Volcker
Page 40
103. New York Times, April 21, 1979, p. 29.
104. The annual rate of inflation averaged 12.8 percent during April, May, and June 1979, compared with an average of 11.6 during the first three months of 1979, and 8.4 during the last three months of 1978.
105. New York Times, February 1, 1979, p. A14.
106. This account comes from the New York Times, June 23, 1979, p. 19.
107. Ibid.
108. New York Times, June 10, 1979, p. 1.
109. This account comes from the New York Times, March 26, 1979, p. A14.
110. This quote and the remaining quotes in this paragraph are from the transcript of the talk as printed in the New York Times, July 16, 1979, p. A10.
111. See Washington Post, July 20, 1979, p. E1.
112. See New York Times, April 21, 1979, p. 29.
113. New York Times, July 20, 1979, p. A1 continued.
114. Washington Post, July 21, 1979, p. B1.
115. The afternoon fixing in London (10:00 A.M. New York time) on June 17 was $296.30. The morning fixing on July 18 was $303.85, a jump of 2.55 percent. The overnight standard deviation of gold returns during the first six months of 1979 was 1.28 percent.
116. New York Times, July 19, 1979, p. A1 continued.
117. This quote and the remaining ones in this paragraph are from the New York Times, July 21, 1979, p. 25.
118. Washington Post, July 24, 1979, p. A5, and New York Times, July 24, 1979, p. A1.
119. PIPAV.
120. The following conversation is based on my discussions with Ritter while we coauthored the textbook Principles of Money Banking and Financial Markets, and on discussions with Volcker and Kavesh.
8. Challenge
1. Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
2. PIPAV.
3. Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
4. Letter dated September 12, 1979, Federal Reserve Bank of New York Archives, Box 95714.
5. See interview with Shultz at www.turmoilandtriumph.org/shultz/economics_tradition.php.
6. Milton Friedman, “The Optimum Quantity of Money,” in Friedman, The Optimum Quantity of Money and Other Essays (Chicago: Aldine, 1969), pp. 1–50.
7. See Milton Friedman, Money Mischief: Episodes in Monetary History (New York: Harcourt Brace and Company, 1994), p. 49.
8. Milton Friedman, “The Fed: At It Again,” Newsweek, February 19, 1979, p. 65.
9. Interview with Milton Friedman, Academy of Achievement, Stanford, CA, July 31, 1991, p. 6, available at www.achievement.org.
10. New York Times, July 29, 1979, p. F1 continued.
11. Milton Friedman, “Burns on the Outside,” Newsweek, January 9, 1978, p. 52.
12. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, 1963), p. 692. They are quoting and agreeing with Carl Snyder, who worked at the New York Fed.
13. Volcker’s dissent on March 20, 1979, was discussed in detail in the previous chapter. He dissented in the following meeting on April 17, 1979, as well. See Transcript, Federal Open Market Committee, April 17, 1979.
14. New York Times, July 29, 1979, p. F1.
15. Washington Post, July 2, 1978, p. A6.
16. Wall Street Journal, July 10, 1978, p. 15.
17. New York Times, July 3, 1978, p. 32.
18. New York Times, July 30, 1979, p. D1.
19. The notes are in the Personal Papers of Paul Volcker and are reproduced in the section entitled “Personal Records and Correspondence.”
20. This conversation is based on the recollection of Paul Volcker.
21. Dr. Michael Lockshin is the director of the Barbara Volcker Center for Women and Rheumatic Disease at the Hospital for Special Surgery in Manhattan. The center was endowed by a gift from Barbara and Paul Volcker.
22. Handwritten letter from Dillon to Volcker dated July 27, 1979, Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
23. PIPAV.
24. See www.federalreserve.gov/generalinfo/virtualtour/architecture.cfm.
25. The boardroom is fifty-six feet long and thirty-two feet wide. A regulation basketball court is ninety-four feet long and fifty feet wide, making half-court forty-seven feet by fifty feet. Thus the boardroom is longer and somewhat narrower than a half-court basketball court, but the high ceiling would make it eminently serviceable for a good game.
