Cardiff Garcia: : Podcast: our long chat with Paul Volcker (plus transcript and highlights):
Paul Volcker: I would never interpret it as you have to have [inflation] exactly zero. Prices tend to go up or down a little bit depending upon whether the economy’s booming or not booming. And I can’t understand making a fetish of a particular number, frankly. What you do want to create is a situation where people don’t worry about prices going up and they don’t make judgments based upon fears of inflation instead of straightforward analysis of what the real economy is doing. And I must confess, I think it’s something of a moral issue.... You shouldn’t be kind of fooling people all the time by having inflation they didn’t expect. Now, they answer, well, if they expect it, it’s okay. But if they expect it, it’s not doing you any good anyway. Those arguments you set forward don’t hold water if you’re expecting it...
Paul Volcker: I went off to London to write the thesis. But I got lazy and found other things to do than writing a thesis in 1952, or whenever it was. So I didn’t get around to writing it. I went back and got a job. I wasn’t intending to become a professor anyway. In those days, the idea of getting a PhD actually was not as common and was not considered de rigueur the way it is today...
Paul Volcker: You couldn’t go back to all the rigidities of the literal Bretton Woods system. But could you have a system that provided for more stability in exchange rates? Yes, I thought so then, I think so now, but it’s been so long since we’ve done it. It’s hard. Not many people are inclined, or countries are inclined, to enter into that negotiation.... Someday, but not right now.
Paul Volcker: Well, if you’re the chairman you always like to have a consensus; if you’re opposed you think it’s a healthy thing to oppose! There’s a little too much opposition these days. Now they have a system: they oppose in public before the meeting but they don’t oppose at the meeting...
Alphachatterbox: The life and times of Paul Volcker. First of all, thanks for talking to us. Appreciate it. You're welcome. We'll see how it goes.
Here's where I want to start. When you were studying economics, those were pretty exciting times for the profession. Hayek and Keynes were still debating, Bretton Woods had been established in the mid 1940s, central bank independence was still kind of a contentious topic. Who were some of the early influences on the way you think about monetary economics? Who were some of the thinkers that influenced your points of view?
Paul Volcker: I'm supposed to have some thinkers that influenced me. I don't remember any standing out in particular.
For some reason, I took the advanced economic theory course when I was either a freshman or a sophomore at Princeton from a guy named Oskar Morgenstern, who was part of the Jewish intellectuals that moved to the United States before the war. And he was Austrian, so you got a full exposure to the Austrian school of economics. To the best of my memory, and maybe my memory is wrong, I could sit through all those economics classes in Princeton, I don't think the word Keynes was ever mentioned.
Cardiff Garcia: The word...? [overtalking]
Paul Volcker: Keynes. John Maynard Keynes. Because the money and banking professor, a guy by the name of [Friedrich] Lutz, another Austrian émigré... they were not Keynesian. And in those days, most professors I guess were not yet Keynesian, or at least it was controversial.
Now, when I went off to Harvard, the first course you got wasn’t literally the first course, one of the first courses you got was from Alvin Hanson, who was the principal Keynesian acolyte at Harvard. And all you heard about was Keynes and the General Theory beginning to end. So I had both sides of it.
Cardiff Garcia: What did you think about Hayek at the time?
Paul Volcker: Well, Hayek, I picked up, the name of the book is... I don't remember. The Road to Serfdom?
Paul Volcker: Road to Serfdom. I found it at home one day, I began [re ]reading it. I read it in college. So that was a good Austrian. I got assigned Road to Serfdom [in college]. That did have an influence. It was a really very challenging analysis of why free markets work and why they were necessary, politically and so forth. But I began [re ]reading and it seemed kind of dull, so I didn’t re read the whole thing. But it did excite me in college.
Cardiff Garcia: What about your early views on inflation and on monetary stability?
Paul Volcker: Well, I finally ended up writing my senior thesis about the Federal Reserve, and for some reason I expressed a good deal of irritation that they weren't spending more time worrying about inflation. Now why I thought that, I don't know, maybe because my father was on salary all those years, so he didn’t get an increase. But I was quite critical of the Federal Reserve for not paying enough attention to inflation. That goes back to when I was an undergraduate, of all things.
But I don't remember a particular professor making a particular point about this. But certainly those Austrians that I had in college, I'm sure they were in favour of stability.
Remember, the great debate that my thesis advisor... I was very shy, I never saw these professors. You had to see the professor when you were writing a thesis, and he explained to me the great debate in those days was, it was better to have steady wages and a gradually declining price level as productivity increased, or you have steady prices with a rising wage level as productivity increased. That's the opposite of the debate you have now. A debate of do you have stability, or is it better to have prices declining and stability of wages . It was a different environment, obviously.
Cardiff Garcia: I read in one of the biographies of you that one of your Harvard professors had said that a little bit of inflation was good for the economy, and you thought that that was... BS.
Paul Volcker: After all that Austrian exposure at Princeton, I went up there and the first economics course I think I had as a graduate student at Harvard was [with] Arthur Smithies, the name comes back to me. He wasn’t one of the most famous professors but he'd been in government, I guess he was well known at the time. And session after session he would drill into our head that a little inflation was a good thing. And I could never figure out why. But I know he kept saying it, so already at the time I for some reason had an allergy to what he was saying. But it's interesting, his lectures, it's the same thing that central banks are saying today. Except I don't think he would've limited it to two percent, but it's a similar argument.
Cardiff Garcia: So let me just lay out the beginning of this question for our listeners, you'll already know this. The conventional defence of having a little bit of inflation is that if you have zero percent inflation, then you're closer to having a deflationary spiral.
Another one is that if you have a little bit of positive inflation, then interest rates will be correspondingly a bit higher, so if there's a downturn, you have room to lower them.
And then finally, and I think this is associated with Janet Yellen quite a bit, is that if you have a little bit of inflation, then it's easier for companies to give real wage cuts to their employees without laying them off, if they just freeze their wages and then they go down because of inflation. You disagree with all that.
