Volcker (57 page)

27
. See
New York Times
, September 23, 1974, p. 55.

28
. Ibid.

29
. The morning fixing in London on December 30, 1974, was $197.50 compared with the final closing price on December 31, 1973, of $112.25.

30
.
New York Times
, May 2, 1975, p. 45.

31
. Ibid.

32
.
New York Times
, April 5, 1974, p. 45.

33
. Transcript, Federal Open Market Committee, January 17, 1977, Tape 7, p. 1, Papers of Arthur Burns, University of Michigan Library, Ann Arbor, MI.

34.
Arthur Burns, “The Anguish of Central Banking,” the 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 15.

35
. The inflation rate was 6.48 percent per year from December 1969 through December 1977 based on data from Lawrence H. Officer and Samuel H. Williamson, available at
www.measuringworth.com/inflation/
. Burns's tenure as Fed chairman is discussed in many articles and books, including William Poole, “Panel Discussion II: Safeguarding Good Policy Practice,” in
Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis
87, no. 2 (March/April 2005), part 2; Robert Hetzel,
The Monetary Policy of the Federal Reserve: A History
(New York: Cambridge University Press, 2008); and Meltzer,
A History of the Federal Reserve System
, vol. 2, book 2.

36
. See Michael J. Haupert, “The Economic History of Major League Baseball,” at eh.net/encyclopedia/article/haupert.mlb.

37
. Burns, “The Anguish of Central Banking,” p. 16.

38
. Ibid.

39
. The conversation is based on the recollection of Paul Volcker.

40
. Memorandum of Discussion, Federal Open Market Committee, November 18, 1975, p. 39, Board of Governors of the Federal Reserve System, Washington, DC.

41
. Transcript, Federal Open Market Committee, July 20, 1976, Tape 10, pp. 5 and 13, Papers of Arthur Burns, University of Michigan Library, Ann Arbor, MI.

42
.
Washington Post
, August 14, 1975, p. A17.

43
. PIPAV.

44
. The Consumer Price Index rose 12.1 from December 1973 through December 1974 and rose 5.0 percent from December 1975 through December 1976.

45
. The morning fixing in London on August 31, 1976, was $103.05.

46
.
New York Times
, August 29, 1976, p. 105.

47
. The price of gold reflects both supply and demand, of course, so that part of the drop in price reflected anticipated sales of gold from U.S. stockpiles and from the International Monetary Fund (see
New York Times
, September 3, 1976, p. D5). However, gold sales by the monetary authorities are only a small fraction of the stock of gold in the world—gold is indestructible, as in Charles de Gaulle's poetry. When speculators want gold as an inflation hedge, there is never enough to go around.

48
.
New York Times
, September 2, 1976, p. 55.

49
. For a discussion of the economic issues in the campaign, see the editorial in the
New York Times
, October 26, 1976, p. 38.

50
. Inflation in 1969 was 5.9 percent.

51
. Unemployment averaged 7.7 percent in 1976 and was 8.5 percent in 1975.

52.
This quote and the remaining quotes in this paragraph are from the
New York Times
, June 5, 1978, p. 1.

53
. According to Andrew Levin and John Taylor, inflationary expectations “reached a peak of about 4½ percent in 1970 and then remained in the range of 3½ to 4½ percent over the next several years.” See “Falling Behind the Curve: A Positive Analysis of the Stop-Start Monetary Policies and the Great Inflation,” a manuscript prepared for the September 2008 NBER Conference on the Great Inflation, p. 6. Available at www.hber.org/public_html/confer/2008/gif08/gif08/levin.pdf.

54
. Memorandum of Discussion, Federal Open Market Committee, August 19, 1975, p. 61–62, Board of Governors of the Federal Reserve System, Washington, DC.

55
. See Robert E. Lucas Jr., “Expectations and the Neutrality of Money,”
Journal of Economic Theory
4, no. 2 (April 1972); and Robert E. Lucas Jr., “Econometric Policy Evaluation: A Critique,” Carnegie-Rochester Conference Series, 1976.

56
. See 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).

57
. See “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.

58
.
New York Times
, December 17, 1978, p. F1.

59
. The London morning fixing was $243.65 on October 31, 1978.

60
.
New York Times
, December 17, 1978, p. F1.

61
. Ibid.

62
. Ibid.

63
. Transcript, Federal Open Market Committee, February 28, 1978, p. 24. Volcker was referring to the possibility of accelerating inflation and the need to slow the economy to engineer a “soft landing” (to avoid a recession).

64
.
New York Times
, December 20, 1977, p. 69.

65
.
New York Times
, January 1, 1978, p. F1.

66
.
New York Times
, December 29, 1977, p. 60.

67
.
New York Times
, January 1, 1978, p. F1 continued.

68
. PIPAV.

69
. The following quotes are from the Transcript, Federal Open Market Committee, August 15, 1978, pp. 1–2.

70
. See
Washington Post
, July 30, 1978, p. G1.

