Volcker (59 page)

30
. See the discussion of the Minutes of the Board of Governors meeting on October 4, in David Lindsey, Athanasios Orphanides, and Robert Rasche, “The Reform of October 1979: How It Happened and Why,” in
Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis
87, no. 2, part 2 (March/April 2005): 199.

31
. The following quote is from the Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 13. The Minutes of the Board of Governors meeting on October 4 (see the previous note) simply summarizes what was said without direct attribution. However, Partee's quote from October 6 is precisely the sentiment summarized in the Minutes of the October 4 meeting of the Board of Governors. Also note that Partee interrupts Volcker on October 6 (Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 12) to say “Lead went up 20 percent.”

32
. Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 4.

33
. Ibid., pp. 7, 8.

34
. Ibid., p. 8, 9.

35
. Ibid., p. 9.

36
. Ibid., p. 10.

37
. Ibid., p. 24.

38
. Ibid., p. 14.

39
. Ibid.

40
. Ibid.

41
. Ibid.

42
. Ibid., p. 19.

43
. Ibid.

44
. Ibid., pp. 19–20.

45
. Ibid., p. 20.

46
. See Joseph Coyne, “Reflections on the FOMC Meeting of October 6, 1979,” in
Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis
, 313.

47.
See page 1 of the transcript of the press conference with Paul Volcker, October 6, 1979, located at fraser.stlouisfed.org/historicaldocs/787.

48
. See
Washington Post
, October 7, 1979, p. A1.

49
. The questions and answers at the press conference are from the transcript of the press conference with Paul Volcker, October 6, 1979, located at fraser.stlouisfed.org/historicaldocs/787/, pp. 4, 7, 8.

50
. See William Greider,
Secrets of the Temple: How the Federal Reserve Runs the Country
(New York: Simon & Schuster, 1987), p. 123. Greider wrote for
Rolling Stone
at the time he authored this book and had been a reporter for the
Washington Post
before that (see williamgreider.com/about).

51
. This quote and the following interchange between Proxmire and Volcker are from
The Nomination of Paul A. Volcker to Be Chairman, Board of Governors of the Federal Reserve System: Hearings Before the Committee on Banking, Housing, and Urban Affairs
, U.S. Senate, 96th Congress, 1st Sess., July 30, 1979, U.S. Government Printing Office, Washington, DC, pp. 4–5.

52
.
New York Times
, December 16, 2005, p. B13.

53
. Transcript, Federal Open Market Committee Meeting, August 14, 1979, p. 21.

54
. PIPAV. Volcker was referring both to Sargent (who won the Nobel Prize in Economics in 2011) and to Neil Wallace. Both men were at the University of Minnesota and were advisers to the Federal Reserve Bank of Minneapolis. Their work on the impotence of monetary policy includes 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).

55
. See the reference in chapter 7 to “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.

1
.
New York Times
, October 14, 1979, p. E18.

2
.
New York Times
, October 21, 1979, p. D1.

3
.
New York Times
, December 2, 1979, p. SM15. Meltzer's three-volume history, entitled
A History of the Federal Reserve System
, is published by the University of Chicago Press. Volume 1, published in 2003, covers the period
1913–1951; volume 2, book 1, published in 2009, covers 1951–1969; and volume 2, book 2, also published in 2009, covers 1970–1986.

4
. PIPAV.

5
. The exchange rate of 1.794 marks per dollar is reported “in Frankfurt” in the
New York Times
(October 9, 1979, p. A1) and the
Washington Post
(October 9, 1979, p. F1). The daily standard deviation of returns on dollar-mark equaled 0.38 percent, and the daily standard deviation of returns on gold equaled 2.0 percent from August 1, 1979, through September 30, the two months since Volcker's appointment. Thus the 2.0 percent increase in dollar mark is statistically significant, while the 3.3 percent decline in gold is not.

6
.
New York Times
, October 9, 1979, p. A1 continued.

7
.
Washington Post
, October 9, 1979, p. F1 continued.

8
. Ibid., p. F1.

9
.
Washington Post
, October 17, 1979, p. A23.

10
.
New York Times
, October 11, 1979, p. D1.

11
. The standard deviation of daily interest rate changes in the ten-year bond rate equaled .41 percent during the first nine months of 1979 and .45 percent from August 1, 1979, through September 30, the two months since Volcker's appointment. On October 9, 1979, the ten-year rate increased by 3.44 percent. (The numbers in this note are percentage change, not percentage points.)

12
. For July 1975 the ten-year bond rate averaged 8.06 percent and the federal funds rate averaged 6.09 percent. For July 1974 the ten-year rate averaged 7.8 percent and the federal funds rate averaged 12.95 percent.

13
. The rate on November 19, 1979, was 10.8 percent and it was 10.78 percent on November 20, 1979.

14
. Transcript, Federal Open Market Committee Meeting, November 20, 1979, p. 29.

15
. The transcript includes “Mark” in the omitted section in the previous quotation.

16
. Transcript, Federal Open Market Committee Meeting, November 20, 1979, p. 30.

17
. Ibid., p. 23.

18
. Arthur Burns, “The Anguish of Central Banking,” the 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 16.

