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Monetary Metamorphosis: The Volcker Fed and Inflation

Published online by Cambridge University Press:  14 September 2012

Iwan Morgan
Iwan Morgan*
Affiliation:
University College London
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Journal of Policy History , Volume 24 , Issue 4 , October 2012 , pp. 545 - 571
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Copyright © Donald Critchlow and Cambridge University Press 2012

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References

NOTES

1. Urquhart, Michael and Hewson, Marillyn, “Unemployment Continued to Rise in 1982 as Recession Deepened,” Monthly Labor Review (February 1983), 3–12.Google Scholar

2. Stein, Judith, Pivotal Decade: How the United States Traded Factories for Finance in the 1970s (New Haven, 2010)Google Scholar; Cowie, Jefferson, Stayin’ Alive: The 1970s and the Last Days of the Working Class (New York, 2010).Google Scholar

3. See, for example, Guttman, Robert, How Credit-Money Shapes the Economy: The United States in a Global System (Armonk, N.Y., 1994)Google Scholar; Konings, Martijn, “The Construction of U.S. Financial Power,” Review of International Studies 35 (2009): 69–94CrossRefGoogle Scholar; and, in particular, Krippner, Greta R., Capitalizing on Crisis: The Political Origins of the Rise of Finance (Cambridge, Mass., 2011).Google Scholar

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7. Axilrod, Stephen H., Inside the Fed: Monetary Policy and Its Management, Martin Through Greenspan to Bernanke (Cambridge, Mass., 2009), 4, 91Google Scholar. Volcker lacks a scholarly biography but is the subject of several journalistic studies. See Greider, William, Secrets of the Temple: How the Federal Reserve Runs the Country (New York, 1987)Google Scholar; Neikerk, William, Volcker: Portrait of the Money Man (New York, 1987)Google Scholar; and Treaster, Joseph B., Paul Volcker: The Making of a Financial Legend (Hoboken, N.J., 2004)Google Scholar. An essential source for his key monetary decisions is Volcker, Paul and Gyohten, Toyoo, Changing Fortunes: The World’s Money and the Threat to America’s Leadership (New York, 1991).Google Scholar

8. Volcker studied economics and history at Princeton (1945–49), attained an M.A. in Political Economy at Harvard (1949–51), which involved the study of money, banking, and public finance under eminent Keynesian Alvin Hansen, and held a scholarship at the London School of Economics (1951–52) while undertaking comparative research on UK and U.S. central banks, but he never turned this into a Harvard Ph.D. as planned. See Treaster, Paul Volcker, 97–111.

9. For Volcker’s own account, see Changing Fortunes, 59–90, 101–28.

10. Axilrod, Inside the Fed, 91–92. For Volcker’s explanation of money-control technical issues, see Transcript of Federal Open Market Committee Meeting (hereafter FOMC Transcript), 6 October 1979, 43–49, http://www.federalreserve.gov/monetarypolicy/files/fomcmoal19791006.pdf.

11. Beckner, Steven K., Back from the Brink: The Greenspan Years (New York, 1996), 10.Google Scholar

12. Fischer, Stanley and Huizinga, John, “Inflation, Unemployment, and Public Opinion Polls,” Journal of Money, Credit and Banking 14 (February 1982): 1–19CrossRefGoogle Scholar; Peretz, Paul, The Political Economy of Inflation in the United States (Chicago, 1983), 71–105Google Scholar. For White House discussion of polls, see Patrick Caddell, Memorandum to the President, “Inflation Rating,” 16 January 1979, Staff Secretary’s File-Presidential Handwriting File (hereafter SSF-PHF), box 115, Jimmy Carter Presidential Library (hereafter JCPL).

13. For Carter administration concern about this, see Charles Schultze, Memorandum for the President, “The State of the Economy and Our Inflation Problem,” 4 March 1979, SSF-PHF, box 122, JCPL.