26. Transcript, Federal Open Market Committee Meeting, August 14, 1979, p. 1.
27. Ibid., p. 20.
28. Ibid., p. 21.
29. See the discussion in the last chapter of Volcker’s speech to the Boston Economic Club in December 1976.
30. Transcript, Federal Open Market Committee Meeting, August 14, 1979, p. 21.
31. Ibid., p. 22–23.
32. Transcript, Federal Open Market Committee Meeting, September 18, 1979, p. 35.
33. Ibid., p. 44.
34. Ibid., p. 35.
35. New York Times, September 19, 1979, p. 1.
36. The Board of Governors approved a half-point increase in the discount rate to 10½ percent on August 16, 1979. See Minutes, Board of Governors, August 16, 1979.
37. PIPAV.
38. New York Times, September 19, 1979, p. 1.
39. New York Times, September 20, 1979, p. 1, continued on D9.
40. PIPAV.
41. New York Times, September 19, 1979, p. 1.
42. Ibid.
43. The intraday high on the Commodity Exchange on September 18 was 376.25 (New York Times, September 19, 1979, p. 1). The London afternoon gold fixing was 375.75 on September 18, compared with 351.75 on September 17, an increase of 6.8 percent. The standard deviation of daily returns on gold in the London fixing equaled 1.36 percent during the first eight months of 1979.
44. PIPAV.
45. Washington Post, September 19, 1979, p. A1.
46. Solomon’s comments on gold are from the New York Times, September 23, 1979, p. E1. The Carter quote is from William Neikirk, Volcker: Portrait of the Money Man (New York: Congdon and Weed, 1987), p. 2.
47. Letter dated September 12, 1979, from Volcker to Kaufman, Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
48. Transcript, Federal Open Market Committee Meeting, September 18, 1979, pp. 13–14.
49. The untitled, unsigned draft, dated September 27, 1979, is from the Personal Papers of Paul Volcker. Interviews with Axilrod and Sternlight confirm that they began drafting their memorandum to Volcker within days of the September 18 discount rate announcement. Their final memorandum to the FOMC is dated October 4, 1979, Personal Papers of Paul Volcker.
50. This discussion relies on Edward Jay Epstein, The Rise and Fall of Diamonds (New York: Simon & Schuster, 1982), pp. 57–59.
51. See Transcript, Federal Open Market Committee, March 29, 1976, tape 5, pp. 16–17, Papers of Arthur Burns, University of Michigan Library, Ann Arbor, MI.
52. “The Role of Monetary Targets in an Age of Inflation,” Journal of Monetary Economics 4, no. 2 (April 1978): 330.
53. Ibid., 332.
54. PIPAV.
55. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987), p. 105.
56. Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 19.
9. The Plan
1. Transcript, Federal Open Market Committee Conference Call, October 5, 1979, p. 5.
2. The remaining quotes in the telephone conference are from ibid., p. 3.
3. The following conversation is based on an interview with Charles Schultze.
4. The dollar had fluctuated between 1.81 and 1.83 marks during the two months since Volcker was appointed chairman. On September 18, the day of the split vote on the discount ra
te, the dollar closed at 1.8115 marks. The 1.74 figure is 4 percent below 1.8115.
5. New York Times, September 24, 1979, p. A1 continued.
6. The quotes in this paragraph are from the New York Times, September 30, 1979, p. 13, and anticipated in the New York Times, September 28, 1979, p. A1 continued.
7. Interview with Charles Schultze.
8. PIPAV. See Joseph Treaster, Paul Volcker: The Making of a Financial Legend (New York: John Wiley, 2004), p. 151, for a slightly different version of this quote: “Schmidt was at his irascible worst—or best.”