19
. See Transcript, Federal Open Market Committee Meeting, November 20, 1979, p. 24, for the remaining quotes in this section.

20
. William Greider,
Secrets of the Temple: How the Federal Reserve Runs the Country
(New York: Simon & Schuster, 1987), p. 105.

21
. The $850 afternoon London gold fixing on January 21, 1980, was the highest recorded price until the $858.85 afternoon fixing on January 3, 2008.
The price rose during January 2008 and ended at $923.00 on January 31, 2008.

22
. See
New York Times
, January 19, 1980, p. 29, for gold responding to the Russian invasion of Afghanistan, and
New York Times
, December 6, 1979, p. D12, for gold responding to rumors of the murder of American hostages in Iran. The annual rate of inflation during the last three months of 1979 was 13.2, 13.2, and 14.4 for October, November, and December, respectively.

23
. The afternoon gold fixing on November 19, 1979, was $389.85.

24
. The quotes and reports in this paragraph are from the
New York Times
, January 12, 1980, p. 27.

25
. The quotes and reports in this paragraph are from the
New York Times
, January 27, 1980, p. WC1.

26
. On April 1, 1980, the afternoon fixing in London was $509.50. On April 30 it was $518.00.

27
.
Washington Post
, November 4, 1979, p. M1.

28
.
New York Times
, March 8, 1980, p. 29.

29
. Okun is quoted in the
New York Times
, March 7, 1980, p. D2. He died on March 23, 1980, two weeks after his prediction, so he did not live to see his forecast validated.

30
. The prime rate was 17.75 percent on March 7, when Okun made his statement. It rose to 20 percent on April 2. The all-time high of 21.5 percent occurred in December 1980.

31
. Reports of the Cincotta protest appeared in the
Chicago Tribune
, April 15, 1980, p. C1, and April 17, 1980, p. B2, and in the
New York Times
, April 15, 1980, p. D7.

32
.
Chicago Tribune
, April 15, 1980, p. C1.

33
. See Joseph Coyne, “Reflections on the FOMC Meeting of October 6, 1979,” in
Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis
87, no. 2, part 2 (March/April 2005): 314.

34
.
Chicago Tribune
, April 17, 1980, p. B2.

35
. The annual rates of inflation in the first four months of 1980 were 16.8, 15.6, 16.8, and 12.0 percent, for an average of 15.2 percent.

36
. See the transcript of Carter's message in the
New York Times
, March 15, 1980, p. 34.

37
. See Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
(New York: Times Books, 1992), p. 171.

38
.
New York Times
, October 10, 1979, p. D5.

39
.
New York Times
, October 13, 1979, p. 31.

40
.
New York Times
, October 10, 1979, p. D5.

41.
From
Implementation of the Credit Control Act Pursuant to Executive Order 12201: Hearings before the Senate Committee on Banking, Housing, and Urban Affairs
, 96th Congress, 2nd Sess., March 14, 1980, U.S. Government Printing Office, Washington, DC, March 18, 1980, p. 17.

42
. See
New York Times
, March 19, 1980, p. D4; and ibid.

43
. See Stacey L. Schreft, “Credit Controls: 1980,”
Federal Reserve Bank of Richmond Economic Review
76, no. 6 (November/December 1990): 25–43.

44
. See
New York Times
, March 30, 1980, p. F1.

45
. Ibid.

46
. See Monetary Aggregates and Money Market Conditions, prepared for the May 16, 1980, FOMC meeting, pp. 1–5. The so-called blue book (named for the color of the cover) begins with “The record decline in demand deposits in April led to a contraction in all of the targeted monetary aggregates last month … The underlying weakness in money supply over the past several weeks most likely reflects not only the lagged effect of previous high interest rates, but also net repayment of bank debt at a time of sizable reduction in economic activity.”

47
. The federal funds rate was 11.57 percent on May 6, compared with 19.78 percent on April 7.

48
. Transcript, Federal Open Market Committee Meeting, May 6, 1980, p. 4.

49
. Ibid., p. 5.

50
. The Federal Open Market Committee's Directive since October 6, 1979, established a reserve growth path consistent with its money-supply target combined with a wide band on the federal funds rate, usually four percentage points. Whenever the funds rate slipped towards its lower or upper band there would be consultation (as with the May 6, 1980, conference call) among the committee members about whether to widen the bands. Also see David E. Lindsey,
A Modern History of FOMC Communication
, Washington, DC: Board of Governors of the Federal Reserve System, June 24, 2003, p. 45.

51
. Transcript, Federal Open Market Committee Meeting, May 6, 1980, p. 5.

52
. See Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 43, for the following exchange among Volcker, Wallich, and Teeters:

VOLCKER: Let me say again that if we adopt this technique, I don't think we can be at all sure where the fed funds rate will go in the very short run.

WALLICH: It doesn't matter all that much.

VOLCKER: And it doesn't matter all that much.

Wallich: It would disavow us.

VOLCKER: No.

TEETERS: It matters to you, Henry, if it goes down.

WALLICH: Yes.

TEETERS: It doesn't matter to me if it goes down.

53
. Transcript, Federal Open Market Committee Meeting, May 6, 1980, p. 5.

54
. Transcript, Federal Open Market Committee Meeting, October 6, 1979, p. 20.