Paul Volcker: Well, that was the classic argument I guess that Keynes would make, but there's a further argument I learned the other day when I was chastising a Federal Reserve official. “Why are you so hot on getting this two percent inflation?” [I asked]
His immediate answer so it wasn’t Janet Yellen, becaue it was h is he said “Well, we think the statistics overstate the real rate of price increase. And if we've got a two percent statistical indication of inflation, that really is stability, if it was correctly measured.”
If that's true, and there may be some truth to that, if that's true then it disrupts all the talk about lack of productivity growth, and lack of real wages. Because if we've been deflating the nominal figures by too high an increase in price level, productivity is really better than what we thought, and wages are really doing better than what we thought. And there may be some truth to that.
Cardiff Garcia: But you're still of the same opinion that you had back then about inflation?
Paul Volcker: I would never interpret it as you have to have exactly zero. Prices tend to go up or down a little bit depending upon whether the economy's booming or not booming. And I can't understand making a fetish of a particular number, frankly.
What you do want to create is a situation where people don’t worry about prices going up and they don’t make judgments based upon fears of inflation instead of straightforward analysis of what the real economy is doing.
And I must confess, I think it's something of a moral issue, too. The government is responsible for money and responsible in a broader sense for the economy. And you shouldn't be kind of fooling people all the time by having inflation they didn’t expect.
Now, they answer, well, if they expect it, it's okay. But if they expect it, it's not doing you any good anyway. Those arguments you set forward don’t hold water if you're expecting it.
Cardiff Garcia: You graduated with your master's from Harvard. You spent some time in Europe thinking about pursuing a PhD, didn’t do that.
Paul Volcker: Well, that's not quite right.
Cardiff Garcia: Okay, what was the timeline?
Paul Volcker: I was at Harvard and they give you an MA when you pass your general examination for the PhD, and I went off to London to write the thesis. But I got lazy and found other things to do than writing a thesis in 1952, or whenever it was.
So I didn’t get around to writing it. I went back and got a job. I wasn’t intending to become a professor anyway. In those days, the idea of getting a PhD actually was not as common and was not considered de rigueur the way it is today.
Cardiff Garcia:
into a girlfriend.
I had a good thesis topic, I must say, but it's irrelevant now.
Cardiff Garcia: Oh, what was it? I'm curious.
Paul Volcker: In those days, it would've been on monetary policy, but the difference in monetary policy in central banking between the US, which had a very diversified banking system, 14,000 banks, and what's going on in the UK, which in those days only had 4 or 5 banks that made a difference. They had four big banks and two big banks by our size. But they didn’t have a lot of little banks. And would that make a difference in operating monetary policy and how you did it and the effectiveness. Anyway, I never did it.
Cardiff Garcia: Did you already have a conclusion about whether or not it altered the way monetary policy was transmitted?
Paul Volcker: No, I had an open mind, I didn’t have a conclusion. I shouldn't tell these stories.
I was at the London School of Economics and I had a fellowship. I went and by British standards in 1951 '52, the war was over but some of the destruction was still around.
The British economy wasn’t very happy anyway, and London School of Economics really didn’t cost anything. And I was given this fellowship that provided for living expenses and academic expenses. The academic expenses were almost zero. So I had enough money, more money than all my student colleagues.
It's neither here nor there, I don't know why I got off on that subject. But when I went around and finally saw the professor who was my tutor, who was a well known monetary historian and analyst, Richard Sayers...
Cardiff Garcia: What was his name?
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You returned to New York.
Well, I had a good time, I learned a lot in London, I got around Europe, I ran
You got distracted by a girlfriend in Europe?
I got distracted and it probably helped me. So I don't think I really wasted my time, but sometimes I think maybe I should've gone back and done something.
Cardiff Garcia: Paul Volcker
Paul Volcker: Richard Sayers. S A Y E R S He wrote a great history of the Bank of England, among other things. But I knocked on his door and entered in, and he put his sandwich under his his desk. He was a very modest man. I introduced myself. He said, “Oh, you're an American student? Are you here to work or to play?”
Cardiff Garcia: He asked that just because you were an American?
Paul Volcker: Yes, that was the first sentence that came out of his mouth. He'd had some
experience, I'm sure, with American students that came and played.
Cardiff Garcia: That's a great story. You returned to New York and you took a job at the New York Fed observing the bond trading desk, I believe?
Paul Volcker: Well, I came back and took a job as an economist at the Federal Reserve Bank of New York. Which I did at, I can say, a junior status probably, intermediate status. You would never do that these days if you didn’t have a PhD. But I was an economist for two or three years.
And then, it was my mentor who did it, he transferred me to the so called trading desk. This was the holy of holies in the Federal Reserve Bank of New York. That's where we actually operated in the market. We bought and sold securities and executed the open market operation, the open market committee’s directors.
And mere economists were not considered suitable for that delicate operation and understanding how markets worked and all the rest, and I was the first economist to have that exposure.
Cardiff Garcia: Why weren't economists considered suitable for that job?
Paul Volcker: Well, they were academic people who didn’t understand, by instinct, markets. And didn’t understand the importance of the inflection of your voice when you talk to the traders, and whether you were giving away anything you shouldn't be giving away, or you fully understood the inflections in their voice and so forth.
The guy that got me there was Bob Roosa, who was vice president of the bank. He was the most senior, very respected economist then. And he had been moved. That was the real breakthrough. He was moved to be one of two or three people, senior officials in charge of the trading desk, and he was there for a little while and he got me to go down there. He thought it was important as an economist to have some exposure to the market.
Cardiff Garcia: Did you have ambitions even back then when you were very young to have a career that was mostly in public service (or in the public sector or the quasi official sector), or did you just essentially take the job you could get and you weren't really picky about it yet?
Paul Volcker: Well, it was more than taking the job I could get. But my father was, most of his life, in public service. And I grew up in an environment where he was the city manager of the town I grew up in.
And that's all I knew as a kid. My father was the city manager of the town and that was an important thing and he was very well respected in the town. And you kind of looked up to him this was a reasonable career or whatever. It wasn’t, obviously, hugely well paid or whatever. He used to keep
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telling me, “Now you go into business, don’t do all this public interest stuff.” But it was monkey see, monkey do.