9. New York Times, September 30, 1979, p. 13.
10. The lecture is published by the Per Jacobsson Foundation, International Monetary Fund, Washington, DC.
11. Ibid., p. 4.
12. Arthur Burns, “The Anguish of Central Banking,” the 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 7.
13. Ibid., p. 9.
14. Ibid., p. 13.
15. Milton Friedman, “Burns on the Outside,” Newsweek, January 9, 1978, p. 52.
16. Burns, “The Anguish of Central Banking,” p. 16.
17. The following quotes are from William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Doubleday and Co., 1975), p. 515.
18. New York Times, October 1, 1979, p. D1.
19. Wall Street Journal, October 1, 1979, p. 6.
20. The London close on Friday, September 28, was 397.25, and the close on Monday, October 1, 1979, was $414.75, a close-to-close change of 4.4 percent. The daily standard deviation of returns on gold equaled 1.5 percent from January 1, 1979, through September 28, 1979.
21. See New York Times, October 3, 1979, p. D1. A nice description of the mechanics of the gold fixing appears in “Gold Fixing: London Tradition,” New York Times, February 12, 1979.
22. New York Times, October 3, 1979, p. D1.
23. Wall Street Journal, October 3, 1979, p. 1.
24. New York Times, October 3, 1979, p. D1.
25. Ibid.
26. PIPAV.
27. I toured the Special Library in the summer of 2009 and discovered the following six nameplates attached to the table: Adolph Miller, Charles Hamlin, Paul Warburg, W. P. G. Harding, Daniel Crissinger, and the Comptroller of the Currency. Those nameplates belong to the original members of the first Federal Reserve Board appointed by Woodrow Wilson, except for Crissinger, who was appointed in 1923 by President Harding. The comptroller is ex officio (belonging to the Office of Comptroller), hence does not bear the name of John Skelton Williams, the first comptroller to sit on the Federal Reserve Board. My tour guide (Joseph Pavel) did not know why Crissinger’s nameplate had replaced that of Frederic Delano, the sixth member of the first board. I provide an explanation of the missing seventh nameplate in the next paragraph.
28. The Board of Governors of the Federal Reserve System (at www.federal reserve.gov/bios/boardmembership.htm) lists Charles Hamlin as the first chairman of the Federal Reserve Board. Hamlin was, in fact, designated as governor by Woodrow Wilson. The first chairman of the Federal Reserve Board was William McAdoo, the secretary of the treasury at the time the Fed was created. See William L. Silber, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy (Princeton, NJ: Princeton University Press, 2007), p. 18.
29. Frederick Schultz, appointed vice-chairman of the board by Jimmy Carter, blamed “errors in judgment and structural flaws” for the Fed’s poor performance during the Great Depression. The first structural problem mentioned is “The Treasury secretary sat on the Federal Reserve Board, so decisions were politicized.” See Frederick Schultz, “The Changing Role of the Federal Reserve,” in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis 87, no. 2, part 2 (March/April 2005): 343.
30. See the discussion of the Minutes of the Board of Governors meeting on October 4, in David Lindsey, Athanasios Orphanides, and Robert Rasche, “The Reform of October 1979: How It Happened and Why,” in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis 87, no. 2, part 2 (March/April 2005): 199.
31. The following quote is from the Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 13. The Minutes of the Board of Governors meeting on October 4 (see the previous note) simply summarizes what was said without direct attribution. However, Partee’s quote from October 6 is precisely the sentiment summarized in the Minutes of the October 4 meeting of the Board of Governors. Also note that Partee interrupts Volcker on October 6 (Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 12) to say “Lead went up 20 percent.”
32. Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 4.
33. Ibid., pp. 7, 8.
34. Ibid., p. 8, 9.
35. Ibid., p. 9.
36. Ibid., p. 10.
37. Ibid., p. 24.
38. Ibid., p. 14.
39. Ibid.
40. Ibid.
41. Ibid.
42. Ibid., p. 19.
43. Ibid.
44. Ibid., pp. 19–20.
45. Ibid., p. 20.
46. See Joseph Coyne, “Reflections on the FOMC Meeting of October 6, 1979,” in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis, 313.