71.
On August 8, 1978, the dollar bought only 1.98 marks, a new low, and on August 14 it declined to 1.95 marks, another new low.

72
. Transcript, Federal Open Market Committee, August 15, 1978, p. 21.

73
. PIPAV.

74
. Transcript, Federal Open Market Committee, October 17, 1978, p. 40.

75
. The conversation is based on Volcker's recollection.

76
. Willes first dissented at the telephone conference of May 5, 1978, and at every regular meeting through October 17, 1978 (see FOMC transcripts). He credits Thomas Sargent and Robert Lucas with teaching him the importance of rational expectations and central bank credibility. See Interview with Mark H. Willes,
www.minneapolisfed.org/about/role/history/willes.cfm
.

77
. Transcript, Federal Open Market Committee, July 18, 1978, p. 40.

78
. The seasonally adjusted monthly rates of inflation in July, August, and September were .8, .6, and .9, which translate into an annual average of 9.2 percent.

79
. This quote and those that follow are from the Transcript, Federal Open Market Committee, October 17, 1978, p. 40.

80
. The exchange rate was 2.25 marks per dollar on October 31, 1977.

81
.
Wall Street Journal
, October 31, 1978, p. 2.

82
. Ibid.

83
.
Washington Post
, November 1, 1978, p. A26.

84
.
Wall Street Journal
, November 6, 1978, p. 1.

85
. See
Wall Street Journal
, November 2, 1978, p. 1, and Robert Solomon,
The International Monetary System, 1945–1981
(New York: Harper & Row, 1982), pp. 349–50. Among the key components of the program were: (1) An increase in the discount rate from 8½ to 9½ percent; (2) the United States would issue $10 billion in foreign currency denominated bonds; and (3) the U.S. would draw $3 billion in foreign currency reserves from the International Monetary Fund for use in the dollar-support operation.

86
.
New York Times
, November 13, 1978, p. D3.

87
. PIPAV.

88
. The dollar closed at 1.86 marks on November 1, which is 6 percent above the close of 1.754 on October 31. The standard deviation of overnight returns during the first ten months of 1978 is .686 percent.

89
. The close on November 30 was 1.9281, which is 9.9 percent above the 1.754 close on October 31.

90
.
Wall Street Journal
, November 2, 1978, p. 4.

91
. Ibid.

92
. The first three months of 1979 had monthly rates of inflation equal to 0.9,
1.0, and 1.0 percent, which translates (by adding them up and multiplying by four) into an annual rate of 11.6 percent.

93
. Transcript, Federal Open Market Committee, March 20, 1979, p. 10.

94
. PIPAV. Volcker adds an excuse for 1949: “I needed a job for six months, until I went to Harvard, and that's what I told them. They were very nice and polite when they said they did not hire temporary workers.”

95
. Transcript, Federal Open Market Committee, March 20, 1979, p. 21.

96
. See public law 95-523, October 27, 1978, available at
www.eric.ed.gov/PDFS/ED164974.pdf
.

97
. Public law 95-523 declares (section 102 [2g]) that “trade deficits are a major national problem requiring a strong export policy” but does not discuss exchange rates. The act is nicknamed after its sponsors, Senator Hubert Humphrey and Representative Augustus Hawkins. Prior to the Humphrey-Hawkins Act, the goals of the central bank were codified in the Federal Reserve Reform Act of 1977 as “maximum employment, stable prices, and moderate long-term interest rates.” See David E. Lindsey,
A Modern History of FOMC Communication: 1975–2002,
Washington, DC: Board of Governors of the Federal Reserve System, July 24, 2003, p. 27.

98
. Transcript, Federal Open Market Committee, March 20, 1979, p. 21.

99
. “The Political Economy of the Dollar,” the Fred Hirsch Memorial Lecture, Warwick University, Coventry, England, November 9, 1978, published simultaneously in the
Federal Reserve Bank of New York Quarterly Review
3, no. 4 (Winter 1978–79), and in the January 1979 issue of the
Banker
(London). See
New York Times
, November 10, 1978, p. D2, and the
Times
(London), November 10, 1978, p. 27.

100
. “Political Economy of the Dollar,”
Quarterly Review
, pp. 10 and 12.

101
. Transcript, Federal Open Market Committee, March 20, 1979, p. 21.

102
. Frank Morris was not a voting member of the FOMC at this meeting, but he participated in the discussion, as was always the case with nonvoting presidents. His argument did not produce the easing that he wanted, just a policy of “maintaining the weekly average federal funds rate at about the current level” in the FOMC Directive (see Record of Policy Actions of the FOMC for the March 20 meeting, released on April 20, 1979, p. 11). The record also reports that “Messrs. [Paul] Volcker, [Philip] Coldwell, [Monroe] Kimbrel, and [Henry] Wallich dissented from this action because they favored a somewhat more restrictive policy posture, in view of strong inflationary forces.”

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.