48. Borrowing by all 5,800 banks averaged $955 million during the previous eighteen months. The data on borrowing at the discount window is the average of monthly figures available at research.stlouisfed.org/fred2/series/BORROW.
49. See Chicago Tribune, May 27, 1984, p. 1.
50. Transcript, Federal Open Market Committee Meeting, May 22, 1984, p. 41.
51. The principle of Too Big to Fail in the United States, usually associated with large bank failures, antedates Continental Illinois. See Benton Gup in Too Big to Fail: Policies and Practices in Government Bailouts (Westport, CT: Praeger Publishers, 2004), who makes the case that Too Big to Fail applies to a wide range of firms and industries, from Chrysler and Lockheed Aircraft in the early 1970s to New York City in 1975. I argue in When Washington Shut Down Wall Street (Princeton, NJ: Princeton University Press, 2007), pp. 123–26, that the Too Big to Fail doctrine goes back much further, to 1914, when Treasury Secretary William McAdoo subsidized banks to help prevent New York City from declaring bankruptcy. (Yes, New York was in trouble even back then.)
52. The Office of the Comptroller of the Currency (OCC) was created as a bureau within the U.S. Treasury by the National Currency Act of February 25, 1863. The comptroller is a presidential appointee subject to Senate confirmation. The act was designed to implement a uniform national currency based on federally chartered banks to replace the multiple currencies issued by individual state-chartered banks. To accomplish that goal, the OCC was charged with the responsibility of monitoring the safety and soundness of national banks and to conduct periodic on-site examinations.
53. The FDIC was established by the Banking Act of 1933, signed by President Franklin Roosevelt on June 16, 1933. The legislation is also known by the more popular title, the Glass-Steagall Act, after its cosponsors Senator Carter Glass and Representative Henry Steagall. Among other things, the act established the FDIC as an independent federal agency governed by a five-person board, each appointed by the president of the United States and confirmed by the Senate. The FDIC’s insurance fund is financed by premiums charged to insured banks, but the agency is ultimately backed by the “full faith and credit” of the U.S. Treasury as a backstop to its accumulated capital.
54. Details of the meeting vary according to the source. The clearest description is in the Chicago Tribune, May 27, 1984, p. 1 continued. Also see William Isaac with Philip Meyer, Senseless Panic: How Washington Failed America (New York: John Wiley, 2010), pp. 67–68; and Irvine Sprague, Bailout: An Insider’s Account of Bank Failures and Rescues (New York: Basic Books, 1986), pp. 154–55.
55. Isaac, with Meyer, Senseless Panic, p. 67.
56. PIPAV.
57. See Statement of C. T. Conover, Comptroller of the Currency, Before the House Subcommittee on Financial Institutions, Supervision, Regulation, and Insurance, 98th Congress, 2nd Sess., September 18, 19, and October 4, 1984, p. 205. Also see the interchange between Conover and Representative Wylie on pp. 291–92. Finally, see Continental Illinois National Bank: Report of an Inquiry into Its Federal Supervision and Assistance: Hearings Before the House Committee on Banking, Finance and Urban Affairs, 99th Congress, 1st Sess., July 1985, p. 164.
58. The FDIC’s investment represented almost 15 percent of its $15 billion insurance fund (see Wall Street Journal, May 23, 1984, p. 1 continued).
59. The impetus for this meeting came from Treasury Secretary Donald Regan. Volcker had suggested that Connor and Isaac discuss the rescue plans with Regan. The treasury secretary suggested that they would have a greater chance of success with private bankers participating. See Sprague, Bailout, p. 156.
60. At last count (June 2011), Volcker has received sixty-one honorary degrees from universities in the United States and abroad. Alphabetically, they begin with Adelphi and Amherst and end with Yeshiva and York (Toronto). He likes them all but is especially proud of the honors he received from his alma maters, Princeton and Harvard. (Yale conferred one as well, just to keep up.) The University of London conferred an honorary degree and considers him an alumnus even though he never finished his doctoral dissertation during his stay there. His family connections with Rensselaer, where his father went, and with Fairleigh Dickinson in Teaneck, where he grew up, make them special as well.
61. PIPAV.
62. The description of this meeting is based on a number of sources, including the recollection of Paul Volcker; Isaac, with Meyer, Senseless Panic; and Sprague, Bailout. I have noted in the text specific quotes attributed to each source.
