Volcker (53 page)

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.

34
. The Bundesbank could sterilize those purchases, preventing them from increasing the money supply. But there are limits to the magnitude of sterilization given by the Bundesbank's holding of other assets (German bonds) and its willingness to hold a potentially depreciating asset such as the French franc.

35
.
New York Times
, November 25, 1968, p. 1.

36
.
New York Times
, April 27, 1969, p. 1.

37
. Telephone logs of Paul Volcker, April 24, 1969, Federal Reserve Bank of New York Archives, Box 0108480.

38
. Ibid.

39
. Telephone logs of Paul Volcker, March 7, 1969, Federal Reserve Bank of New York Archives, Box 0108480.

40
. Memorandum to the president dated June 23, 1969, Federal Reserve Bank of New York Archives, Box 108473.

41
. PIPAV.

42
. Ibid.

43
. Memorandum to the president, June 23, 1969, p. 4.

44
. Ibid.

45
. Ibid., p. 9.

46
. Ibid., p. 10.

47
. See, for example, Maurice Obstfeld, Jay C. Shambaugh, and Alan M. Taylor, “The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility,”
Review of Economics and Statistics
87, no. 3 (August 2005): 423–38. The Trilemma can be traced back (without the nomenclature) to Robert A. Mundell, “Capital Mobility and Stabilization Policy Under Fixed and Floating Exchange Rates,”
The Canadian Journal of Economics and Political Science
29, no. 4 (November 1963): 475–85, and J. M. Fleming, “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates,”
IMF Staff Papers
9, no. 3 (November 1962): 369–80.

48
. See Genesis 41: Joseph stored grain from the seven good years to prepare for the seven lean years.

49
. The risk of this transaction, called uncovered interest arbitrage, is that the value of the currency in which the speculator borrows—in this case, the U.S. dollar—increases before the speculator repays the loan. That is why the commitment to fixed exchange rates is so important.

50
. Volcker and Gyohten,
Changing Fortunes
, p. 34.

51
. Ibid., p. 33.

52
. Memorandum to the president, June 23, 1969, pp. 13, 18.

53.
Ibid., Attachment A, Summary of Basic Options, p. 1.

54
. Ibid. Special drawing rights are bookkeeping entries (not paper) created under the auspices of the International Monetary Fund to help settle international obligations. Unlike gold, which is generally acceptable in payment of all obligations, SDRs are usable only by central banks and have (so far) never gained the general acceptance they were designed for.

55
. See
New York Times
, August 9, 1969, for reports on the devaluation.

56
. Memorandum to the president, June 23, 1969, Attachment A, Summary of Basic Options, p. 1.

57
. Fixed exchange rates under Bretton Woods were not quite fixed. Central bankers could allow the exchange rate to fluctuate 1 percent on either side of “parity.” For example, the Bank of England could permit the dollar price of sterling, with a “par value” of $2.40 in 1969, to increase to $2.424 or to decline to $2.376 before intervening in the marketplace.

58
. Memorandum to the president, June 23, 1969, p. 29.

59
. On February 7, 1969, Volcker received a memo from Robert Solomon, an economist at the Federal Reserve Board, and an expert in international trade, with a covering note entitled, “Contingency Planning—U.S. Suspension of Gold Convertibility,” and a document outlining the consequences of suspension written almost a year earlier, on April 8, 1968, Federal Reserve Bank of New York Archives, Box 108473.

60
. Memorandum to the president, June 23, 1969, p. 32.

61
. Ibid., p. 31.

62
. Memorandum from Burns to Nixon, February 22, 1969, in
Foreign Economic Policy, 1969–1972; International Monetary Policy, 1969–1972
, vol. 3, p. 304fn.

63
. The closing conversation in the meeting is based on Paul Volcker's recollection.

1
. The morning and afternoon London gold fixings were at $35 per ounce, but the
New York Times
(December 10, 1969, p. 1) reported an intraday quote by Zurich bullion dealers of $34.80 bid, offered at $35.00.

2
. This conversation is based on Paul Volcker's recollection.

3
. See Allan H. Meltzer,
A History of the Federal Reserve
, vol. 2, book I (Chicago: University of Chicago Press, 2009), p. 453n316.

4
. See the discussion of the “Accord” in chapter 2.

5.
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), p. 252.

6
. Members of the Federal Reserve Board who serve a full fourteen-year term cannot be reappointed. Martin was first appointed by Harry Truman in March 1951, to fill a partially unexpired term, and then was reappointed by Dwight Eisenhower in January 1956, to a full fourteen-year term. Richard Nixon announced the appointment of Arthur Burns to succeed Martin as chairman of the Federal Reserve Board in October 1969. See
New York Times
, October 18, 1969, p. 1.

7
. Daily data between March 18, 1969, and March 31, 1969, show that the three-month bill fell below 6 percent. It averaged 8 percent from December 26 through the end of the year.