So I wasn’t very conscious about it, but it was a natural thing to do. And when I first graduated from college, I graduated because the terms were mixed up after the war. I was one semester ahead of most of my classmates.
I graduated in February instead of June, and I was going to graduate school, which I knew in the fall, so I had eight or nine months. I had more than the summer off, and I went round knocking on doors in Washington, which you never do now.
I'd knock on the door and said I'd like a job for nine months for the Treasury, the Federal Reserve, couple other places I went. You couldn't imagine doing that now. But in those days, they listened to me. And I got offered one job, which I didn’t take, and [then] I went to the Federal Reserve.
This is when I got out of college. And I went to the Federal Reserve [in Washington DC], knocked on the door and the personnel people said, ‘All right, well you sit here, let's think about it’, and two of the most senior economists showed up and interviewed me.
And they finally said, “Well, I'm sorry, you’ve got good qualifications and so forth, but we don’t hire people temporarily that don’t have a graduate degree, so goodbye, come back some other time.”
So I always like to say I got turned down at the Federal Reserve for my first job. So then sort of by accident I got this job at the Federal Reserve back in New York [after graduate school], but it was the flip of a coin. I might've gone to a private bank at the time.
Cardiff Garcia: So you worked at the New York Fed for a few years, following Robert Roosa. In the mid 1950s, you went to work for five years as a financial economist at Chase Manhattan. What did you learn?
Paul Volcker: Well, I learned about how banks work, so that was not a bad experience.
It was in '57 I think when I went over. They offered me a job out of the clear blue sky or dark cloud
or whatever. And it was a 50 percent increase in salary, or whatever it was.
And I was getting kind of worn. The Federal Reserve could be a bit dull in those days. And it was a very bureaucratic institution, as the story about the trading desk... you know, you never saw the president or talked to him. You wrote a memorandum some time, you had a question. You would write a reply that went to your superior, that went to his superior, finally got on the president's desk and the president may have written a note on it, going back through layers before you got it.
Cardiff Garcia: Did you find that Chase was less bureaucratic?
Paul Volcker: Was much less bureaucratic.
You may have thought Chase was a big bank for the time you would've thought it was bureaucratic. I hadn't been there three weeks before the president called me up and said, “Look, I want you to look into something”. Then he began discussing with me whether I thought the dollar was overvalued or something. Nobody in the Federal Reserve asked me this kind of stuff. So it was, from my view, much less bureaucratic.
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Cardiff Garcia: Was that the primary lesson about working for the government versus working for the private sector?
Paul Volcker: Private sector can be bureaucratic too, but I think it was more peculiarly the Federal Reserve Bank of New York was pretty rigid, much more than it would've been in Washington, I'm thinking.
But [Chase] was less bureaucratic. I then could work with t heir trading desk, which was an active trading desk. I wasn’t on the desk, but I sort of worked with those people. And so I had that exposure to an actual trading operation in the real world, and I did projections of how much money we had to lend, and I did relevant stuff for the bank.
Cardiff Garcia: Did you also gain an appreciation for both sides of it, so that later when you went back to Treasury and the Fed, you sort of understood what the banks were doing?
Paul Volcker: Absolutely. It was an important part of my background.
Cardiff Garcia: 1962, you go to the Treasury Department, you’re named Director of Financial Analysis, and then a year later or so Treasury Deputy Undersecretary for Monetary Affairs. What brought you back to the government, what took you to Treasury?
Paul Volcker: What brought me back to the Treasury was what brought me to the trading desk in the Federal Reserve Bank of New York. Bob Roosa had become Undersecretary of the Treasury for Monetary Affairs, and he'd been there a year.
It's hard to replicate the atmosphere at that time. But Kennedy had been elected president. It was a new world, we were going to do everything good and solve all the economic problems, have peace and prosperity in the world.
I r e m e m b e r t h i n k i n g G o d , t h e y ' r e g o i n g t o s o l v e a l l t h e p r o b l e m s b e f o r e I e v e r g o d o w n t h e r e . T h a t didn’t work out that way, but Bob decided to set up a new group, office of financial analysis, as it was called, to bring in some economic scholars to refresh the place. And so my job was to hire some of these people, get them in, get them integrated into what the Treasury was doing.
Turned out to be not a very good idea from my standpoint, for two reasons. A think tank within the government doesn't work very well. They're either actively involved in policymaking and policy officials, or they're not paying any attention to it.
So we did a little of that and we did the forecasting for the Treasury. But for some reason I got exposed to the other undersecretary, which was Joe Fowler, and to the Secretary of the Treasury, who was then Douglas Dillon, who became kind of a hero of mine. And I, without any great planning, sort of became the personal economist for Douglas Dillon, the Secretary. I saw a lot of him.
And then when a guy named Dewey Daane, an old Federal Reserve man who had been Deputy Undersecretary, went to the Federal Reserve Board, I got his job, which at that point then exposed me to the international negotiations.
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So I had a pretty broad experience in the Treasury and I was in the policy side, the economic side, the financial side of the Treasury, debt management and all that stuff. And of course the experience at Chase helped in that respect.
Cardiff Garcia: Here I want to start talking a bit about Bretton Woods.
You started to have some doubts while you were at Treasury about the gold convertibility part of it. Can you just talk about how you arrived at that hesitation?
Paul Volcker
Cardiff Garcia:
Paul Volcker
Let's not get to doubts first, let me get to the conviction first.
What's the conviction?
Well, the conviction of the Treasury, and Bob Roosa was the leader in all this,
was that the dollar convertible into gold as the fulcrum for the exchange rate system internationally was not to be tampered with, was not to be questioned. It was fundamental to the Bretton Woods System, which everybody was very proud of having established at the end of World War Two
And it was the sacred duty of the Treasury in the United States to defend that system. I began having some doubts whether that was going to be possible. But those, I'll tell you, were very much hidden. You expressed those doubts in the Treasury at that point, which I'm not saying I did. You would've been put in a...
Cardiff Garcia: In a silo somewhere.
Paul Volcker: In a silo someplace, put on a stool in the corner and the dunce cap on.