47. See page 1 of the transcript of the press conference with Paul Volcker, October 6, 1979, located at fraser.stlouisfed.org/historicaldocs/787.
48. See Washington Post, October 7, 1979, p. A1.
49. The questions and answers at the press conference are from the transcript of the press conference with Paul Volcker, October 6, 1979, located at fraser.stlouisfed.org/historicaldocs/787/, pp. 4, 7, 8.
50. See William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987), p. 123. Greider wrote for Rolling Stone at the time he authored this book and had been a reporter for the Washington Post before that (see williamgreider.com/about).
51. This quote and the following interchange between Proxmire and Volcker are from The Nomination of Paul A. Volcker to Be Chairman, Board of Governors of the Federal Reserve System: Hearings Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 96th Congress, 1st Sess., July 30, 1979, U.S. Government Printing Office, Washington, DC, pp. 4–5.
52. New York Times, December 16, 2005, p. B13.
53. Transcript, Federal Open Market Committee Meeting, August 14, 1979, p. 21.
54. PIPAV. Volcker was referring both to Sargent (who won the Nobel Prize in Economics in 2011) and to Neil Wallace. Both men were at the University of Minnesota and were advisers to the Federal Reserve Bank of Minneapolis. Their work on the impotence of monetary policy includes 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).
55. See the reference in chapter 7 to “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.
10. Sticking to It
1. New York Times, October 14, 1979, p. E18.
2. New York Times, October 21, 1979, p. D1.
3. New York Times, December 2, 1979, p. SM15. Meltzer’s three-volume history, entitled A History of the Federal Reserve System, is published by the University of Chicago Press. Volume 1, published in 2003, covers the period 1913–1951; volume 2, book 1, published in 2009, covers 1951–1969; and volume 2, book 2, also published in 2009, covers 1970–1986.
4. PIPAV.
5. The exchange rate of 1.794 marks per dollar is reported “in Frankfurt” in the New York Times (October 9, 1979, p. A1) and the Washington Post (October 9, 1979, p. F1)
. The daily standard deviation of returns on dollar-mark equaled 0.38 percent, and the daily standard deviation of returns on gold equaled 2.0 percent from August 1, 1979, through September 30, the two months since Volcker’s appointment. Thus the 2.0 percent increase in dollar mark is statistically significant, while the 3.3 percent decline in gold is not.
6. New York Times, October 9, 1979, p. A1 continued.
7. Washington Post, October 9, 1979, p. F1 continued.
8. Ibid., p. F1.
9. Washington Post, October 17, 1979, p. A23.
10. New York Times, October 11, 1979, p. D1.
11. The standard deviation of daily interest rate changes in the ten-year bond rate equaled .41 percent during the first nine months of 1979 and .45 percent from August 1, 1979, through September 30, the two months since Volcker’s appointment. On October 9, 1979, the ten-year rate increased by 3.44 percent. (The numbers in this note are percentage change, not percentage points.)
12. For July 1975 the ten-year bond rate averaged 8.06 percent and the federal funds rate averaged 6.09 percent. For July 1974 the ten-year rate averaged 7.8 percent and the federal funds rate averaged 12.95 percent.
13. The rate on November 19, 1979, was 10.8 percent and it was 10.78 percent on November 20, 1979.
14. Transcript, Federal Open Market Committee Meeting, November 20, 1979, p. 29.
15. The transcript includes “Mark” in the omitted section in the previous quotation.
16. Transcript, Federal Open Market Committee Meeting, November 20, 1979, p. 30.
17. Ibid., p. 23.
18. Arthur Burns, “The Anguish of Central Banking,” the 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 16.
19. See Transcript, Federal Open Market Committee Meeting, November 20, 1979, p. 24, for the remaining quotes in this section.
20. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987), p. 105.