14. Glassman, James and Sege, Ronald, “The Recent Inflation Experience,” Federal Reserve Bulletin 67 (May 1981): 389–97Google Scholar; De Long, Bradford, “America’s Peacetime Inflation: The 1970s,” in Romer, Christina and Romer, David, Reducing Inflation: Motivation and Strategy (Chicago, 1997), 247–76Google Scholar; Samuelson, Robert J., The Great Inflation and Its Aftermath: The Past and Future of American Affluence (New York, 2008).Google Scholar

15. Hertzberg, Daniel, “Troubled Houses,” Wall Street Journal, 22 February 1980, 1Google Scholar. See also Anderson, Harry, “Fighting the Inflation ‘Crisis,’” Newsweek, 10 March 1980, 24–26.Google Scholar

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17. Poole, William, “Burnsian Monetary Policy: Eight Years of Progress?” Journal of Finance 34 (May 1979): 473–96 (475)CrossRefGoogle Scholar; Hetzel, Robert L., “Arthur Burns and Inflation,” Economic Quarterly (Federal Reserve Bank of Richmond) 84 (Winter 1988): 21–44Google Scholar; Niskanen, William A., Reaganomics: An Insider Account of the People and Policies (New York, 1988), 156–61Google Scholar; and Mayer, Thomas, Monetary Policy and the Great Inflation in the United States: The Federal Reserve and the Failure of Macroeconomic Policy, 1965–1979 (Cheltenham, UK, 1998)Google Scholar. Historian Wyatt Wells offers a more sympathetic but not uncritical assessment in Economist in an Uncertain World: Arthur F. Burns at the Federal Reserve, 1970–1978(New York, 1994).

18. For good discussion, see Mussa, Michael, “U.S. Monetary Policy in the 1980s,” in American Economic Policy in the 1980s, ed. Feldstein, Martin (Chicago, 1994), 86–95.Google Scholar

19. Taylor, John B., “A Historical Analysis of Monetary Policy Rules,” in Monetary Policy Rules, ed. Taylor, (Chicago, 1999), 319–41CrossRefGoogle Scholar; Orphanides, Athanasios, “The Quest for Prosperity Without Inflation,” Journal of Monetary Economics 50 (April 2003): 633–63CrossRefGoogle Scholar; and Edward Nelson, “The Great Inflation of the Seventies: What Really Happened?” Working Paper No. 2004-001, Federal Reserve Bank of St. Louis (January 2004).

20. See, in particular, Hetzel, “Arthur Burns and Inflation.”

21. See, for example, Pierce, James, “The Political Economy of Arthur Burns,” Journal of Finance 34 (June 1979): 485–96CrossRefGoogle Scholar; Kane, Edward J., “Politics and Fed Policymaking: The More Things Change, the More They Remain the Same,” Journal of Monetary Economics 6 (April 1980): 199–211CrossRefGoogle Scholar; Woolley, Monetary Politics; and Meltzer, Allan, “Origins of the Great Inflation,” Federal Reserve Bank of St. Louis Review 87 (March–April 2005): 145–75.Google Scholar

22. Arthur Burns, “The Anguish of Central Banking,” The 1979 Par Jacobssen Lecture, 30 September 1979, esp. 21–25, www.perjacobsson.org/lectures/1979.pdf. Abrams, Burton, “How Richard Nixon Pressured Arthur Burns: Evidence from the Tapes,” Journal of Economic Perspectives 20 (Fall 2006): 177–88CrossRefGoogle Scholar, documents presidential insistence on pre-1972 election monetary ease, but there is no evidence that Burns responded more to this than his own beliefs. His willingness to ease during the Ford and Carter presidencies when he was not under White House pressure points more to the significance of ideas.

23. Charles Schultze, Memorandum for the President, “Background for the Quadriad Meeting on April 5,” 4 April 1978, SSF-PHF, box 78, JCPL; William Miller, Statement to the Joint Economic Committee of the U.S. Congress, 15 December 1978, reproduced in Federal Reserve Bulletin64 (December 1978): 943–46 (943).