But it was a constructive effort to cooperate internationally, to defend this basic apparatus of the international monetary system. And over time, beginning then, all kinds of initiatives were taken, largely led by Roosa. The swap agreements were established and largely by the Federal Reserve, but it was Roosa who got the Federal Reserve to establish the swap agreements.
We borrowed some money occasionally in foreign currencies, which had never been done before. We strengthened the IMF and special agreements to borrow and on and on, and then began putting controls on some international transactions. We had something called the interest equalization tax, which is designed to discourage foreigners from borrowing in the United States, taking the dollars out of the United States, weakening the dollar.
So it was a whole panoply of things began developing, developed to sustain the stability of the dollar. I was in a subordinate role, but I was sort of in the middle of it, too.
Cardiff Garcia: Helping to implement some of these controls and some of the other ideas that Bob Roosa had.
Paul Volcker: Eventually when I became undersecretary, yes, I had to do all that. But it was an interesting experience. As I say, Douglas Dillon was there. He left eventually when Johnson became President and Henry Fowler, called Joe Fowler, became Secretary, who I'd known because he had been Undersecretary, and he became very friendly to me.
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I don’t quite know why, because I worked much more closely with Roosa, but when Fowler came in, he wanted to reform the system, not reform those basic elements I talked about but develop something to replace gold or to supplement gold, which had been a matter of discussion. But Roosa never wanted to talk about it, because it raised some question of the dollar.
Cardiff Garcia: That had to be kept quiet.
Paul Volcker: He wanted to keep it quiet, but Fowler came in looking for something to do. He decided this is his story. He would go after reform of the system in that respect. And I told him that was a crazy idea.
Anyway, the interesting part of that experience was a big fight between the Federal Reserve and the Treasury, to some degree. But William McChesney Martin, the then chairman of the Federal Reserve, and Lyndon Johnson had a battle. And the Federal Reserve finally won, and asserted their independence, and Mr Johnson was not very happy.
And I was in a most peculiar position because I thought the Federal Reserve position was correct and the administration position was incorrect and I was asked to write stuff to defend the administration. It was a little awkward. But I left about that time, right after that happened.
Cardiff Garcia:
inconsistent?
Paul Volcker
Cardiff Garcia:
Paul Volcker
Cardiff Garcia:
Paul Volcker
frankly.
Paul Volcker: And by the time I came back, it was clearly shakeable.
But still, I felt responsible for defending it to the last stab, so to speak. I didn’t want to become the
engine for upsetting the system.
By that time, the SDR had been created, largely because of Fowler's initiative. But it had never been used and (I actually forget about this) when I was sitting there as Undersecretary for Monetary Affairs, these positions have all been changed, I know, there were just two when I was there and there was no Deputy Secretary.
I had half the Treasury and I had all the interesting part, I had all the domestic finance and the national finance, debt management, credit programmes, what else is there?
Did you leave for other reasons or did you leave because you thought it was
I think after four of five years, I think it was time to go. I had kids. And you returned to Chase in '65.
I returned to Chase.
As the Director of Planning for four years.
Right, that's right. That wasn’t nearly as interesting as being in the Treasury,
It's interesting what you say, though, that you had some private doubts, but that it was hard to express them at the time because Bretton Woods was considered an unshakeable part of global stability.
Cardiff Garcia:
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Cardiff Garcia:
Paul Volcker
Cardiff Garcia:
This is 1969 when you went back to the Treasury.
1969 when I went back.
Undersecretary of Monetary Affairs, first I think started working for Treasury
Secretary David Kennedy, was it?
Paul Volcker: Yes.
Cardiff Garcia: At the beginning. Here's my first question about that period in your life. You were a lifelong Democrat.
Paul Volcker
Cardiff Garcia:
Paul Volcker
Well, now that isn't true.
You were a Democrat.
I was a Democrat, but kind of when I was young and naïve I guess my
family or at least my father was Republican I considered myself a Republican. By that time [1969], I had become, yes, a Democrat, no question about it.
Cardiff Garcia: A Democrat. You weren't Richard Nixon's biggest fan. But when he asked you to come work in his administration, you took the job. What convinced you to take the job?
Paul Volcker: What convinced me to take the job? How could I turn down the most interesting job in Washington? I still think it's the best job I ever had.
Why, you say, Nixon?
Nixon, I don't think, had anything to do with it. [David] Kennedy, apparently, who turned out not be a strong Secretary, but he apparently put his foot down and insisted upon it, and I barely knew him.
Now, the other undersecretary I did know, and he was a Republican, and he was close to Kennedy; he must've vouched for me and pushed me. But still to this day I don’t quite know. Some reason Kennedy just saw there. I was told, I don't know if it was true, I was the only acknowledged Democrat who was in the administration.
And I've seen stuff since then that Nixon was always suspicious of me. He never forgot that. Not that I was that close to Nixon. I was not. But he, I'm sure, didn’t quite trust me.
Cardiff Garcia: You felt like an outsider in the administration a bit?
Paul Volcker: Well, not so much, because I was very active. I had plenty to do and I got along with the Secretary. And then John Connally became the Secretary and I got along with him. So I never felt like an outsider, I was in the middle of it. But I was not part of the White House operation at all.
Cardiff Garcia: But you were put in charge of an interagency task force, and it was even known as the Volcker Group.
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Paul Volcker: Yes, absolutely. There had been such a group, I don't know if the previous group had been immortalised in a presidential directive, but this always struck me as odd.
And compared to now, I was named or nominated to become Undersecretary, I guess, informally. I couldn't be formally nominated until the president got inaugurated. But it was clear I was going to be nominated for Undersecretary of Monetary Affairs.
My office overlooked Pennsylvania Avenue. And on inaugural day, the parade churning down Pennsylvania Avenue, I'm sitting in my new office. I was not entitled, I was a private citizen, but in those days, yeah, you're going to become Undersecretary, here's your office.
And I got this memorandum from the National Security Council plunked on my desk.
Cardiff Garcia: From Kissinger.
