Documents
References to the Personal Papers of Paul Volcker are documents given to me by Volcker from his personal files. References to documents held at the Federal Reserve Bank of New York come from two sources: (1) documents from Volcker’s tenure as president of the Federal Reserve Bank of New York, which are the property of the Federal Reserve Bank of New York; and (2) documents shipped in 1987 from Volcker’s personal files at the Board of Governors for storage at the Federal Reserve Bank of New York. As of this writing (January 2012), both sets of materials, referred to as Federal Reserve Bank of New York Archives, are available from the Federal Reserve Bank of New York.
Minutes and transcripts of Federal Open Market Committee meetings (with exceptions noted) are publicly available documents and were sent in electronic form to me by David Small, economist at the Board of Governors. Transcripts of meetings from March 26, 1976, through January 5, 1978, not yet publicly available, were purchased in hard copy from the Papers of Arthur Burns, University of Michigan.
Minutes of the Board of Governors concerning the discount rate between 1979 and 1987, the discussion of Mexico in 1982, Continental Illinois between 1982 and 1985, and the Bankers Trust commercial paper discussions between 1979 and 1987 were all received in redacted form based on Freedom of Information Act (FOIA) requests.
Documents from the National Archives II, College Park, Maryland, were located at my request by Thomas Culbert, Aviation Information Research Corporation. David Small, economist at the Board of Governors, also provided copies of selected documents from the National Archives.
Interviews
Direct quotes in the text attributed to Paul Volcker come either from published material, in which case the document is cited, or from personal interviews I conducted with him, in which case they are labeled PIPAV (Personal Interviews with Paul A. Volcker). Forty-two interviews, which lasted between one and three hours, were conducted between August 2008 and September 2011, and were recorded. Some discussions were not recorded, and our telephone conversations were not recorded.
I conducted personal interviews with the following people to provide background information. I provide their affiliation as they relate to Paul Volcker:
Stephen Axilrod: staff director and secretary of the Federal Open Market Committee during Volcker’s tenure as chairman.
Peter Bakstansky: senior vice president of the Federal Reserve Bank of New York and head of the public information area during Volcker’s term as president of the Federal Reserve Bank of New York.
Ben Bernanke: chairman, Board of Governors of the Federal Reserve System, 2006–present.
Michael Bradfield: assistant general counsel for international affairs, U.S. Treasury Department, during Volcker’s tenure as undersecretary; general counsel of the Board of Governors of the Federal Reserve System during Volcker’s tenure as chairman.
Gerald Corrigan: vice president of the Federal Reserve Bank of New York during Volcker’s tenure as president; special assistant to Volcker during his first year as Fed chairman; and member of the FOMC (first as president of the Federal Reserve Bank of Minneapolis and then as president of the Federal Reserve Bank of New York) during Volcker’s tenure as chairman.
Joseph Coyne: chief spokesman and assistant to the Board of Governors of the Federal Reserve System during Volcker’s tenure as chairman.
Anthony Dowd: Volcker’s chief of staff, 2009–present.
Tyler Gellasch: legislative assistant to Senator Carl Levin, cosponsor of the Merkley-Levin Amendment, which incorporated the Volcker Rule as Section 619 of the Dodd-Frank legislation.
Austan Goolsbee: chairman of President Obama’s Council of Economic Advisers and chief of staff of the President’s Economic Recovery Advisory Board (PERAB) during Volcker’s tenure as chairman of PERAB.
Lyle Gramley: member of President Jimmy Carter’s Council of Economic Advisers, 1977–1980, and member of the Board of Governors of the Federal Reserve System, 1980–1985.
Alan Greenspan: chairman, Board of Governors of the Federal Reserve System, 1987–2006.
Robert Kavesh: classmate of Volcker’s at Harvard and close personal friend.
Rudolph Penner: director of the Congressional Budget Office, 1983–1987.
Charles Schultze: chairman of President Jimmy Carter’s Council of Economic Advisers.
Robert Solow: 1987 Nobel Memorial Prize in Economics.
Neal Soss: special assistant to Paul Volcker, 1982–1983.
