34. The Bundesbank could sterilize those purchases, preventing them from increasing the money supply. But there are limits to the magnitude of sterilization given by the Bundesbank’s holding of other assets (German bonds) and its willingness to hold a potentially depreciating asset such as the French franc.
35. New York Times, November 25, 1968, p. 1.
36. New York Times, April 27, 1969, p. 1.
37. Telephone logs of Paul Volcker, April 24, 1969, Federal Reserve Bank of New York Archives, Box 0108480.
38. Ibid.
39. Telephone logs of Paul Volcker, March 7, 1969, Federal Reserve Bank of New York Archives, Box 0108480.
40. Memorandum to the president dated June 23, 1969, Federal Reserve Bank of New York Archives, Box 108473.
41. PIPAV.
42. Ibid.
43. Memorandum to the president, June 23, 1969, p. 4.
44. Ibid.
45. Ibid., p. 9.
46. Ibid., p. 10.
47. See, for example, Maurice Obstfeld, Jay C. Shambaugh, and Alan M. Taylor, “The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility,” Review of Economics and Statistics 87, no. 3 (August 2005): 423–38. The Trilemma can be traced back (without the nomenclature) to Robert A. Mundell, “Capital Mobility and Stabilization Policy Under Fixed and Floating Exchange Rates,” The Canadian Journal of Economics and Political Science 29, no. 4 (November 1963): 475–85, and J. M. Fleming, “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates,” IMF Staff Papers 9, no. 3 (November 1962): 369–80.
48. See Genesis 41: Joseph stored grain from the seven good years to prepare for the seven lean years.
49. The risk of this transaction, called uncovered interest arbitrage, is that the value of the currency in which the speculator borrows—in this case, the U.S. dollar—increases before the speculator repays the loan. That is why the commitment to fixed exchange rates is so important.
50. Volcker and Gyohten, Changing Fortunes, p. 34.
51. Ibid., p. 33.
52. Memorandum to the president, June 23, 1969, pp. 13, 18.
53. Ibid., Attachment A, Summary of Basic Options, p. 1.
54. Ibid. Special drawing rights are bookkeeping entries (not paper) created under the auspices of the International Monetary Fund to help settle international obligations. Unlike gold, which is generally acceptable in payment of all obligations, SDRs are usable only by central banks and have (so far) never gained the general acceptance they were designed for.
55. See New York Times, August 9, 1969, for reports on the devaluation.
56. Memorandum to the president, June 23, 1969, Attachment A, Summary of Basic Options, p. 1.
57. Fixed exchange rates under Bretton Woods were not quite fixed. Central bankers could allow the exchange rate to fluctuate 1 percent on either side of “parity.” For example, the Bank of England could permit the dollar price of sterling, with a “par value” of $2.40 in 1969, to increase to $2.424 or to decline to $2.376 before intervening in the marketplace.
58. Memorandum to the president, June 23, 1969, p. 29.
59. On February 7, 1969, Volcker received a memo from Robert Solomon, an economist at the Federal Reserve Board, and an expert in international trade, with a covering note entitled, “Contingency Planning—U.S. Suspension of Gold Convertibility,” and a document outlining the consequences of suspension written almost a year earlier, on April 8, 1968, Federal Reserve Bank of New York Archives, Box 108473.
60. Memorandum to the president, June 23, 1969, p. 32.
61. Ibid., p. 31.
62. Memorandum from Burns to Nixon, February 22, 1969, in Foreign Economic Policy, 1969–1972; International Monetary Policy, 1969–1972, vol. 3, p. 304fn.
63. The closing conversation in the meeting is based on Paul Volcker’s recollection.
4. Gamble
1. The morning and afternoon London gold fixings were at $35 per ounce, but the New York Times (December 10, 1969, p. 1) reported an intraday quote by Zurich bullion dealers of $34.80 bid, offered at $35.00.
2. This conversation is based on Paul Volcker’s recollection.
3. See Allan H. Meltzer, A History of the Federal Reserve, vol. 2, book I (Chicago: University of Chicago Press, 2009), p. 453n316.
4. See the discussion of the “Accord” in chapter 2.
5. 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. 252.
6. Members of the Federal Reserve Board who serve a full fourteen-year term cannot be reappointed. Martin was first appointed by Harry Truman in March 1951, to fill a partially unexpired term, and then was reappointed by Dwight Eisenhower in January 1956, to a full fourteen-year term. Richard Nixon announced the appointment of Arthur Burns to succeed Martin as chairman of the Federal Reserve Board in October 1969. See New York Times, October 18, 1969, p. 1.