8
.
New York Times
, November 4, 1969, p. 63.

9
. The peak in the London gold fixing was $43.83 on March 10, 1969, but Zurich traded at $44.00 (
New York Times
, December 10, 1969, p. 1 continued).

10
.
New York Times
, December 9, 1969, p. 93.

11
. Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
(New York: Times Books, 1992), p. 64.

12
.
New York Times
, November 15, 1969, p. 53.

13
. The following conversation is from William Safire,
Before the Fall: An Inside View of the Pre-Watergate White House
(New York: Doubleday and Co., 1975), pp. 491–92.

14
. See Volcker Group memorandum dated November 4, 1970, entitled, “Options Regarding the Capital Restraint Program for 1971,” International Monetary Papers, Selected Volcker Group Documents, Book No. 1, 1970, Personal Papers of Paul Volcker. Note that the overall balance of payments must always balance, but within the list of imports and exports some items are more worrisome than others, and these are highlighted by different ways to measure the deficit. For contemporary views of alternative measures, see
Economic Report of the President, 1970
, Council of Economic Advisers, Washington, DC, pp. 126–27, and Lawrence Ritter and William Silber,
Principles of Money, Banking, and Financial Markets
(New York: Basic Books, 1974), pp. 468–72. Also see International Monetary Fund Annual Report, Washington, DC, 1971, p. 198, Table 74 (United States Balance of Payments Summary, 1969–First Quarter 1971).

15
. The price of gold exceeded thirty-nine dollars on October 26 and 27, and then traded between thirty-seven dollars and thirty-eight dollars during November.

16.
See page 2, Volcker Group memorandum dated November 4, 1970, entitled “Options Regarding the Capital Restraint Program for 1971,” International Monetary Papers, Selected Volcker Group Documents, Book No. 1, 1970, Personal Papers of Paul Volcker.

17
. “Legal Aspects of Suspension of Gold Sales and Application of Option I or Option II,” November 21, 1970, Michael Bradfield to Paul Volcker, Personal Papers of Paul Volcker.

18
. See the entry for November 18, 1970, in H. R. Haldeman,
The Haldeman Diaries
(New York: G. P. Putnam's Sons, 1994), p. 211.

19
. See the entry for November 19, 1970, in ibid., p. 212.

20
. Milton Friedman, “The Role of Monetary Policy,”
American Economic Review
58, no. 1 (March 1968): 1–17.

21
. See “The Economy,”
Time
, December 31, 1965.

22
. See “Letters,”
Time
, February 4, 1966.

23
. “President Nixon described himself as ‘now a Keynesian in economics' according to Howard K. Smith of the American Broadcasting Company, one of the four television commentators who interviewed the President on a television show …”
New York Times
, January 7, 1971, p. 19.

24
. See
New York Times
, July 22, 1970, p. 2.

25
.
New York Times
, September 30, 1970, p. 59.

26
. A search of the
New York Times
, the
Wall Street Journal
, and the
Washington Post
shows that the first article using the word
stagflation
to describe the American problem is “Money Imperils Romance: Europeans Fear American ‘Stagflation' Will Drag Their Own Economies Down,”
New York Times
, September 30, 1970, p. 59. An article in the
Washington Post
entitled “The Battle: Stagflation” appeared on February 25, 1971, p. A21. The term did not appear in the
Wall Street Journal
until April 23, 1973, p. 12.

27
.
New York Times
, December 9, 1970, p. 93.

28
. Ibid.

29
. “The Accord of 1970” is the headline of the
New York Times
article by Leonard Silk, December 9, 1970, p. 93. Nixon's quote in full is: “People have got to know whether or not their President is a crook. Well, I'm not a crook. I've earned everything I've got.”
Washington Post
, November 18, 1973, p. A1.

30
. See Safire,
Before the Fall
, p. 491, quoting Burns in 1970. Also see Burton Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,”
Journal of Economic Perspectives
20, no. 4 (Fall 2006): 177–88.

31
. John Connally,
In History's Shadow: An American Odyssey
(New York: Hyperion, 1993), p. 235.

32
. Reported without attribution in the
Washington Post
, December 15, 1970, p. B1.

33.
Washington Post
, December 15, 1970, p. A1.

34
. Ibid.

35
. This comment to Barbara and the subsequent conversation is based on Volcker's recollection.

36
. Herbert Stein,
Presidential Economics
(New York: Simon & Schuster, 1984), p. 162.

37
. Safire,
Before the Fall
, p. 497.

38
. The CEA was not, of course, really evil. Paul McCracken, Herbert Stein, and Hendrick Houthakker were first-rate economists and enjoyable to work with. I should know, because I was a senior staff economist (on leave from New York University) with the CEA during 1970–1971.

39
. The letter is dated April 27, 1970, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473. It was written two days after a newspaper report (
New York Times
, April 25, 1970, p. 46) that implied Volcker would support wider bands in the existing system.