Peter Sternlight: manager for domestic operations, Federal Reserve System’s Open Market Account, during Volcker’s tenure as chairman.
James Volcker: Paul Volcker’s son.
Janice Volcker Zima: Paul Volcker’s daughter.
Murray Weidenbaum: chairman of President Ronald Reagan’s Council of Economic Advisers, 1981–1982; and assistant secretary of the treasury for economic policy, 1969–1971.
Data
The daily London gold fixing comes from the London Bullion Market Association, available at www.lbma.org.uk/goldfixg. Monthly data on inflation (measured by the Consumer Price Index) and the unemployment rate are published by the U.S. Department of Labor and were downloaded from the economic database at the Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED), available at research.stlouisfed.org/fred2/. The Survey of Professional Forecasters data on expected inflation come from the series maintained by the Federal Reserve Bank of Philadelphia and are available at www.phil.frb.org/research-and-data/real-time-center. Daily data for yields on U.S. Treasury securities are “constant maturities” as interpolated by the U.S. Treasury and made available through Datastream. The data on the discount rate and the daily federal funds rate come from FRED and are available at research.stlouisfed.org/fred2/categories/118. Data on exchange rates between the U.S. dollar and the German mark, the British pound, and the Japanese yen are end-of-day quotes in New York for the spot exchange rate. The data on the pound and the yen come from Datastream and the data on the mark are from Bloomberg. Data on money supply growth come from the transcripts of the Federal Open Market Committee and from FRED, at research.stlouisfed.org/aggreg/. Some annual data come from the Economic History Association, available at eh.net/hmit/.
Acknowledgments
This project took a year longer than I expected because Paul Volcker refused to retire from public life. It would have taken even longer without the help of students at the Stern School of Business, New York University, who analyzed the documentary evidence that underpins this book. Steven Chuang, Christopher Cramer, Benjamin Harding, Chris Hemmelgarn, Elizabeth Holt, Benjamin Loveland, and Rebecca Solow listened to excerpts from the Nixon tapes, read minutes of the Federal Open Market Committee meetings covering 1975 through 1987, reviewed congressional testimony, cataloged Volcker’s correspondence, and digested clippings from newspapers throughout the world. I would like to thank them for spending more energy on this project than I had a right to ask—usually with good cheer. Thanks also to Carol M. Arnold-Hamilton, research librarian at NYU’s Bobst Library, for her guidance with congressional testimony.
I supplemented the written record with interviews that added a personal perspective to Volcker’s public personae. I would like to thank the following for sharing their thoughts on the historical record and their insights about Paul Volcker that transcend the printed page: Stephen Axilrod, Peter Bakstansky, Ben Bernanke, Michael Bradfield, Jerry Corrigan, Joseph Coyne, Anthony Dowd, Tyler Gellasch, Austan Goolsbee, Lyle Gramley, Alan Greenspan, Henry Kaufman, Robert Kavesh, Rudolph Penner, Charles Schultze, Robert Solow, Neal Soss, Peter Sternlight, and Murray Weidenbaum.
Jimmy Volcker and Janice Volcker Zima, Paul’s children, offered especially sensitive insights into their father’s life. Anke Dening (Mrs. Paul Volcker since February 2010) coordinated my visits with precision and unearthed documents that her husband did not know existed.
Archivists at the Federal Reserve Bank of New York, Joseph Komljenovich and Julie Sager, were especially helpful in pr
oviding access to documents stored there from Volcker’s presidency of the Federal Reserve Bank of New York (1975–1979) and to documents shipped there at Volcker’s request from his period at the Federal Reserve Board (1979–1987). Lawyers at the Federal Reserve Board raised obstacles to my seeing these documents, but Lynn Fox, a senior advisor to the board, smoothed the way. Joseph Pavel of the Federal Reserve Board’s public relations office conducted two very helpful tours of the physical premises.