63. As reported in the New York Times, May 21, 1984, p. D6, by one of the participants.
64. See Isaac, with Meyer, Senseless Panic, p. 69.
65. PIPAV. Also see Isaac, with Meyer, Senseless Panic, p. 69.
66. See Isaac, with Meyer, Senseless Panic, p. 69.
67. PIPAV. Isaac confirms Volcker’s opposition to the 100 percent guarantee: “Volcker was negative,” Isaac, with Meyer, Senseless Panic, p. 69.
68. PIPAV. Isaac complained more formally in testimony before the Senate Banking Committee, “The Federal Reserve does not take any risk … The only agency that is at risk in the banking system, the true lender of last resort, is the FDIC.” See Hearings Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, 99th Congress, 1st Sess., Deposit Insurance Reform and Related Supervisory Issues, July 23, 1985, p. 27. Also see Sprague, Bailout, p. 162, for the relationship between the 100 percent guarantee and the $2 billion capital infusion. “After infusing $2 billion in the bank, we could make the guarantee because then it would be more cost effective to do an assisted merger or bailout than a payoff.”
69. PIPAV.
70. This is the third paragraph of the press release on May 17, 1984, distributed jointly by the Office of the Comptroller, the FDIC, and the Federal Reserve Board. See Sprague, Bailout, p. 276, for the entire document.
71. See New York Times, July 26, 1984, p. D1, for a detailed account of Treasury’s objections. William Isaac argues that debt covenants of the holding company precluded the FDIC’s investing directly in the bank itself (other than as a loan) and that the creditors were protected by the assets of the holding company upon liquidation. See Isaac, with Meyer, Senseless Panic, pp. 74–75.
72. PIPAV.
73. Wall Street Journal, May 18, 1984, p. 3.
74. Transcript, Federal Open Market Committee Meeting, May 22, 1984, p. 32.
75. See Federal Reserve Press Release, July 20, 1984, pp. 1–13. The committee members discussed this omission at the meeting (see Transcript, May 22, 1984, pp. 38–39) and claimed that the professional Fed watchers could read between the lines and detect the subtle changes in the directive (which is what they are paid to do).
76. Volcker summarized the discussion at the meeting on May 22, 1984 (transcript, pp. 27–28): “My bottom line is that we’ve run out of room for the time being for any tightening … [but] I don’t have any sense here that we should be easing.”
77. The increase in the Consumer Price Index measured 3.4 percent from August 1, 1984, through August 1, 1985, compared with 12.9 percent from August 1, 1979, through August 1, 1980.
78. Unemployment stood at 7.1 percent in August 1985. The last time it was that low (or lower) was April 1980, when it was 6.9 percent.
79. The average price of the afternoon London gold fixing was $414 during November 1982, compared with an average of $317 during the month of July 1985. Gold was high in November 1982 because of the Mexican crisis. Using June 1982 as a benchmark, when the price of gold averaged $315, shows virtually no change. On August 6, 1985, the price closed at $319.80.
80. Robert L. Hetzel, The Monetary Policy of the Federal Reserve: A History (New York: Cambridge University Press, 2008), p. 178, writes, “The year 1985 should have been a time of satisfaction for the FOMC. It had brought down trend inflation to 4%. With dramatic increases in the funds rate [in] 1984, it had confronted and subdued the inflationary expectations created by a strong economic recovery.” The Annual Report of the C
ouncil of Economic Advisers, February 1986, Washington, DC, p. 37, said: “The current expansion that began in November 1982 marks an important departure from the pattern of persistently rising inflation rates … What is particularly unusual compared with the average postwar expansion is that the inflation rate has continued to decelerate during the third year of this expansion.”
81. The Re-nomination of Paul Volcker: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs, 98th Congress, 1st Sess., July 14, 1983, p. 18.
82. See chapter 13 and Reagan’s diary entry for June 7, 1983, in Douglas Brinkley, ed., The Reagan Diaries, vol. 1 (New York: HarperCollins, 2009), p. 234.
83. The ten-year rate was 10.65 percent on August 6, 1985, compared with an average of 13.42 percent during the entire month of May 1984, and 13.99 percent on May 30, 1984. It was 8.91 on August 6, 1979.
