Volcker (62 page)

38
. Thomas Sargent describes the same confrontation as “a game of chicken.” See his “Interpreting the Reagan Deficits,” in Thomas Sargent,
Rational
Expectations and Inflation
, 2nd ed. (New York: HarperCollins, 1993), pp. 211–26.

39
.
New York Times
, January 10, 1982, p. NES10.

40
.
New York Times
, August 28, 1981, p. D2.

41
. See
New York Times
, January 28, 1982, p. D6, and January 30, 1982, p. 29.

42
. See Record of Policy Actions of the Federal Open Market Committee, February 1–2, 1982, p. 3. “M1 [checking accounts plus currency] grew at an annual rate of 11½ percent in December and accelerated in January to a rate estimated to be above twenty percent.”

43
. Ibid.

44
. Transcript, Federal Open Market Committee Meeting, February 1–2, 1982, p. 41.

45
. Ibid., p. 46.

46
. Ibid., p. 90.

47
. Ibid., pp. 90–91.

48
. See Record of Policy Actions of the Federal Open Market Committee, February 1–2, 1982, p. 14.

49
. See “Kennedy Urges End to Federal Reserve Autonomy,”
New York Times
, April 7, 1982, p. A24.

50
. Transcript, Federal Open Market Committee Meeting, February 1–2, 1982, p. 104.

51
. Interview with Murray Weidenbaum.

52
. Based on Volcker's Daily Planner for 1982 and an official White House photograph of Reagan and Volcker on February 15, 1982.

53
. Douglas Brinkley, ed.,
The Reagan Diaries
, vol. 1,
January 1981–October 1985
(New York: HarperCollins, 2009), p. 110.

54
.
New York Times
, February 19, 1982, p. A20.

55
. The following conversation is based on an interview with Murray Weidenbaum.

56
. See “Reagan's ‘First Friend,'”
New York Times
, March 21, 1982, p. SM26.

57
.
Washington Post
, March 30, 1982, p. A1.

58
. Ibid., p. A1 continued.

59
. Ibid.

60
.
New York Times
, August 15, 1982, p. E4.

61
.
New York Times
, October 24, 1982, p. 25 continued.

62
.
New York Times
, August 15, 1982, p. E4.

63
.
Washington Post
, August 7, 1982, p. A1.

64
. Ibid.

65
. See
Washington Post
, August 20, 1982, p. A1. The vote was 226–207 in the House and 52–47 in the Senate.

1
. The letter is from the Personal Papers of Paul Volcker.

2
. The annual rate of inflation for the year ending August 1982 was 6 percent compared with 12.6 percent for the year ending November 1980.

3
. The story is from an interview with Jerry Corrigan.

4
.
Time
, March 8, 1982, and
People
, May 10, 1982.

5
. Transcript, Federal Open Market Committee Meeting, May 18, 1982, p. 41.

6
.
Washington Post
, August 7, 1982, p. A1, reported a 9.8 percent unemployment rate for July, “the highest in 41 years, since late 1941.” The total number of unemployed equaled 10.8 million for July 1982, according to the Bureau of Labor Statistics.

7
. The unemployment rate reached a peak of 10.8 percent in November and December 1982, corresponding to twelve million unemployed workers.

8
. Housing starts averaged 936,000 units from January through June 1982, compared with 2,020,000 units in 1978. See
Economic Report of the President
, February 1983, Washington, DC, Government Printing Office, p. 216.

9
. See Joseph Treaster,
Paul Volcker: The Making of a Financial Legend
(New York: John Wiley, 2004), p. 5.

10
.
Washington Post
, April 7, 1982, p. D7 continued.

11
. The quotes in this paragraph and the next are from “Paying More for Money,” the cover story in
Time
, March 8, 1982.

12
. PIPAV. Also see Andrew Tobias, “A Talk with Paul Volcker,”
New York Times
, September 19, 1982, p. 271.

13
. The New York Mercantile Exchange had not yet launched its crude oil futures contract, but the International Monetary Fund published an average monthly price index of Brent, Dubai, and West Texas crude oil beginning 1980. The index reached a monthly peak of 73.71 in January 1981 and declined to 60.15 in August 1982 (source:
www.imf.org/external/np/res/commod/index.asp
).

14
.
Wall Street Journal
, January 5, 1982, p. 34.

15
. Transcript, Federal Open Market Committee Meeting, October 5, 1982, p. 19.

16
. See Milton Friedman and Anna J. Schwartz,
A Monetary History of the United States, 1867–1960
(Princeton, NJ: Princeton University Press, 1963), p. 434, “Federal insurance of bank deposits was the most important structural change in the banking system to result from the 1933 panic, and … the structural change most conducive to monetary stability since state bank notes were taxed out of existence immediately after the Civil War.” They also note (p. 437) that “The reduction in [bank] failures is not of
course attributable to any correspondingly drastic improvement in the quality of bank officials or in the effectiveness of the supervisory authorities.”

17
. Insurance was set at $2,500 per account in the original legislation and was raised in a series of steps to $100,000 in 1980. See Lawrence Ritter and William Silber,
Principles of Money, Banking, and Financial Markets
(New York: Basic Books, 1983), 4th ed., p. 106.

18
. See chapter 17 for more on the financial crisis that began in August 2007.

19
. PIPAV.

20
. The document “U.S. Bank Claims on Mexico (end-1981: adjusted for guarantees),” Personal Papers of Paul Volcker, appears without a date but has a cover sheet that says, “Please Transmit Promptly to the Office of Chairman Volcker for Ms. Sandy Wolfe.” It is combined with a telegram dated August 18, 1982, from the Mexican minister of finance, Jesús Silva Herzog, to Edwin Truman at the Federal Reserve Board. Data on bank size is from
History of the Eighties: Lessons for the Future
, Federal Deposit Insurance Corporation, Washington, DC, 1997, p. 237.