I have asked a number of people to comb the manuscript for errors. I appreciate their help. Kenneth Garbade applied his electron microscope to remove sloppy analysis. Rudolph Penner checked for fiscal irresponsibility. Thomas Sargent enforced rational expectations. Lillian Silber eliminated mixed metaphors and dangling participles. Richard Sylla corrected historical inaccuracies. Paul Wachtel kept me on message. My agent, Eric Lupfer at William Morris Endeavor, and my editor, Peter Ginna at Bloomsbury Press, gave wise guidance (especially in the form of Peter’s squiggles) while softening the prose.
Special thanks to Ken and Lillian for listening to my complaints and responding with much-appreciated encouragement. And thanks to Paul Volcker for not meddling.
Notes
Introduction: More Than a Central Banker
1. The letter is dated summer 1987, Personal Papers of Paul Volcker. The 1970 Academy Award–winning film Patton, starring George C. Scott, memorialized the exploits of General George S. Patton during World War II, but Patton also served with distinction in World War I, where he first encountered the tank warfare that made him famous. The M60 Patton tank, still used throughout the world, was named after him.
2. See Ben Bernanke, “Paul Volcker,” Time, April 29, 2010, available at www.time.com/time/specials/packages/article/0,28804,1984685_1984745_1984803,00.html.
3. See WSJ.com, October 19, 2011, 10:27 A.M.
4. Volcker said this publicly in response to a question at the 2011 Henry Kaufman Lecture, Museum of American Finance, December 7, 2011, “A Conversation with Paul Volcker,” moderated by Professor Richard Sylla.
5. New York Times, July 16, 1979, p. A10.
6. New York Times, April 1, 1982, p. D1.
Prologue: The Three Crises of Paul Volcker
1. Personal interview with Paul A. Volcker, hereafter referred to as PIPAV.
2. Newsweek, December 8, 2008, p. 10.
3. New York Times, October 21, 2009, p. A1.
4. See full text of Obama’s remarks on financial reform, January 21, 2010, 11:39 A.M., WSJ.com.
5. Ibid.
6. PIPAV.
7. Volcker’s testimony is in Experts’ Perspectives on Systemic Risk and Resolution Issues: Hearings Before the Committee on Financial Services, U.S. House of Representatives, 111th Congress, 1st Sess., September 24, 2009, pp. 6–34. Biden’s quote is from an interview with Volcker’s chief of staff, Anthony Dowd.
8. See Washington Post, January 22, 2010, p. A1 continued.
9. PIPAV.
10. Ibid.
11. This quote and remainder in this paragraph are from a dinner speech at the Stanford Institute for Economic Policy Research Economic Summit, Stanford, CA, February 11, 2005, Personal Papers of Paul Volcker.
12. See Volcker’s memorandum “Contingency,” May 8, 1971, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 0108477, pp. 1–2.
13. PIPAV.
14. The Federal Reserve’s First Monetary Policy Report for 1984: Hearings Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, 98th Congress, 2nd Sess., February 8, 1984, p. 108.
15. The 10 percent figure is based on an unscientific survey I took each academic year between 2000 and 2005 while teaching 350 first-year MBA students (average age of twenty-eight) at the Stern School of Business, New York University.
16. President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010. The Volcker Rule prohibitions against bank proprietary trading activities and certain relationships with hedge funds are contained in Section 619 of the act.
1. The Early Years
1. See chapter 4, Pamphlet, Teaneck Collection at Teaneck Public Library, available at www.teaneck.org/virtualvillage/teaneck12years.
2. PIPAV.
3. Washington’s quote comes from a letter to Colonel George Baylor, warning him about the selection of officers for his brigade: “I earnestly recommend to you to be circumspect in your choice of officers … Do not suffer your good nature, when application is made, to say yes when you ought to say no; remember that it is a public not a private cause that is to be injured or benefited by your choice.” Jared Sparks, The Writings of George Washington; Being His Correspondence, Addresses, Messages, and Other Papers, Official and Private, vol. 4 (Boston: Russell, Odiorne and Metcalf, and Hilliard, Gray, and Co., 1834), p. 269.
4. PIPAV. For Dick Rodda’s perspective, see “Oral History of Teaneck,” Teaneck Public Library, transcribed interview with Richard Rodda, July 10, 1984. Also see Joseph Treaster, Paul Volcker: The Making of a Financial Legend (New York: John Wiley, 2004), pp. 84–85.
