Volcker (54 page)

40
. PIPAV.

41
. The conversation is based on Volcker's recollection.

42
. “Contingency Planning: Options for the International Monetary Problem,” March 14, 1971, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108477.

43
. PIPAV. “Reasonably foreseeable events—possibly in a matter of weeks—could set off strong speculation and strain one or more of the basic elements of the present fixed exchange rate system,” appears on page 1 of “Contingency Planning: Options for the International Monetary Problem,” March 14, 1971, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108477.

44
. “Contingency Planning: Options for the International Monetary Problem,” pp. 5–6.

45
. See ibid., p. 33. The 15 percent number came from a review of statistical estimates conducted by John Auten, a Treasury economist working for Volcker (see Volcker and Gyohten,
Changing Fortunes
, p. 72).

46
. Until the 1980s the Nissan brand was called Datsun in the United States.

47
. China has followed the same strategy during the first decade of the twenty-first century, fixing a relatively low value for the renminbi per dollar to encourage Americans to import just about everything Beijing produces, from cotton knit shirts to steel manhole covers.

48
. “Contingency Planning: Options for the International Monetary Problem,” March 14, 1971, p. 59.

49
. Memorandum to the secretary from Paul Volcker, March 26, 1971, page 8 of “An Economic Policy Program to Meet Domestic and International
Objectives,” prepared by John Auten under the direction of Murray Weidenbaum, assistant secretary for economic policy, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108477.

50
. According to Herbert Stein, at the time a member of Nixon's Council of Economic Advisers, “Connally found himself the head of a Treasury that already included a number of officials who had been leaning towards ‘incomes policies' and who were in conflict with the purists—the CEA and Shultz—on that subject.” See Herbert Stein,
Presidential Economics
(New York: Simon & Schuster, 1984), p. 163.

51
.
New York Times
, January 11, 1970, p. 125.

52
. “Contingency Planning: Options for the International Monetary Problem,” March 14, 1971, p. 61.

53
.
New York Times
, May 5, 1971, p. 1.

54
.
New York Times
, May 8, 1971, p. 37.

55
. Under the rules of fixed exchange rates administered by the International Monetary Fund, the Bundesbank was obligated to intervene to support the dollar-mark exchange rate once it declined by 1 percent below its par value. But greater adjustments were permitted if a country's exchange rate was in “fundamental disequilibrium.” The
Wall Street Journal
(May 6, 1971, p. 1) reported, “Germany justifies the move as a temporary emergency measure until the mark's future can be resolved.” Also see Robert Solomon,
International Monetary System, 1945–1981
(New York: Harper & Row, 1982), pp. 59 and 178–80.

56
.
New York Times
, May 6, 1971, p. 1. The Bundesbank was worried about the inflationary consequences of buying dollar-denominated assets. As I pointed out in the last chapter, it could sterilize those purchases to prevent an increase in the domestic money supply, but there are limits to sterilization because the Bundesbank did not want to hold large amounts of a potentially depreciating asset such as the dollar.

57
.
New York Times
, May 6, 1971, p. 1. These markets reopened within a week, while the foreign exchange markets in London and New York remained open throughout the period.

58
.
New York Times
, May 11, 1971, p. 63.

59
. PIPAV.

60
. Memorandum “Contingency,” May 8, 1971, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108477, pp. 1–2, 4.

61
. See
New York Times
, May 13, 1971, p. 65. The $400 million loss is confirmed by the Federal Reserve report for the week ending May 13, 1971 (see
Wall Street Journal
, May 14, 1971, p. 26).

62
. Volcker and Gyohten,
Changing Fortunes
, p. 74.

63.
PIPAV.

64
. Ibid.

65
. See Volcker and Gyohten,
Changing Fortunes
, p. 75, for this quote and the following interchange.

66
. This quote and the remaining in this section from McCracken are in Memorandum from the Chairman of the Council of Economic Advisers to President Nixon, June 2, 1971, reprinted in Bruce Duncombe, ed.,
Foreign Relations of the United States, 1969–1976, vol. 3, Foreign Economic Policy: International Monetary Policy, 1969–1972
(Washington, DC: U.S. Government Printing Office, 2001), p. 438.

67
. This quote and the remaining in this section from Connally are in Memorandum from Secretary of the Treasury Connally to President Nixon, June 8, 1971, reprinted in Duncombe, ed.,
Foreign Relations of the United States,
vol. 3, pp. 440–41.

68
. Memorandum from Jon Huntsman of the White House Staff to Secretary of the Treasury Connally, June 8, 1971, reprinted in ibid., pp. 442–43.

69
. Dated July 27, 1971, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108477. The term
New Economic Policy
appeared in Nixon's speech announcing the program on August 15, 1971. See Transcript of the President's Address,
New York Times
, August 16, 1971, p. 14.

70
. See the entry for August 2, 1971, in Haldeman,
The Haldeman Diaries
, pp. 335–36.

71
. See Nixon Tape 562b (at 1 hour, 2 minutes) at www.nixontapes.org/chron2.htm.

72
. See Nixon Tape 563b (at the 17-minute mark) at www.nixontapes.org/chron2.htm.

73
. PIPAV.

74
. See “Speculative Attacks Grow on U.S. Currency Abroad,”
New York Times
, August 13, 1971, p. 35. Charles A. Coombs, who worked at the Federal Reserve Bank of New York during this period and was in charge of U.S. Treasury and Federal Reserve operations in the gold and foreign exchange markets, writes, “To protect the gold stock, the Federal Reserve … was forced to draw another $2.2 billion on swap lines.” See Charles A. Coombs,
The Arena of International Finance
(New York: John Wiley, 1976), pp. vii and 217.