84. The ten-year rate was 8.91 percent on August 6, 1979, and was 10.65 percent on August 6, 1985. The monthly payment at 8.91 percent equals $893 versus $1,008 at 10.65 percent, for a difference of $115 per month or $1,380 per year.
85. For August 1985 the overnight federal funds rate averaged 7.92 percent, the year-over-year inflation in the Consumer Price Index measured 3.4 percent, and the Survey of Professional Forecasters reported (for the third quarter) a one-year expected inflation of 4.21 percent. For August 1979 the numbers are 10.94 percent for federal funds, CPI inflation of 11.8 percent, and an expected inflation of 8.03 percent. Although the expected inflation forecasts are for one year ahead the ten-year expected rate moves in the same direction, although by a smaller amount.
86. The 5 percent deficit number comes from an estimated deficit of $202 billion for 1986 and a GNP of $3,992 billion for 1985. See Annual Report of the Council of Economic Advisers, February 1986, Washington, DC, pp. 252 and 339.
87. See “Plan to End Deficit in 1991 Gaining Wide Support,” New York Times, October 4, 1985, p. A32.
88. See William Niskanen, Reaganomics: An Insider’s Account of the Policies and the People (New York: Oxford University Press, 1988), p. 66.
89. Washington Post, December 12, 1985, p. A1.
90. On October 1, 1985, the day before the bill was introduced, the yield on the ten-year bond was 10.29 percent, and on December 11, 1985, it was 9.2 percent.
91. The ten-year bond rate traded at 7.99 percent and 7.93 percent on the first two trading days of March 1986 (before the cut in the discount rate on March 7). On March 22, 1978, the ten-year traded at 7.98 percent, which was the last time it was below 8 percent.
92. PIPAV.
93. In October 1985 the federal funds rate averaged 8.01 percent and the London afternoon gold fixing averaged $325.84, compared with February 1986, when the overnight rate averaged 7.87 percent and gold averaged $338.89. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987), p. 696, argues that falling oil prices “from $26 a barrel to $12 in a few short weeks at the end of 1985” cheered investors because of the favorable outlook for inflation. The facts are that crude oil futures prices (the “front month”) declined from $29.75 on December 2, 1985 (the first trading day of the month), to $26.30 on December 31, 1985. Moreover, if the outlook for inflation had improved, the price of gold should have declined during this period.
94. New York Times, December 24, 1985, p. D1.
95. New York Times, January 20, 1986, p. D5.
96. See “The Budget Noose Remains,” New York Times, February 8, 1985, p. 26: “In throwing out a key provision of the Gramm-Rudman-Hollings law, a Federal court addressed only procedure, not substance. The rest of the law remains in place and so does the first task for the President and Congress: to find a mutually acceptable way to reduce the deficit … The law calls on the Comptroller General, head of the General Accounting Office, to determine whether the deficit reduction goals are met. But the Comptroller General’s office is subject to Congressional authority. That’s the vulnerability found by a three-judge district court in Washington yesterday, ruling in a case brought by members of Congress. Giving him such responsibility intrudes improperly into executive branch terrain, the court held.”
97. New York Times, February 8, 1986, p. 9.
98. Ibid.
99. See Wall Street Journal, March 3, 1986, p. 1.
100. Rudolph Penner and Alan Abramson, Broken Purse Strings: Congressional Budgeting, 1974 to 1988 (Washington, DC: Urban Institute Press, 1988), p. 70.
101. Thomas Sargent describes the battle between the monetary and fiscal authorities more generally as follows: “While the authorities are playing this game of chicken, we would observe large … government deficits, low rates of monetization of government debt … and maybe also high real rates of interest on government debt.” See Thomas Sargent, Rational Expectations and Inflation, 2nd ed. (New York: HarperCollins, 1993), p. 221.
102. Washington Post, December 12, 1985, p. A1 continued.
103. Wall Street Journal, January 21, 1986, p. 64.
104. Ibid.
105. PIPAV and Wall Street Journal, January 21, 1986, p. 64.
15. The Resignations
1. The following conversation is based on the recollection of Paul Volcker.
2. See Washington Post, January 9, 1985, p. A1, for the announcement of the job switch.
3. On August 6, 1979, the day before Volcker took office, the mark closed at 1.8295 marks per dollar and the yen closed at 217.15 yen per dollar. On September 20, 1985, the last trading day before the Plaza Agreement, the mark was at 2.8475, a 56 percent increase in the value of the dollar, and the yen was at 241, an increase in the dollar of 11 percent.