7. Daily data between March 18, 1969, and March 31, 1969, show that the three-month bill fell below 6 percent. It averaged 8 percent from December 26 through the end of the year.
8. New York Times, November 4, 1969, p. 63.
9. The peak in the London gold fixing was $43.83 on March 10, 1969, but Zurich traded at $44.00 (New York Times, December 10, 1969, p. 1 continued).
10. New York Times, December 9, 1969, p. 93.
11. Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 64.
12. New York Times, November 15, 1969, p. 53.
13. The following conversation is from William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Doubleday and Co., 1975), pp. 491–92.
14. See Volcker Group memorandum dated November 4, 1970, entitled, “Options Regarding the Capital Restraint Program for 1971,” International Monetary Papers, Selected Volcker Group Documents, Book No. 1, 1970, Personal Papers of Paul Volcker. Note that the overall balance of payments must always balance, but within the list of imports and exports some items are more worrisome than others, and these are highlighted by different ways to measure the deficit. For contemporary views of alternative measures, see Economic Report of the President, 1970, Council of Economic Advisers, Washington, DC, pp. 126–27, and Lawrence Ritter and William Silber, Principles of Money, Banking, and Financial Markets (New York: Basic Books, 1974), pp. 468–72. Also see International Monetary Fund Annual Report, Washington, DC, 1971, p. 198, Table 74 (United States Balance of Payments Summary, 1969–First Quarter 1971).
15. The price of gold exceeded thirty-nine dollars on October 26 and 27, and then traded between thirty-seven dollars and thirty-eight dollars during November.
16. See page 2, Volcker Group memorandum dated November 4, 1970, entitled “Options Regarding the Capital Restraint Program for 1971,” International Monetary Papers, Selected Volcker Group Documents, Book No. 1, 1970, Personal Papers of Paul Volcker.
17. “Legal Aspects of Suspension of Gold Sales and Application of Option I or Option II,” November 21, 1970, Michael Bradfield to Paul Volcker, Personal Papers of Paul Volcker.
18. See the entry for November 18, 1970, in H. R. Haldeman, The Haldeman Diaries (New York: G. P. Putnam’s Sons, 1994), p. 211.
19. See the entry for November 19, 1970, in ibid., p. 212.
20. Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58, no. 1 (March 1968): 1–17.
21. See “The Economy,” Time, December 31, 1965.
22. See “Letters,” Time, February 4, 1966.
23. “President Nixon described himself as ‘now a Keynesian in economics’ according to Howard K. Smith of the American Broadcasting Company, one of the four television commentators who interviewed the President on a television show …” New York Times, January 7, 1971, p. 19.
24. See New York Times, July 22, 1970, p. 2.
25. New York Ti
mes, September 30, 1970, p. 59.
26. A search of the New York Times, the Wall Street Journal, and the Washington Post shows that the first article using the word stagflation to describe the American problem is “Money Imperils Romance: Europeans Fear American ‘Stagflation’ Will Drag Their Own Economies Down,” New York Times, September 30, 1970, p. 59. An article in the Washington Post entitled “The Battle: Stagflation” appeared on February 25, 1971, p. A21. The term did not appear in the Wall Street Journal until April 23, 1973, p. 12.
27. New York Times, December 9, 1970, p. 93.
28. Ibid.
29. “The Accord of 1970” is the headline of the New York Times article by Leonard Silk, December 9, 1970, p. 93. Nixon’s quote in full is: “People have got to know whether or not their President is a crook. Well, I’m not a crook. I’ve earned everything I’ve got.” Washington Post, November 18, 1973, p. A1.
30. See Safire, Before the Fall, p. 491, quoting Burns in 1970. Also see Burton Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” Journal of Economic Perspectives 20, no. 4 (Fall 2006): 177–88.
31. John Connally, In History’s Shadow: An American Odyssey (New York: Hyperion, 1993), p. 235.
32. Reported without attribution in the Washington Post, December 15, 1970, p. B1.
33. Washington Post, December 15, 1970, p. A1.
34. Ibid.
35. This comment to Barbara and the subsequent conversation is based on Volcker’s recollection.
36. Herbert Stein, Presidential Economics (New York: Simon & Schuster, 1984), p. 162.
37. Safire, Before the Fall, p. 497.
38. The CEA was not, of course, really evil. Paul McCracken, Herbert Stein, and Hendrick Houthakker were first-rate economists and enjoyable to work with. I should know, because I was a senior staff economist (on leave from New York University) with the CEA during 1970–1971.
39. The letter is dated April 27, 1970, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 108473. It was written two days after a newspaper report (New York Times, April 25, 1970, p. 46) that implied Volcker would support wider bands in the existing system.
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.
5. Transformation
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.
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