75
. See Nixon Tape 273a (at the 48-minute mark, at 1 hour, 17 minutes, and at 1 hour, 34 minutes) at www.nixontapes.org/chron2.htm for these three quotes.

76
. See Nixon Tape 273b at various points for the following discussion (see the following minute marks: 19, 26, 28, 32, 33, 36, 37, 38, and 43) at www.nixontapes.org/chron2.htm.

77.
The decision to meet at Camp David on August 13 occurred as described here and had nothing to do with the British demand for $3 billion in gold. Two author/participants in these events (Haldeman,
The Haldeman Diaries
, p. 340; and Safire,
Before the Fall
, p. 512) mistakenly attribute the decision to the demand for gold by the United Kingdom. The British demand is never mentioned on the Nixon tape recordings of August 12, because it did not happen until the morning of August 13. Volcker recalls a telephone call received by Charles Coombs (see biographical information in note 74) conveying the demand by the United Kingdom on the morning of August 13. Volcker had invited Coombs, who wanted to make a plea to Connally against suspension, to the Treasury. The timing is also confirmed by a quotation in Safire (p. 514) from Connally at Camp David on the thirteenth: “The British came in today to ask us to cover $3 billion.”

78
.
New York Times
, August 16, 1971, p. 1.

1
. Nixon did not want to resort to the 1917 act, but according to the U.S. Senate Report 93-549, Emergency Powers Statutes (93rd Congress, 1st Sess.), the president needed the Trading with the Enemy Act to impose certain controls on imports. The key provision of the act, section 5(b), states, “During the time of war [or during any other period of national emergency declared by the President] the President may … investigate, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.” The wage-price freeze was imposed under the authority of the Economic Stabilization Act of 1970 (Public Law 91-379). The suspension of gold convertibility was authorized under the Gold Reserve Act of 1934.

2
. See William Safire,
Before the Fall: An Inside View of the Pre-Watergate White House
(New York: Doubleday and Co., 1975), p. 518. Nixon was answering Peter G. Peterson, at the time serving as an assistant to the president for international economic affairs and executive director of the Council on International Economic Policy. Peterson had said that the State Department wanted to be at this meeting.

3.
The following people signed the guest book: John Connally, Paul McCracken, Arthur Burns, Paul Volcker, Herbert Stein, Peter Peterson, H. R. Haldeman, John Ehrlichman, George Shultz, William Safire, Caspar Weinberger, Arnold Weber, Kenneth Dam, Michael Bradfield, and Larry Higby. Source: Bruce Duncombe, ed.
Foreign Relations of the United States, 1969–1976
, vol. 3,
Foreign Economic Policy; International Monetary Policy, 1969–1972
(Washington, DC: Government Printing Office, 2001), p. 466.

4
. Based on an interview with Michael Bradfield.

5
. The following conversation is based on Volcker's recollection, supplemented by H. R. Haldeman,
The Haldeman Diaries
(New York: G. P. Putnam's Sons, 1994), pp. 340–45, and Safire,
Before the Fall
, pp. 513–15.

6
. Bryan actually ran three times as the Democratic nominee for president: 1896, 1900, and 1908.

7
. See Safire,
Before the Fall
, p. 515.

8
. In Tab B of Volcker's briefing book, in the section entitled “How Large an Exchange Rate Realignment Should the United States Seek,” Volcker writes, “There are major uncertainties here … relevant studies in the U.S. Treasury and in the International Monetary Fund (IMF) produce rather different answers … The Treasury [estimates] slightly over $.5 billion improvement in the U.S. balance of payments position for each one percent exchange rate change … The IMF [estimates] a $.85 billion improvement … Therefore with the most optimistic assumption … the required exchange rate change would be an effective devaluation of 15 percent.” Volcker (Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
[New York: Times Books, 1992], p. 72) mentions a study he asked John Auten, a senior economist at Treasury, to undertake summarizing the academic literature on calculating exchange rate elasticity. That particular analysis has not been found, but numerous academic studies were submitted to the Volcker Group by prominent international economists at the time, including Richard N. Cooper, Paul Wonnacott, and Thomas Willett.

9
. See Safire,
Before the Fall
, p. 520.

10
. See the Transcript of the President's Address,
New York Times
, August 16, 1971, p. 14.

11
. The Dow Jones Industrial Average rose by 3.7 percent, and the S&P 500 increased by 3.2 percent. The daily standard deviation of returns in the S&P 500 from January through July 1971 is 0.51 percent.

12
. See “Abreast of the Market” column,
Wall Street Journal
, August 17, 1971, p. 33, and August 18, 1971, p. 29. GM and Ford did not trade on the sixteenth
because of an imbalance of buy orders. The increases reported in the text occurred on the seventeenth.

13
. See “Abreast of the Market” column,
Wall Street Journal
, August 17, 1971, p. 33.

14
.
Wall Street Journal
, August 17, 1971, p. 1.

15
. The remaining text of the paragraph is based on ibid., p. 7.

16
. See “Nixon: Flair for the Long Ball,”
Wall Street Journal
, August 17, 1971, p. 14.

17
. Ibid., p. 6.

18
. Ibid.

19
. Belgium, the Netherlands, and France (of course) converted $422 million into gold during the first week of May 1971 (
New York Times
, May 13, 1971, p. 65).