4. PIPAV.
5. Transcript, Federal Open Market Committee Meeting, October 1, 1985, p. 25.
6. On September 20, 1985, the Friday before the Plaza Agreement, the yen closed at 241 yen per dollar and the mark closed at 2.8475 marks per dollar. On February 3, 1986, the yen closed at 191.6 yen per dollar, a 20 percent decline in the value of the dollar, and the mark closed at 2.4 marks per dollar, a 15.7 percent drop in the value of the dollar. According to Volcker, the expected depreciation at the Plaza meeting was about 10–12 percent. See Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 254.
7. The FOMC consists of the seven-member board plus a rotating group of five presidents of the regional Federal Reserve banks, with the exception of the president of the New York Fed, who is a permanent member of the FOMC.
8. See New York Times, October 11, 1985, p. D1.
9. The phrase “Gang of Four” as applied to the Reagan appointees to the Federal Reserve Board appears in a headline in the Washington Post, January 30, 1986, p. A25.
10. See New York Times, October 11, 1985, p. D1.
11. See Minutes of the Board of Governors of Federal Reserve System, January 27, 1986, p. 5: “At several previous meetings, most recently on January 21, 1986, the Board had considered but taken no action on requests by some Reserve Banks to lower the discount rate.” The last discount rate change was on May 20, 1985, a decline from 8.0 percent to 7.5.
12. This quote and the remaining quotes in this conversation are based on the recollection of Paul Volcker and on the reports in the New York Times, March 24, 1986, p. A1, and the Washington Post, March 17, 1986, p. A11. The Minutes of the Board of Governors of Federal Reserve System, February 24, 1986, pp. 2–3, gives a general description.
13. Washington Post, March 19, 1986, p. A1.
14. PIPAV.
15. Washington Post, February 20, 1986, p. A15.
16. Ibid.
17. The following conversation is based on the recollection of Paul Volcker.
18. PIPAV.
19. See Minutes of the Board of Governors of Federal Reserve System, February 24, 1986, p. 6, for a description of the afternoon meeting. The face-saving on all sides is reflected in the following quote: “In view of the improved prospects for coord
inated actions, a consensus was recorded to reconsider the decision reached earlier today to reduce the discount rate.”
20. Washington Post, March 8, 1986, p. A1.
21. Ibid.
22. Ibid.
23. Washington Post, March 17, 1986, p. A11.
24. Washington Post, March 22, 1986, p. A1.
25. Ibid.
26. See the twelfth annual survey of “Who Runs America,” U.S. News & World Report, May 20, 1985, p. 54.
27. PIPAV. Also see Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), p. 19.
28. Washington Post, March 27, 1986, p. A1.
29. Letter dated August 6, 1979, Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
30. Response to Carlock, dated August 16, 1979, Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
31. Letter dated June 19, 1983, Personal Papers of Paul Volcker.
32. Newsweek, February 24, 1986, p. 46.
33. Ibid.
34. PIPAV.
35. New York Times, March 31, 1987, p. B6.
36. PIPAV.
37. Washington Post, February 28, 1987, p. A21.
38. Washington Post, March 14, 1987, p. A21.
39. See “Bank Curb Eased in Volcker Defeat,” New York Times, May 1, 1987, p. D1.
40. See Minutes of the Federal Reserve Board, “Citicorp; J.P. Morgan & Co.; Bankers Trust New York Corporation, all of New York, New York—Applications to underwrite and deal in certain securities,” April 29, 1987.
41. New York Times, May 1, 1987, p. D1.
42. Ibid.
43. Wall Street Journal, May 4, 1987, p. 66.
44. The following dialogue is based on the recollection of Paul Volcker and on the Wall Street Journal, June 3, 1987, p. 20, and the Washington Post, June 3, 1987, p. A1 continued. Reagan’s diary entry (see the next note) confirms Volcker’s recollection that he chose not to be reappointed. Bob Woodward in Maestro, p. 23, claims that Volcker asked Baker, “If I were [interested] would the President reappoint me?” Woodward also claims that Volcker then suggested (without quotes), let me think about it. The public record fails to confirm Woodward’s version.
Volcker Page 44