24. Ehrbar, A. F., “Bill Miller Is a Fainthearted Inflation Fighter,” Fortune, 31 December 1978, 40–43Google Scholar; Carter rebuke for “unnecessary and improper conduct,” written on Schultze to the President, 11 April 1979, White House Central Files-Subject Files, FI-27, box 7, JCPL. See also Biven, Jimmy Carter’s Economy, 143–44.

25. Romer, Christina D., “Commentary,” Federal Reserve Bank of St. Louis Review 87 (March–April 2005): 184Google Scholar; Ben Bernanke, “Central Bank Independence, Transparency, and Accountability,” Speech for Monetary and Economic Studies International Conference, Bank of Japan, 25 May 2010, http://www.federalreserve.gov/newsevents/speech/bernanke.20100525a.htm.

26. Volcker recorded three FOMC dissenting votes against ease in this period and was uniformly in favor of keeping the federal funds rate at the target level or raising it. One analysis of his FOMC votes prior to becoming Fed chair places him 65th out of 83 (in descending order of ease) of all Federal Reserve governors and bank presidents from 1966 to 1996 in his average interest-rate preference (7.44 percent) and 63rd in his net ease dissent frequency. See Chappell, Henry W. Jr., McGregor, Rob Roy, and Vermilyea, Todd A., Committee Decisions on Monetary Policy: Evidence from the Historical Records of the Federal Open Market Committee (Cambridge, Mass., 2005), 42–44, 240–55.Google Scholar

27. Volcker and Gyohten, Changing Fortunes, 167; FOMC transcript, 20 November 1979, 30.

28. Volcker, Paul, “The Contribution and Limitations of ‘Monetary Analysis,’” Quarterly Review (Federal Reserve Bank of New York) (1978): 35–41Google Scholar, and “The Role of Monetary Targets in an Age of Inflation,” Journal of Monetary Economics 4 (Winter 1978): 329–39CrossRefGoogle Scholar; Volcker and Gyohten, Changing Fortunes, 173.

29. House Committee on the Budget, Hearings on the Economic Outlook at Mid-Summer, 96th Cong., 2nd sess., 293–94. For similar views in the age of “quantitative ease,” see Volcker, Paul, “A Little Inflation Can Be a Dangerous Thing,” New York Times, 18 September 2011.Google Scholar

30. Schultze, Memorandum for the President, “Policy Response to Recent Economic Developments,” 16 March 1979, SSF-PHF, box 123, JCPL; Michael Blumenthal and Alfred Kahn, [untitled] Memorandum for the President, 24 May 1979, SSF-PHF, box 133, and Stuart Eizenstat to the President, “Results of Consultations with Private Economists and Businessmen,” 25 July 1979, SSF-PHF, box 140, JCPL.

31. Stein, Pivotal Decade, 226–27; Greider, Secrets of the Temple, 34–47; Biven, Jimmy Carter’s Economy, 237–40; Volcker and Gyohten, Changing Fortunes, 163–64.

32. “Monetary Policy: Paul Volcker,” in American Economic Policy in the 1980s, ed. Feldstein, 145–46; Cowan, Edward, “High-Interest Foes Fear Deeper Slump,” New York Times, 20 September 1979, 1Google Scholar; Berry, John, “Fed Lifts Discount Rate to Peak 11% on Close Vote,” Washington Post, 19 September 1979.Google Scholar

33. Axilrod, Inside the Fed, 94–95; Volcker and Gyohten, Changing Fortunes, 164–73; FOMC Transcript, 6 October 1979, 6.

34. Mussa, “U.S. Monetary Policy in the 1980s,” 96–97.

35. Greider, Secrets of the Temple, 119–20; Volcker and Gyohten, Changing Fortunes, 169.

36. FOMC Transcript, 6 October 1979, 5, 28.

37. Meyer, Martin, “Merrill Lynch Quacks Like a Bank,” Fortune, 20 October 1980, 135–43Google Scholar; Schulman, Bruce, The Seventies: The Great Shift in American Culture, Society, and Politics (New York, 2001), 136–40.Google Scholar

38. Kaufman, Henry, Interest Rates, Markets, and the New Financial World (New York, 1986)Google Scholar; Nocera, Joseph, A Piece of the Action: How the Middle Class Joined the Money Class (New York, 1994)Google Scholar; and Krippner, Capitalizing on Crisis, chap. 3.