Paul Volcker: From Kissinger outlining president arrangements for international monetary negotiations, or something. Said you're going to establish this group and I would be the chairman, and a Kissinger guy and a State Department guy and somebody else, a Council of Economics guy would be in this group. But I would become the chairman and I was report to Henry Kissinger.
Cardiff Garcia: How did that go over?
Paul Volcker: I went running down to David Kennedy. I said, hey, you better do something, set this up, this is fine for me but it ain't so good for you. You better do something with the White House. I don't think he ever did anything.
Cardiff Garcia: Was this a classic Kissinger power play, like trying to get you to report to him instead of to your actual boss?
Paul Volcker: Well, I don't know how much... I think one of Kissinger's staff members, who I knew at the time and know very well since, I think he had an interest in international monetary affairs. So I suspect he cooked this up and gave it to Kissinger, and said this is the way we ought to organise this. Kissinger would've given it heavy attention.
But I don't know the answer to the question. But anyway, de facto I never reported to Kissinger, I reported to Secretary of the Treasury.
Cardiff Garcia:
Paul Volcker
Cardiff Garcia:
Sure, your boss.
He was my boss, yes.
So you're the head of this task force. And then in June 1969, you presented
some of the conclusions to Nixon and some of the other economic brain trust. And you said that the potential threat to the US dollar's role was, and I'm quoting here, “a common recognition at large scale conversion [of US dollars into gold] would be frustrated by a lack of adequate gold reserves”, and that driving the wish to convert were domestic inflationary pressures.
And this was where you first suggested that one day, the possibility of suspending the convertibility of US dollars into gold might be necessary. Nixon later on did accept parts of that plan, but before we get to that, I'm curious to know how Nixon reacted in the moment when you presented the ideas.
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Paul Volcker: Well, you may be quoting correctly, but it was put in a context of t his may be a possibility but we're going to fight that for the moment. We've got to give sustaining the system a fair chance, and we'll go out and we'll create a lot of SDRs and do other things to defend the system. But it may not work. But this is the course that we recommended.
And I think, frankly, Nixon got tired of listening after a while and he said “Okay, enough”, and off we went and I took that as agreed it's the policy.
Cardiff Garcia: This was interesting, too, because although you still believed in the stability brought by Bretton Woods, at the time you were also recommending a limited amount of exchange rate flexibility and a revaluation of the dollar against some other foreign currencies.
Paul Volcker: Yeah, we were recommended some widening of the band to get a little flexibility. I don't remember all the details. You’ve read something that you have read more recently than I. I don't remember.
I remember we sent this big report in, and one of the possibilities was doing what some people, particularly Republicans, recommended: why don’t we double the price of gold and go on and we can do that, and that memorandum you're talking about strongly rejected that course. It would've sent Bob Roosa to his grave earlier.
Cardiff Garcia: Here's more of I guess a philosophical question. In economics, there's this idea of the monetary trilemma, which says that (for our listeners) you can have two of the following three things, but not all three, and those things are: fixed exchange rates, free capital flows or an independent monetary policy. Your preference seems to have been for fixed exchange rates as were called for by Bretton Woods, no capital controls because you'd had some experience with that and you weren't convinced they were going to work.
Paul Volcker: Yeah, exactly.
Cardiff Garcia: And you wanted monetary policy to be consistent across countries to make
sure that no one country would drive up inflation at the expense of global monetary stability. How did you arrive at that preference, or is that not right?
Paul Volcker: Well, I guess that's a fair summary. But I didn’t want to go to a floating system. I was worried about the instability that would create and the whole question was how you could get the adjustments going, particularly at that point with Germany, but increasingly with Japan, because they were running the big surpluses.
And they couldn't run the big surpluses and we run a deficit all the time, and sustain the position we were in. So we were going to fight it out, I guess, as long as seemed reasonable.
And what worried me more than that trilemma, which I don’t deny the trilemma worried me over time, but more to the point was the so called Triffin dilemma, which still exists.
The Triffin dilemma said you can't keep providing international reserves by more and more dollars outstanding and maintain the price of gold, because at this proportion, sooner or later, we become so
12
great that it no longer became sustainable. That was the dilemma that we were in and that was the dilemma that the SDR was supposed to help cure.
We can create a lot of SDRs so in effect we can supplement the gold supply with artificial gold. Anyway, what happened then, nearly as I can remember, well, there was a sense of crisis when I took o f f i c e . N o t b e c a u s e I t o o k o f f i c e . [ L a u g h t e r ]
There had been a crisis in the gold market before and a lot of unsuccessful international negotiations at the end of the previous administration, but I guess it was in what are we talking about, that'd be 1970, I guess but for other reasons, the Federal Reserve tightened policy, and that took the pressure off the dollar for a while.
So we had a kind of free ride for a year or more, where you didn’t have to face the inevitable, if it was inevitable, you had a little more time to work it out. Gave us a year but it couldn't be worked out. It was impossible, actually.
Cardiff Garcia: You were then, and I am assuming you are now, someone who's always believed that the Fed should take into account international considerations. Do you see any parallels between the lessons back then and some of the more common worries now, where Federal Reserve policy might drive some international capital flows? Should the Fed always take into account what's happening abroad?
Paul Volcker: You ought to be knowledgeable about it, but it's not often you can take a lot of account of it. And typically, I'm sure to this day, the Federal Reserve, as a decision making body, I guess inevitably the domestic priority is so strong and now I will exaggerate the only person that cares about the international side is the chairman. Now, that's not absolutely true, but it tends to be true. He's the ones who's exposed to that range of policy issues more closely than the others.
But in the end you can't go entirely contrary to domestic policy. No central bank can. They are instruments of your home government; they're not instruments of the world. But there are times when you can get cooperation and work together, and it happens at times.
Cardiff Garcia: Let's go ahead to 1971. Nixon announces the new plan suspending gold convertibility and he adds a temporary wage price freeze and also a temporary import surcharge. Some of those ideas coming directly from you and from John Connally. There was some turmoil in global finance.
Paul Volcker:
Cardiff Garcia:
idea.
Paul Volcker:
Cardiff Garcia:
came from you.
The good ideas came from me.
