ase of gold would be legalized. Presidential Executive Order 11825 became effective on December 31, 1974. It invoked provisions of Public Law 93-373 to revoke earlier Executive Orders banning gold holding.

  27. See New York Times, September 23, 1974, p. 55.

  28. Ibid.

  29. The morning fixing in London on December 30, 1974, was $197.50 compared with the final closing price on December 31, 1973, of $112.25.

  30. New York Times, May 2, 1975, p. 45.

  31. Ibid.

  32. New York Times, April 5, 1974, p. 45.

  33. Transcript, Federal Open Market Committee, January 17, 1977, Tape 7, p. 1, Papers of Arthur Burns, University of Michigan Library, Ann Arbor, MI.

  34. Arthur Burns, “The Anguish of Central Banking,” the 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 15.

  35. The inflation rate was 6.48 percent per year from December 1969 through December 1977 based on data from Lawrence H. Officer and Samuel H. Williamson, available at www.measuringworth.com/inflation/. Burns’s tenure as Fed chairman is discussed in many articles and books, including William Poole, “Panel Discussion II: Safeguarding Good Policy Practice,” in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis 87, no. 2 (March/April 2005), part 2; Robert Hetzel, The Monetary Policy of the Federal Reserve: A History (New York: Cambridge University Press, 2008); and Meltzer, A History of the Federal Reserve System, vol. 2, book 2.

  36. See Michael J. Haupert, “The Economic History of Major League Baseball,” at eh.net/encyclopedia/article/haupert.mlb.

  37. Burns, “The Anguish of Central Banking,” p. 16.

  38. Ibid.

  39. The conversation is based on the recollection of Paul Volcker.

  40. Memorandum of Discussion, Federal Open Market Committee, November 18, 1975, p. 39, Board of Governors of the Federal Reserve System, Washington, DC.

  41. Transcript, Federal Open Market Committee, July 20, 1976, Tape 10, pp. 5 and 13, Papers of Arthur Burns, University of Michigan Library, Ann Arbor, MI.

  42. Washington Post, August 14, 1975, p. A17.

  43. PIPAV.

  44. The Consumer Price Index rose 12.1 from December 1973 through December 1974 and rose 5.0 percent from December 1975 through December 1976.

  45. The morning fixing in London on August 31, 1976, was $103.05.

  46. New York Times, August 29, 1976, p. 105.

  47. The price of gold reflects both supply and demand, of course, so that part of the drop in price reflected anticipated sales of gold from U.S. stockpiles and from the International Monetary Fund (see New York Times, September 3, 1976, p. D5). However, gold sales by the monetary authorities are only a small fraction of the stock of gold in the world—gold is indestructible, as in Charles de Gaulle’s poetry. When speculators want gold as an inflation hedge, there is never enough to go around.

  48. New York Times, September 2, 1976, p. 55.

  49. For a discussion of the economic issues in the campaign, see the editorial in the New York Times, October 26, 1976, p. 38.

  50. Inflation in 1969 was 5.9 percent.

  51. Unemployment averaged 7.7 percent in 1976 and was 8.5 percent in 1975.

  52. This quote and the remaining quotes in this paragraph are from the New York Times, June 5, 1978, p. 1.

  53. According to Andrew Levin and John Taylor, inflationary expectations “reached a peak of about 4½ percent in 1970 and then remained in the range of 3½ to 4½ percent over the next several years.” See “Falling Behind the Curve: A Positive Analysis of the Stop-Start Monetary Policies and the Great Inflation,” a manuscript prepared for the September 2008 NBER Conference on the Great Inflation, p. 6. Available at www.hber.org/public_html/confer/2008/gif08/gif08/levin.pdf.

  54. Memorandum of Discussion, Federal Open Market Committee, August 19, 1975, p. 61–62, Board of Governors of the Federal Reserve System, Washington, DC.

  55. See Robert E. Lucas Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory 4, no. 2 (April 1972); and Robert E. Lucas Jr., “Econometric Policy Evaluation: A Critique,” Carnegie-Rochester Conference Series, 1976.

  56. See Thomas Sargent and Neil Wallace, “Rational Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule,” Journal of Political Economy 83, no. 2 (April 1975); and Thomas Sargent and Neil Wallace, “Rational Expectations and the Theory of Economic Policy,” Journal of Monetary Economics 2, no. 2 (April 1976).

  57. See “Reconciling our Short- and Long-Run Goals in Economic Policy,” a speech delivered to the Boston Economic Club, December 15, 1976, Personal Papers of Paul Volcker, pp. 11–12.

  58. New York Times, December 17, 1978, p. F1.

  59. The London morning fixing was $243.65 on October 31, 1978.

  60. New York Times, December 17, 1978, p. F1.

  61. Ibid.

  62. Ibid.

  63. Transcript, Federal Open Market Committee, February 28, 1978, p. 24. Volcker was referring to the possibility of accelerating inflation and the need to slow the economy to engineer a “soft landing” (to avoid a recession).