21
. See
Washington Post
, August 4, 1982, p. D7 continued. In
History of the Eighties: Lessons for the Future
, p. 237, Table 7.1 lists Continental as the eighth-largest in assets as of the end of 1981.

22
. See chapter 6 in Irvine Sprague,
Bailout: An Insider's Account of Bank Failures and Rescues
(New York: Basic Books, 1986), for a discussion of Penn Square.

23
. The devaluation began on February 17, 1982, when Mexico allowed the peso to float versus the dollar. It traded at 27 pesos per dollar before February 17 and traded at 45 pesos per dollar on August 6, 1982. See
Washington Post
, August 7, 1982, p. D8.

24
. See Joseph Kraft,
The Mexican Rescue
(New York: Group of Thirty, 1984), p. 8.

25
. Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
(New York: Times Books, 1992), p. 199.

26
. See Kraft,
The Mexican Rescue
, p. 4.

27
. The following discussion is based on ibid., pp. 9–14; Volcker and Gyohten,
Changing Fortunes
, pp. 200–207; and the recollection of Paul Volcker.

28
. The telephone numbers appear in the document “U.S. Bank Claims on Mexico (end-1981: adjusted for guarantees),” Personal Papers of Paul Volcker.

29
. See Ron Chernow,
The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
(New York: Atlantic Monthly Press, 1990), p. 127.

30
. At the FOMC meeting on August 24, 1982 (Transcript, Federal Open Market Committee Meeting, August 24, 1982, p. 1), Volcker says, “Mr. Solomon
made a little introductory statement … indicating that there was some expectation of some private new money as part of this [negotiation].” According to the
New York Times
(August 21, 1982, p. 32): “The Mexican government and United States officials put heavy pressure on commercial banks … to agree to a program under which the banks would postpone repayments of $10 billion in Mexican debt … Despite denials by the Federal Reserve that it had anything to do with the meeting and that it had merely provided the group with a room, Anthony Solomon, president of the Federal Reserve Bank of New York, made an opening statement to the participants … that the Federal Reserve fully supported the plan that was presented by Mr. Silva Herzog.”

31
. Transcript, Federal Open Market Committee Meeting, August 24, 1982, p. 18.

32
.
International Financial Markets and Related Problems: Hearings Before the House Committee on Banking, Finance and Urban Affairs
, 98th Congress, February 2, 1983, p. 76, Table V.

33
. The federal funds rate was 14.73 percent on July 1, 1982, versus 9.03 percent on August 24, 1982. The ten-year rate was 14.4 percent on July 1, 1982, and 12.35 percent on August 24, 1982.

34
. Transcript, Federal Open Market Committee Meeting, August 24, 1982, p. 23.

35
. Transcript, Federal Open Market Committee Meeting, October 5, 1982, p. 38.

36
. Transcript, Federal Open Market Committee Meeting, August 24, 1982, p. 30.

37
. Transcript, Federal Open Market Committee Meeting, October 5, 1982, p. 19.

38
. See Milton Friedman and Anna Schwartz,
A Monetary History of the United States,
1867–1960 (Princeton, NJ: Princeton University Press, 1963), pp. 313–14.

39
. Transcript, Federal Open Market Committee Meeting, October 5, 1982, p. 20.

40
. Ibid., p. 70.

41
. The transcript for the October 5, 1982 meeting (esp. pp. 10–11 and pp. 34–42) cites technical problems associated with the All-Savers certificate program, making the narrow money supply figures suspect. But this was only a temporary phenomenon. See Allan Meltzer,
A History of the Federal Reserve
, vol. 2, book 2 (Chicago: University of Chicago Press, 2009), pp. 1104–31, for further discussion.

42
. Transcript, Federal Open Market Committee Meeting, October 5, 1982, pp. 53.

43.
See Marvin Goodfriend and Robert G. King, “The Incredible Volcker Disinflation,”
Journal of Monetary Economics
52, no. 5 (2005): 1003.

44
. Ibid., p. 985, claims that the Volcker disinflation did not gain credibility until much later. Goodfriend and King argue that “the behavior of intermediate and long term interest rates is evidence that the [Volcker] disinflation” was not credible. They cite the rise in the ten-year rate from 13 percent to 14 percent from the beginning of 1981 to 1982 as evidence. I argued in the previous chapter that this increase in rates was a consequence of the increase in the budget deficit and the uncertainty over the magnitude of the increased deficit.

45
. See Transcript of the Press Conference at the Business Council Meeting, Hot Springs, Virginia, October 9, 1982. He had told the FOMC at the October 5 meeting that he would indicate the change in policy before the release of the minutes six weeks later to avoid concern in the markets about movements in the money supply. See Transcript, Federal Open Market Committee Meeting, October 5, 1982, p. 53.

46
.
New York Times
, October 13, 1982, p. A30, and October 14, 1979, p. E18.

47
.
New York Times
, October 13, 1982, p. A30.

48
.
New York Times
, October 12, 1982, p. D1 continued.

49
.
International Debt: Hearings Before the Senate Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing and Urban Affairs
, 98th Congress, 1st Sess., February 14, 1983.

50
. See Board of Governors of the Federal Reserve System,
Federal Reserve System: Purposes and Functions
, Washington, DC, 9th ed., 2005, chapter 5, for the supervisory responsibilities of the Federal Reserve and other agencies.