The good ideas came from you, okay. I think the import surcharge was his
The import surcharge was definitely Connally's idea.
The temporary suspension of gold convertibility and the wage price freeze
Well, yeah, I wasn’t alone, but I had concluded probably six months earlier that it was inevitable that we were going to have to change the then present system.
Paul Volcker
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It's just a question of how you did it, when you did it, and I had all kinds of plans in my mind and on paper and so forth.
Connally became Secretary of the Treasury earlier that year, and for whatever reason, he was certainly, I think, favourable, looking for an avenue for change, constructive change. People think he was looking for destructive change.
Cardiff Garcia: Destructive change instead of constructive change.
Paul Volcker: I was looking for constructive change, and I'd written some stuff for him,
which I'm sure he circulated around.
My concern was there was no way of negotiating a change in the system, and there were two big interests at stake. It would take a big change in exchange rate and it was nothing you could negotiate quietly, and then have everybody agree on a big change.
You had to have some force behind the proposal, and the only way to do it would be to say, “I'm sorry, we simply don’t have the resources to provide gold upon demand anymore.”
Fortuitously, right at the time of the decision making, we had some demands which we couldn't possibly have met, but my idea, the great plan, was we'd float for a while, negotiate a change in exchange rates that was adequate, and that was the plan that was accepted at Camp David and so forth.
But one big important thing to me was left out. Well, something put in that I didn’t like was a surcharge. Because that put an antagonistic...
Cardiff Garcia: It would maybe be interpreted as the US waging kind of an economic battle against other countries.
Paul Volcker: Right, and I thought it would make negotiations more difficult.
Connally obviously thought it would make the negotiations easier. He may have been right, I don't
know. But it was not my idea.
But my idea was, as soon as we could get a reasonable exchange rate adjustment, then we ought to negotiate a change in the system that would offer some continuing stability in the international monetary system.
Well, from the politicians' standpoint and I was naïve at the time that was something for the future. That's not what worried them at the moment.
So we didn’t get any commitment to that, and it was from my naïve standpoint Connally and Nixon between them made the suspension of gold a great political victory. Most people, when they're devaluing or changing the currency, it's a problem, “Forgive us, we'll go back, we'll do better next time”. No, with them, they made it into a triumph, which was a remarkable political lesson to me.
But there was no urgency for reform. Now later, we had the devaluation, it wasn’t adequate. We had the realignment of exchange rates. We changed the price of gold, which made reform more difficult,
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in my mind. But we did then have a negotiation to put the system back together again, and at least in the time we had available, we couldn't reach an adequate agreement.
Cardiff Garcia: So, in order, the UK floated, then later the Japanese, and then eventually most of the rest of Europe.
Paul Volcker: Well, what happened was we agreed upon these new exchange rates at the so called Smithsonian. From my standpoint, anyway, the exchange rate change was not adequate. The size of it wasn’t adequate to deal with our balance of payments problem.
So it was inevitable we'd come under pressure again, and we did not. And then the politicians were dead set against this, but I couldn't argue against it.
We couldn't resume convertibility because it was obvious it couldn't last. But we tried it out and see what happened without the convertibility. We had the fixed exchange rates.
And I think it was in the summer that the British were first to change, and they didn’t have a very strong reason to do it. They were under modest pressure but not heavy pressure.
Then there was a disturbance in the exchange markets in Europe in January, I guess, what would've been January of '72.
And it was a lot of churning of exchange markets in Europe. And I said, look, this is our chance to get a decent exchange rate. Why don’t we use this, everything is up in the air anyway: why don’t we use this to negotiate a reasonable exchange rate change from the dollar.
So I go running off to Japan and running off to Europe and we negotiated this further sizeable exchange rate change in the dollar. But there was not enough commitment to it. My own feeling was [if] we change the price of gold again, that there'd be a further speculation in the gold market, which there was, and that was too difficult to keep the exchange rate steady.
So we ended up, for lack of anything better to do, floating. Which some people in the United States liked anyway. So that's where we were then, that's were we are today.
Cardiff Garcia: Did you think after it became obvious that a system of floating exchange rates was inevitable were you still somewhat hopeful that the benefits of Bretton Woods could at least be replicated under a floating exchange rate system?
Paul Volcker: You couldn't go back to all the rigidities of the literal Bretton Woods system. But could you have a system that provided for more stability in exchange rates? Yes, I thought so then, I think so now, but it's been so long since we've done it.
It's hard. Not many people are inclined, or countries are inclined, to enter into that negotiation. There've been some advocates here and there. In this so called Group of 30 I used to be chairman of were a lot of central bankers and finance officials. And as we'd get together I attended part of a recent meeting I said we really ought to attach priority to monetary reform, do something to get more stability. And one or two others go, that's right.
Everybody else sat there and gave it no support, which is a fair characterisation of the mood around the world in terms of getting a more stable exchange rate system. Someday, but not right now.
15
Cardiff Garcia: So you're at this role at Treasury until 1975, and here's where I want to ask you a bit about Arthur Burns.
Burns replaced at the Fed a personal hero of yours, William McChesney Martin. Burns had been an economic counsellor to Nixon himself. [Burns] was against gold convertibility being suspended during the time that you were there at Treasury, and he also made a famous statement about monetary policy, which was that monetary policy is made in Washington, not in Paris. And you were a little bit disheartened by that, because you thought that international concerns should be taken into account. How would you define your relationship with Arthur Burns?
Paul Volcker: Well, Arthur Burns was a famous professor of economics, and he was, of course, my elder, and I respected his economics; he was a specialist in business conditions and economic cycles, that was his specialty, and I gave him a lot of weight in that area.
Cardiff Garcia: In t hat area.
Paul Volcker: Yes. Financial markets were not his thing. He thought they were. He thought
everything was.
But he was totally unrealistic in thinking that we could negotiate a big exchange rate change and sustain gold at the middle of the system, and so forth. To me, it just was not sensible.
And then when we did make the negotiation to change the exchange rates as you refer to this meeting in Paris when a logical question of the press was, “Okay, you've made all these changes now; are you going to conduct monetary policy in a way that's supportive of these changes??