39. Richard G. Anderson and Kenneth A. Kavajecz, “An Historical Perspective on the Federal Reserves Monetary Aggregates,” and Kavajecz, “The Evolution of the Federal Reserve’s Monetary Aggregates: A Timeline,” Federal Reserve Bank of St. Louis Review76 (March–April 1994). See also Degen, Robert, The American Monetary System: A Concise Survey of Its Evolution Since 1896 (Lexington, Mass., 1987), 190–93.Google Scholar

40. FOMC Transcript, 18–19 December 1980, 30–50 (44); Morris, Frank, “Monetarism Without Money,” New England Economic Review (March–April 1983): 5–6.Google Scholar

41. Charles Schultze, Memorandum for the Economic Policy Group, “Forecast Summary,” 13 December 1979, SSF-PHF, box 160, and Memorandum for the President, “Interest Rates,” 2 April 1980, SSF-PHF, box 179, JCPL.

42. FOMC Minutes, 18 March, 6 May, and 22 May 1980; FOMC Transcript, 22 April 1980, 18.

43. FOMC Minutes, 21 October 1980; Mussa, “U.S. Monetary Policy in the 1980s,” 98–104; Volcker and Gyohten, Changing Fortunes, 173.

44. FOMC Transcript, 16 September 1980, 24.

45. FOMC Transcript, 18–19 December 1980, 62–63; “Monetary Policy: Paul Volcker,” 148 (quotation).

46. FOMC Transcripts, 2–3 February, 6–7 July, and 5–6 October 1981, 1–2 February and 29–30 March 1982 illuminate Fed thinking. See also Niskanen, Reaganomics, 162–69, and Mussa, “U.S. Monetary Policy in the 1980s,” 104–11.

47. FOMC Transcript, 18 May 1982, 27.

48. FOMC Transcript, 1–2 February 1982, 5; Volcker, “Monetary Policy,” 149.

49. FOMC Transcripts, 6–7 July 1981, 45 [Governor Fred Schultz remarks], 18 August 1981, 43, [Governor Henry Wallich quotation], 17 November 1981, 18 [Governor Lyle Gramlee remarks].

50. Judd, John P., “The Recent Decline in Velocity: Instability in Money Demand or Inflation?” Federal Reserve Bank of San Francisco Economic Review (Spring 1983): 12–19Google Scholar; Niskanen, Reaganomics, 184–89.

51. Volcker and Gyohten, Changing Fortunes, 177.

52. Urquhart and Hewson, “Unemployment Continued to Rise in 1982,” 3–4.

53. FOMC Transcript, 5 October 1982 (for Volcker remarks, see pp. 12, 31, 53); “Federal Reserve Press Release: Record of Policy Actions of FOMC Meeting, October 5, 1982,” 19 November 1982.

54. “Monetary Policy: Paul Volcker,” 146.

55. Friedman, Milton, “Why a Surge in Inflation Is Likely,” Wall Street Journal, 1 September 1983, 22Google Scholar, “The Fed Hasn’t Changed Its Ways,” Wall Street Journal, 20 August 1985, 1Google Scholar, and “The Case for Overhauling the Federal Reserve,” Challenge 28 (July–August, 1985), 5–7.Google Scholar

56. Axilrod, Inside the Fed, 113–14. See also Tobin, James, “Monetarism: An Ebbing Tide?” The Economist, 27 April 1985, 25.Google Scholar

57. “Monetary Policy: Summary of Discussion,” in American Economic Policy in the 1980s, ed. Feldstein, , 162–63Google Scholar; Roberts, Paul Craig, The Supply-Side Revolution: An Insider’s Account of Policymaking in Washington (Cambridge, Mass., 1984), 116.CrossRefGoogle Scholar

58. Beryl Sprinkel, Memorandum for Cabinet Council on Economic Affairs (hereafter CCEA), “Domestic Monetary Policy,” 24 April 1981, CCEA: Meeting Files, OA8637, Ronald Reagan Presidential Library (hereafter RRPL).

