Volcker (55 page)

20
. U.S. Treasury Department News, “Statement by Secretary Connally at the Opening of a News Conference and Transcript,” August 16, 1971, Personal Papers of Paul Volcker.

21
.
New York Times
, August 16, 1971, p. 1.

22
. U.S. Treasury Department News, “Statement by Secretary Connally at the Opening of a News Conference and Transcript,” August 16, 1971.

23
. Ibid.

24
. The details of the meeting are recorded in Memorandum of Conversation, August 16, 1971, reprinted in Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, pp. 469–78. The news conference is reported in the
New York Times
, August 17, 1971, p. 19.

25
. Ibid., pp. 469–78.

26
. Ibid.

27
.
New York Times
, August 18, 1971, p. 21.

28
. See Memorandum of Conversation, August 16, 1971, reprinted in Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, pp. 469–78.

29
. On May 4, 1971, the dollar-mark exchange rate was 3.63 marks per dollar, and on August 13, 1971, the exchange rate was 3.388.

30
. See chapter 4.

31
.
Guardian
, August 29, 1971, p. 1.

32
. See “Economic Poker Game,”
New York Times
, September 15, 1971, p. 61.

33
.
New York Times
, August 18, 1971, p. 21.

34
.
New York Times
, November 29, 1971, p. 65 continued.

35
.
Financial Times
, August 21, 1971.

36
.
New York Times
, August 22, 1971, section 3, p. 1.

37
. See Safire,
Before the Fall
, p. 515.

38
. Ibid., p. 518.

39.
Data for the afternoon gold fixing from August 17 through August 20 are $43.05; $43.15; $43.30; $43.30. On August 31 the fixing was $40.65.

40
.
Newsweek
, January 27, 1997, p. 86.

41
. The prices of precious metals often reflect their use as the monetary standard. For example, in analyzing the consequences of the demonetization of silver in 1873, Milton Friedman argues, “The most obvious, but by no means most important consequence of the U.S. return to gold rather than to a bimetallic standard was the sharp rise in the gold-silver price ratio.” See “The Crime of 1973,” in
Money Mischief: Episodes in Monetary History
(New York: Harcourt Brace and Company, 1992), p. 68.

42
. The conversation is based on Telephone Logs of Paul Volcker, September 11, 1971, Federal Reserve Bank of New York Archives, Box 0108480.

43
. A story with a similar theme is John Taintor Foote's
A Wedding Gift: A Fishing Story
(London: D. Appleton-Century Co., 1924). Volcker keeps a copy in his bookshelf at home.

44
.
New York Times
, September 6, 1971, p. 24.

45
. Between May 4, 1971, and August 13, 1971, the German mark appreciated from 3.63 marks per dollar to 3.38, an increase of 6.9 percent. By the end of November 1971 the mark had appreciated another 2.1 percent, to 3.31 marks per dollar. The Japanese kept the yen fixed at the official 360 per dollar until the end of August, when they allowed the yen to appreciate to 336 yen per dollar, just about matching the percentage increase in the mark. By the end of November the Japanese allowed the yen to appreciate to 327.25 yen per dollar, again almost matching the increase in the mark. The French franc remained fixed at 5.52 francs per dollar throughout this period. Unlike the Germans and the Japanese, the French could continue buying dollars to prevent their currency from appreciating without worrying so much about the inflationary consequences because the dollar inflows to France were much smaller. France also increased controls on capital inflows.

46
. PIPAV.

47
. See
Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969–1974
, edited by Robert H. Ferrell (Lawrence: University Press of Kansas, 2010), p. 65.

48
. In 1971 the G-10 consisted of Britain, Canada, Japan, Sweden, the United States, and five of the six Common Market countries: Belgium, France, Italy, the Netherlands, and West Germany (
New York Times
, November 29, 1971, p. 65 continued).

49
.
New York Times
, December 2, 1971, p. 73.

50
. Letter from Burns to Nixon, October 14, 1971, reprinted in Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, p. 516.

51.
See the discussion of the meeting between Nixon, Connolly, and Burns of November 24, 1971, in ibid., pp. 565–66.

52
. In August 1971 Switzerland and France held 65 and 55 percent, respectively, of their foreign exchange reserves in the form of gold. Japan held slightly less than 6 percent in gold (see the
Economist
, August 21, 1971, p. 54).

53
. Volcker had written an outline of U.S. proposals prior to the G-10 meeting and had distributed it to the participants. It says that the United States would eliminate the 10 percent surcharge in exchange for an average 11 percent depreciation of the dollar against the major currencies. The document assumes continuation of suspension of convertibility and assumes no change in the dollar price of gold. A draft of the document is in the Personal Papers of Paul Volcker, and a version that John Connally sent to the White House appears in Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, pp. 580–81.

54
. The following quotes are from Volcker and Gyohten,
Changing Fortunes
, p. 86.

55
. See Hubert Zimmerman,
Money and Security, 1950–1971
(Cambridge: Cambridge University Press, 2002), p. 226. The Blessing letter also helps explain why the suspension of convertibility had a relatively benign impact. Convertibility had been circumscribed in practice by the Blessing letter and by Japan's willingness to hold dollars rather than gold as reserves.

56
. This and the following quotes are from Volcker and Gyohten,
Changing Fortunes
, p. 86.