And Arthur takes the microphone from George Schulz, [who] was there, and goes, “I want you all to know that monetary policy is made in the United States, not in Paris.” Which is not exactly, I would argue...
Cardiff Garcia: Not the most cosmopolitan thing that a Fed chair has ever said.
Paul Volcker: We had a meeting with Arthur, George Schulz and I, in Paris before the final meeting there to ask, d o we put it together again? And Arthur said “Yes, we're gonna put it together again, we've got to return to fixed rates, we've got to do it.”
I said, “Arthur, if we're going to put it to again, the first thing you've got to do is get on a plane, go back to Washington and tighten money because there's no way you can hold this together with the monetary policy we now have.”
He was not ready, of course, to do that. But anyway, there we were.
For reasons I never quite figured out, Arthur this is a few years later just got after me, after me, after me to become President of the Federal Reserve Bank of New York.
Cardiff Garcia: Right, this is what's interesting, is that you guys had disagreed on a few ideas.
Paul Volcker: I don’t understand it.
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Cardiff Garcia: But he wanted you to be the New York Fed President, knowing that you might disagree with him once you were there.
Paul Volcker: Yes, he must've. So I don't know whether he thought this was a way to get me out of the way or... Anyway, I finally yielded, when I was really anxious to get back in the private sector.
Cardiff Garcia: You were anxious to get back into the private sector, but you still agreed to become the New York Fed President.
Paul Volcker: Well, I guess I was weak, I couldn't get myself to say no. And maybe at the end I... I don't know.
Cardiff Garcia: While you were the New York Fed President, how often would you say you disagreed with the rest of the FOMC in terms of the appropriate course for monetary policy?
Paul Volcker: Well, the FDIC [sic] was pretty well split during a lot of that period. I'm not sure, looking back, as to whether I actually dissented when Burns was still the Chairman. But I disagreed a lot. Whether I actually dissented, or how many times, I don't remember.
Then [William] Miller became Chairman and I began dissenting in virtually ever meeting. Which is unusual because the President of the Federal Reserve Bank of New York likes to line himself up with the Chairman of the system to show some unity and credibility and so forth. But there was a split on the committee, and a lot of the banks were more in favour of tightening than the Reserve Board members were.
Cardiff Garcia: More in favour of tightening, okay. Did that influence your views at all on the necessity of having a consensus on the board or did you think that was a healthy thing, to have opposing voices speaking loudly?
Paul Volcker: Well, if you're the chairman you always like to have a consensus; if you're opposed you think it's a healthy thing to oppose! There's a little too much opposition these days. Now they have a system: they oppose in public before the meeting but they don't oppose at the meeting.
Cardiff Garcia:
Paul Volcker
Cardiff Garcia:
The reverse of what you had back then.
The reverse, exactly.
Okay, 1979. After a very brief period in which William Miller was the Fed
chair, he ends up being reappointed to Carter's Treasury Department.
Paul Volcker: Appointed.
Cardiff Garcia: How confident were you that you would be tapped to be the next Fed chair from your role at the New York Fed?
Paul Volcker: I wasn't confident at all. I didn't really think about it. 17
When Burns left I was President of Federal Reserve Bank of New York. It was logical that you would; simply you're President of Federal Reserve Bank of New York, I'd been in the Treasury, I was pretty well known, so it would not have been a surprise to be nominated as Chairman of the Federal Reserve. But of course I wasn't. I didn't know Carter. It was not particularly... I guess Blumenthal was Secretary of the Treasury. I had no great expectation but it would not have been a surprise.
When the second thing came up, when Mellon [sic, Miller] was made Secretary of the Treasury it was done rather suddenly. Nobody was expecting that and there was suddenly an opening in the Federal Reserve that nobody...
Cardiff Garcia: Had expected.
Paul Volcker: ... nobody had expected, nobody knew anything about. I didn't have any particular expectation. It was a matter of just a few days so I did not have... I was surprised when I got a telephone call!
Cardiff Garcia: So you start at the Fed. Did you know that immediately, because you were new there, you wanted to move as quickly as possible to tighten policy at a pace that had outstripped what had happened there before? And how hard was it to convince the rest of the FOMC to go along with you?
Paul Volcker: I forget my timing a little bit here. There had been a change in the discount rate, either immediately after I became chairman or a few days before I became chairman. And then I didn't think it had been enough so we had another change, I guess, in late August or early September, I can't remember.
But I thought these two big discount rate changes within the space of a month or so; I thought, this will begin making an impression on the market. Didn't make any impression on the market at all because the discount rate is just a Board of Governors' vote and it was four to three, and that hadn't worried me maybe as much as it should because I knew I had four votes. We could have gone out and raised it again two weeks later and still had four votes!
But the market said, “Okay, it's four to three, that's the last change we'll see, it's gotten too close, too controversial, there won't be any more.”
So this is really what stimulated me to say, “We're going to do something to get more unity here and get a tougher policy approach.” So that was the beginning of changing the way we were going about policy, which did command unanimity for a variety of reasons.
It was not unlike what some of the presidents in prior years had been advocating, some of them forgot about... they're probably different but it was a version of what some of them had advocated. And I guess inflation kept getting worse and I guess they didn't... We did have a discount rate change at the same time but I think they were convinced that with the change in approach, they ought to give it a chance. So we had unanimity and it was important to have unanimity.
Cardiff Garcia: Your monetary policy approach throughout your years as Fed chair is pretty well known by now that you had to get aggressive to bring down inflation, and you did. And there were a lot of complaints at the time from different parts of the economy, there were all these symbolic things happening, where farmers were driving tractors onto the lawn in front of your
18
offices. I don't want to go through the details of all that too much. I just want to ask if it was hard on you personally, or maybe even on your family, as a lot of the complaints really ratcheted up. And there was even some talk in Congress about limiting central bank independence. Was it hard on you personally to withstand all that?
Paul Volcker: There was one former Congressional friend that got up every session of Congress and asked for my impeachment, every day for three years.
Cardiff Garcia:
Paul Volcker
Cardiff Garcia:
Paul Volcker
And asked for your impeachment?
Yes.