  64. New York Times, December 20, 1977, p. 69.

  65. New York Times, January 1, 1978, p. F1.

  66. New York Times, December 29, 1977, p. 60.

  67. New York Times, January 1, 1978, p. F1 continued.

  68. PIPAV.

  69. The following quotes are from the Transcript, Federal Open Market Committee, August 15, 1978, pp. 1–2.

  70. See Washington Post, July 30, 1978, p. G1.

  71. On August 8, 1978, the dollar bought only 1.98 marks, a new low, and on August 14 it declined to 1.95 marks, another new low.

  72. Transcript, Federal Open Market Committee, August 15, 1978, p. 21.

  73. PIPAV.

  74. Transcript, Federal Open Market Committee, October 17, 1978, p. 40.

  75. The conversation is based on Volcker’s recollection.

  76. Willes first dissented at the telephone conference of May 5, 1978, and at every regular meeting through October 17, 1978 (see FOMC transcripts). He credits Thomas Sargent and Robert Lucas with teaching him the importance of rational expectations and central bank credibility. See Interview with Mark H. Willes, www.minneapolisfed.org/about/role/history/willes.cfm.

  77. Transcript, Federal Open Market Committee, July 18, 1978, p. 40.

  78. The seasonally adjusted monthly rates of inflation in July, August, and September were .8, .6, and .9, which translate into an annual average of 9.2 percent.

  79. This quote and those that follow are from the Transcript, Federal Open Market Committee, October 17, 1978, p. 40.

  80. The exchange rate was 2.25 marks per dollar on October 31, 1977.

  81. Wall Street Journal, October 31, 1978, p. 2.

  82. Ibid.

  83. Washington Post, November 1, 1978, p. A26.

  84. Wall Street Journal, November 6, 1978, p. 1.

  85. See Wall Street Journal, November 2, 1978, p. 1, and Robert Solomon, The International Monetary System, 1945–1981 (New York: Harper & Row, 1982), pp. 349–50. Among the key components of the program were: (1) An increase in the discount rate from 8½ to 9½ percent; (2) the United States would issue $10 billion in foreign currency denominated bonds; and (3) the U.S. would draw $3 billion in foreign currency reserves from the International Monetary Fund for use in the dollar-support operation.

  86. New York Times, November 13, 1978, p. D3.

  87. PIPAV.

  88. The dollar closed at 1.86 marks on November 1, which is 6 percent above the close of 1.754 on October 31. The standard deviation of overnight returns during the first ten months of 1978 is .686 percent.

  89. The close on November 30 was 1.9281, which is 9.9 percent above the 1.754 close on October 31.

  90. Wall Street Journal, November 2, 1978, p. 4.

  91. Ibid.

  92. The first three months of 1979 had monthly rates of inflation equal to 0.9, 1.0, and 1.0 percent, which t
ranslates (by adding them up and multiplying by four) into an annual rate of 11.6 percent.

  93. Transcript, Federal Open Market Committee, March 20, 1979, p. 10.

  94. PIPAV. Volcker adds an excuse for 1949: “I needed a job for six months, until I went to Harvard, and that’s what I told them. They were very nice and polite when they said they did not hire temporary workers.”

  95. Transcript, Federal Open Market Committee, March 20, 1979, p. 21.

  96. See public law 95-523, October 27, 1978, available at www.eric.ed.gov/PDFS/ED164974.pdf.

  97. Public law 95-523 declares (section 102 [2g]) that “trade deficits are a major national problem requiring a strong export policy” but does not discuss exchange rates. The act is nicknamed after its sponsors, Senator Hubert Humphrey and Representative Augustus Hawkins. Prior to the Humphrey-Hawkins Act, the goals of the central bank were codified in the Federal Reserve Reform Act of 1977 as “maximum employment, stable prices, and moderate long-term interest rates.” See David E. Lindsey, A Modern History of FOMC Communication: 1975–2002, Washington, DC: Board of Governors of the Federal Reserve System, July 24, 2003, p. 27.

  98. Transcript, Federal Open Market Committee, March 20, 1979, p. 21.

  99. “The Political Economy of the Dollar,” the Fred Hirsch Memorial Lecture, Warwick University, Coventry, England, November 9, 1978, published simultaneously in the Federal Reserve Bank of New York Quarterly Review 3, no. 4 (Winter 1978–79), and in the January 1979 issue of the Banker (London). See New York Times, November 10, 1978, p. D2, and the Times (London), November 10, 1978, p. 27.

  100. “Political Economy of the Dollar,” Quarterly Review, pp. 10 and 12.

  101. Transcript, Federal Open Market Committee, March 20, 1979, p. 21.

  102. Frank Morris was not a voting member of the FOMC at this meeting, but he participated in the discussion, as was always the case with nonvoting presidents. His argument did not produce the easing that he wanted, just a policy of “maintaining the weekly average federal funds rate at about the current level” in the FOMC Directive (see Record of Policy Actions of the FOMC for the March 20 meeting, released on April 20, 1979, p. 11). The record also reports that “Messrs. [Paul] Volcker, [Philip] Coldwell, [Monroe] Kimbrel, and [Henry] Wallich dissented from this action because they favored a somewhat more restrictive policy posture, in view of strong inflationary forces.”