5. PIPAV.
6. Ibid.
7. Ibid.
8. Ibid.
9. Ibid.
10. Ibid.
11. John von Neumann and Oskar Morgenstern, Theory of Games and Economic Behavior (Princeton, NJ: Princeton University Press, 1944).
12. Oskar Morgenstern, The Limits of Economics (London: William Hodge and Company, 1937), p. 4.
13. Ibid., p. 14.
14. Oskar Morgenstern, On the Accuracy of Economic Observations (Princeton, NJ: Princeton University Press, 2nd ed., 1963), p. 190
15. PIPAV.
16. Friedrich A. Hayek, The Road to Serfdom (Chicago: The University of Chicago Press, 1944), reprinted 1976.
17. PIPAV.
18. Ibid.
19. Ibid.
20. Ibid.
21. Ibid.
22. Ibid.
23. Robert Roosa, Federal Reserve Operations in the Money and Government Securities Markets (New York: Federal Reserve Bank of New York, July 1956). The author’s first footnote on page 7 reads, “Messrs. Tilford C. Gaines and Paul A. Volcker must be singled out, however, because of their valiant help in steering the original draft of this booklet through the final stages of editing, checking, and printing.”
24. New York Times, December 25, 1993, p. A37.
25. Bid means the dealer is ready to buy, and offer means the dealer is ready to sell. The 9 is short for the bid price of, say, 100 9/32, and the 10 is short for 100 10/32. The phrase “100 by 100” refers to the size of the transaction: 100 bonds with a face value of $1,000 each.
26. See the discussion in 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. 161.
27. Ibid., p. 271.
28. PIPAV.
29. Ibid.
30. Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 5.
31. See Robert V. Roosa, The Dollar and World Liquidity (New York: Random House, 1967), p. 1. According to Arthur Schlesinger, A Thousand Days: John F. Kennedy in the White House (Boston: Houghton Mifflin Company, 1965), p. 654, Kennedy “used to tell his advisers that the two things which scared him most were nuclear war and the payments deficit.”
32. Schlesinger, A Thousand Days, p. 154.
33. New York Times, October 31, 1960, p. 1.
34. New York Times, November 2, 1960, p. 25.
35. Volcker and Gyohten, Changing Fortunes, p. 4.
36. New York Times, July 2, 1944, p. 14.
37. Ibid.
38. New York Times, July 2, 1944, p. 14.
39. A detailed list of the participants appears in the Christian Science Monitor, July 1, 1944, p. 1.
40. Washington Post, July 28, 1944, p. 1.
41. White had earned a Ph.D. from Harvard
and had been brought to the Treasury by University of Chicago economist Jacob Viner, a leading authority on international trade and finance, who had been on special assignment at the Treasury. See James Boughton, “Harry Dexter White and the International Monetary Fund,” Finance and Development 35, no. 3 (September 1998).
42. New York Times, July 6, 1944, p. 1 continued.
43. See Charles Kindleberger, “Competitive Currency Depreciation Between Denmark and New Zealand,” Harvard Business Review 12, no. 4 (July 1934), pp. 416–26; and Sebastian Mallaby, Wall Street Journal, Saturday/Sunday, October 25–26, 2008, p. W3.
44. New York Times, November 29, 1964, p. F1.
45. New York Times, March 22, 1954, p. 35.
46. The twice-daily gold fixing did not begin until April 1968.
47. New York Times, October 21, 1960, p. 1.
48. Treasury charged eight and three-quarter cents for handling (see Wall Street Journal, September 23, 1960).
49. Volcker and Gyohten, Changing Fortunes, p. 21. The date is listed there as October 30, 1960. It should be October 20.
50. Ibid.
51. New York Times, October 20, 1960, p. 51.
52. New York Times, October 22, 1960, p. 22.
53. New York Times, October 30, 1960, p. E10.
54. New York Times, October 25, 1960, p. 1.
55. Volcker and Gyohten, Changing Fortunes, p. 25.
56. Schlesinger, A Thousand Days, p. 654.
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