Do you remember who it was?
Yes, Henry Gonzalez. How could I forget?
Anyway, look, I'm getting to be an old man; this all happened about 30, 40 years ago. I'll tell you my
sense of what it was.
First of all, there was a lot of concern in the country about inflation and the poor performance of the country. Carter got voted out of office, basically because of all this concern. He went up on the mountain and fired his Secretary of the Treasury and others. “Malaise” was the magic word and people weren't happy, maybe not quite as unhappy as they are now, but there was some of that same feeling. That stagflation had us by the throat and so people were ready for some change.
So this very tough policy and eventually a big recession there was a feeling, I hold to this day, there was kind of a feeling that, l ook, we're in a very unhappy situation and the Federal Reserve's trying to do something about it. And we did some things that they could understand were going to tighten down on the money supply.
Milton Friedman had made that... Milton Friedman was not my favourite but he made the slogan for all the right policies.
So the mass of opinion may not have been highly favourable but it wasn't out for attack. People that got the farmers: somebody can drum them up and get their tractors out there.
The interesting one was homebuilders. Homebuilders are always the ones stuck in this kind of tight money situation and I was very fortunate, having a leadership of the homebuilders which was quite constructive. They kind of understood what was happening and they'd come in and see me and we'd have a conversation.
Farmers would come in and see me. We'd make some little change to show them we were sympathetic to what they were doing and the farm leader never let a big... He may have put the tractors around once but...
And there were community groups that would surround us once in a while.
But the homebuilders got caught on this thing of sending me 2x4s! “We don't need 2x4s any more, we'll saw them up and send them in to the Federal Reserve.” You're smiling but it was kind of a joke
19
on their part! It was showing that they were doing something, but it wasn't really. Some of them said, “Tighten money, get rid of inflation.”
But what I remember there, which I think was meaningful to me anyway: Homebuilders asked me to go out and address their convention in Las Vegas in the middle of all this, and I said okay.
I was out there. I remember walking towards the auditorium where I had to give this, and I ran into a Senator who was not happy with us. He was quite unhappy with me personally. He said, “What are you doing out here? The homebuilders are having a convention. They'll kill you!”
So I walked from this thing and did my uplifting speech to the homebuilders: “Things are tough but let's get through it, they're going to be much better, we've got to do this and get it done.” They all stood up and collective applause when I got finished!
Cardiff Garcia: Standing applause.
Paul Volcker: There was nobody throwing darts at me and so forth. They were willing to accept the idea that something had to be done, and some day it would be over and they'd begin to build homes again.
And I think that was the attitude of the country more broadly, which is why the Congress never did pass those resolutions They talked but they never did anything.
I don't know how close to the edge we were, but was I worried about it? Sure, I worried about it but..
Cardiff Garcia: There were a couple of other big events during your tenure as Fed chair. One of them was what happened with Latin America and more specifically Mexico.
At the time you thought that a possible default from the Mexican Government would pose a big threat to the US banking system. What was it that convinced you that the right course of action to take then was to allow the Mexican Government to pay off its debts over time, and to allow the banks to not have to write down the value of their loans? What made you think that that was the right course of action then?
Paul Volcker: Because I didn't want an international financial crisis! This was in the middle of a recession with interest rates very high.
Cardiff Garcia: ‘82, I believe.
Paul Volcker: ‘82. It wasn't just Mexico.
Mexico was the spark in the end but all the big Latin American countries were in trouble, against this background...
You'd had this big increase in oil prices a few years earlier. The Middle East was flowing with dollars, they didn't know what to do with the dollars. They were deposited in the big international banks, mostly the American banks but the big Japanese banks, the big English banks too. And they didn't have any place to lend it, to so they lent it to Latin America.
It went on for several years and banks got more and more exposed, and Latin America more and more exposed. But the banks were all legal lenders. (All these crises have something in common.)
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Even small banks in the United States said, “If Citibank is lending, if Chase is lending, why don't I lend too, I'll get in this thing.”
So they began lending. There was this famous story, which I think is true, that the leftist President of Mexico in the middle of would have been probably 1981 his finance minister went to him and the central bank [?] and said, “Look, we can't keep borrowing like this, we've got to slow it down, we're going to have a great crisis.”
And he said, “Well, I don't know, you want to do anything?” [The president] sent some of his colleagues, including his son, I guess, around to ask bankers whether there was any problem here, were they frightened to lend to Mexico? All the banks said “No, no, no, we're perfectly happy, keep...” So he fired the finance minister!
Then the new [Mexican] finance minister came back and he was very closely in touch with us during the first half of ‘82. He kept telling us what was going on. We had our famous, or infamous, lemon meringue pie lunches.
Cardiff Garcia: Lemon meringue pie lunches?
Paul Volcker: Yes, I'd give them lunch at the Federal Reserve. I like lemon meringue pie.
We had lemon meringue pie on Fridays.
But we kept in touch, we could see what was happening. But we didn't know what to do, and finally one bank stopped lending. One bank stopped lending, and they all stopped lending.
And so we lent them enough money, we thought, to get them through the summer. There was going to be a Presidential election. The new President would, in practice, become influential in September; that was the Mexican tradition, even though he wouldn't technically be in office for a few more months.
So the finance minister said, we've got to sweat it out until my friend, [Miguel] de la Madrid, becomes President; then we'll take stronger action. So we lent them the money to do that. But it didn't last so we had a crisis on our hands in August.
The plan that was developed with Mexico and others elsewhere at that point with international co operation we got the European banks, Japan involved, the IMF involved we decided that the banks ought to not demand payment of Mexico.
You've got to understand: all those big banks had more lending to Latin America than their capital, way in excess of their capital. So it wasn't just Mexico. It was Argentina, Brazil, Venezuela I don't know about Venezuela Colombia, Ecuador. If Mexico blew, they were all going to blow, or that's what we assumed.
The Mexican finance minister and central banker were very good, responsible people.
Cardiff Garcia: Good, responsible counterparts in this game?
Paul Volcker: Yes. We worked out a little show and we invited... The difference is that we'd invite the major Mexican creditors into one room, because it was a