57
. The agenda for Pompidou's meeting with Nixon appeared in the
New York Times
, November 24, 1971, p. 5, and November 25, 1971, p. 1.

58
. See Volcker and Gyohten,
Changing Fortunes
, p. 87.

59
.
New York Times
, December 14, 1971, p. 1.

60
. See “A Framework for Monetary and Trade Settlement,” in Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, pp. 597–99.

61
. Under the new system, exchange rates could vary 2¼ percent on either side of parity compared with the 1 percent margins permitted under Bretton Woods.

62
. See point 5 in “A Framework for Monetary and Trade Settlement,” in Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, p. 598.

63
.
New York Times
, December 15, 1971, p. 91.

64
. The exchange rates are the new central values of the dollar compared with the par values prior to the May 1971 crisis. See Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3, p. 601.

65
. Recall that fixed exchange rates under Bretton Woods were not quite fixed (just as fat-free muffins are not quite fat-free). Central bankers could allow the
exchange rate to fluctuate 1 percent on either side of “parity.” For example, the Bank of Japan could permit the yen, with a “par value” of 360 yen per dollar, to fluctuate between 363.3 and 356.4 before intervening in the marketplace. After the Smithsonian realignment the yen had a central value of 308 yen per dollar and could vary between 314.93 and 301.07.

66
.
New York Times
, December 19, 1971, p. 1.

67
. Volcker and Gyohten,
Changing Fortunes
, p. 90.

68
. According to Volcker (ibid., p. 89), “The trade weighted depreciation of the dollar amounted to a little under 8 percent … Without Canada … the figure was 12 percent … Either way it was well short of what we felt we needed to restore solid equilibrium in our external payments.”

1
. Letter from Pompidou to Nixon, dated February 4, 1972, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473, with response of Nixon to Pompidou, dated February 10, 1972, marked “PAV draft” in pencil.

2
. The
New York Times
, February 3, 1972, p. 1, reports that gold touched fifty dollars an ounce during trading hours on February 2, 1972.

3
. This quote and the remaining quotes are from the letter from Pompidou to Nixon dated February 4, 1972, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473.

4
. On December 20, the day after the Smithsonian news conference, the overnight federal funds rate was 3.75 percent, the three-month Treasury bill rate was 4.12 percent, and the dollar bought 3.258 marks. On February 2, 1972, the funds rate had declined to 3.13 percent, the bill rate had dropped to 3.4 percent, and the dollar bought only 3.185 marks.

5
. Quotes in this paragraph and in the two that follow are from Burton Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,”
Journal of Economic Perspectives
20, no. 4 (Fall 2006): 180–84.

6
. The quotes are from Abrams (see ibid.). Shultz may have been referring to unconfirmed reports that Nixon had threatened to double the size of the Federal Reserve Board as a way to gain more control. See William Safire,
Before the Fall: An Inside View of the Pre-Watergate White House
(New York: Doubleday and Co., 1975), p. 492.

7
. See February 4, 1972, Letter from Pompidou to Nixon, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473.

8.
See Memorandum of Conversation, August 16, 1971, reprinted in Bruce Duncombe, ed.,
Foreign Relations of the United States, 1969–1976
, vol. 3,
Foreign Economic Policy, 1969–1972; International Monetary Policy, 1969–1972
, p. 472.

9
.
New York Times
, May 13, 1972, p. 43.

10
. See Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
(New York: Times Books, 1992), p. 84.

11
. PIPAV.

12
.
New York Times
, May 13, 1972, pp. 1, 43.

13
. See
New York Times
, May 17, 1972, p. 63.

14
.
Washington Post
, May 13, 1972, p. A1 continued.

15
.
Washington Post
, May 17, 1972, p. A1.

16
.
New York Times
, May 17, 1972, p. 47.

17
. Connally writes in his autobiography,
In History's Shadow: An American Odyssey
(New York: Hyperion, 1993), p. 233, that he resigned because of interference by White House staffer John Ehrlichman in tax policy without clearing it with Connally.

18
. PIPAV.

19
.
Guardian
, June 13, 1972, p. 12.

20
.
New York Times
, May 17, 1972, p. 46.

21
.
Washington Post
, May 17, 1972, p. A1 continued.

22
.
Washington Post
, May 18, 1972, p. A23.

23
. The close on May 16 in the afternoon fixing in London (approximately 10:00 A.M. New York time) was $54.60. The opening in the morning fixing in London on May 17 (approximately 5:30 A.M. New York time) was $57.50. The announcement was made during the day on May 16, 1972, and the increase of 5 percent is statistically significant. The standard deviation of returns during the first four months of 1972 was .62 percent per day.

24
. See
Wall Street Journal
, May 18, 1972, p. 5. The
Journal
reports that a contributing factor to the price jump was an announcement by South Africa that it would curtail gold sales.

25
.
New York Times
, June 23, 1972, p. 47.

26
. Ibid.

27
.
New York Times
, June 24, 1972, p. 1.

28
. PIPAV.

29
. The remaining quotes in this paragraph are from a transcript of the June 23, 1972, Nixon Tapes, available at
www.nixonlibrary.gov/forresearchers/find/tapes/watergate/wspf/741-002.pdf
. Also available in
Time
, August 19, 1974.