59. Donald Regan, Memorandum for the President, “Current Monetary Policy,” 12 May 1981, and Murray Weidenbaum, Memorandum for the President, “Economic Situation and Outlook,” 12 May 1981, White House Office of Records Management, FG010-01, RRPL; Roberts, The Supply-Side Revolution, 115–17.

60. “The President’s News Conference, February 18, 1982,” in John T. Woolley and Gerhard Peters, American Presidency Project (University of California, Santa Barbara), www.americanpresidency.org; Ronald Reagan to Justin Dart, 12 April 1982, and to Alfred Kingon, 25 June 1982, Presidential Handwriting File-Presidential Records (hereafter PHF-PR), Box 3, RRL.

61. Donald Regan testimony to U.S. Congress, Joint Economic Committee, The 1982 Economic Report of the President, 97th Cong., 2nd sess., esp. 197–228; Regan, Donald, For the Record: From Wall Street to Washington (San Diego, 1987), 171–72, 178.Google Scholar

62. Kettl, Leadership at the Fed, 181–82.

63. Galbraith, James, Balancing Acts: Technology, Finance, and the American Future (New York, 1989), 169Google Scholar. For principal-agent theory, see Woolley, Monetary Politics; and Alt, James, “Leaning into the Wind or Ducking Out of the Storm? U.S. Monetary Policy in the 1980s,” in Alesina, Albertino and Carliner, Geoffrey, eds., Economics and Politics in the 1980s (Chicago, 1991), 53–67.Google Scholar

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65. FOMC Transcript, 2–3 February 1981, 3. For similar comments about the political cover afforded by money-stock targeting, see ibid., 30 June–1 July 1982, 55, and 20–21 December 1982, 35. Volcker later acknowledged, “I thought this was a way of getting ahead of the ball instead of behind the ball.” See Treaster, Paul Volcke r, 156.

66. Alan Greenspan, untitled enclosure in “Briefing Book for Long Range Planning Meeting, Camp David, February 5, 1982,” WHSOC–Richard Darman Files, box 1, RRPL.

67. Reich, Cary, “Inside the Fed,” Institutional Investor (May 1984): 162Google Scholar; Shapiro, Walter with others, “Will Reagan Reappoint Volcker?” Newsweek, 23 May 1983, 23Google Scholar; Cuff, David, “Business People: Volcker Is Supported by Executive Poll,” New York Times, 8 June 1983, D2.Google Scholar

68. From 1945 to 1988, polls showed that on average presidential approval was increased by half a percentage point for each percentage point of respondents’ belief that his party was best able to handle the issue identified as the most important problem facing the nation. However, each point of inflation took two points off presidential approval. See King, Gary and Ragsdale, Lyn, The Elusive Executive: Discovering Statistical Patterns in the Presidency (Washington, D.C., 1988), 88–95.Google Scholar

69. In the New York Times–CBS exit poll of 4 November 1980, which asked voters to nominate the two most significant issues affecting their presidential ballot decision, 33 percent specified inflation, 24 percent jobs, and 21 percent balancing the budget—and only 10 percent cited taxes. See http://www.ropercenter.uconn.edu/elections/common/exitpolls.html.

70. Richard Wirthlin to James Baker and others, “Federal Deficits,” 30 August 1983, WHOSC–Michael Deaver Files, OA11584, RRPL; Wirthlin to Baker and others, “Major Findings of the July National Survey,” 16 July 1984, WHOSC–James Baker Files, Box 9, RRPL.

71. Volcker and Gyohten, Changing Fortunes, 178.

72. Lawrence Kudlow, Memorandum for CCEA, “Financial and Economic Update,” 18 January 1982, WHSOF–CFF, 18 January 1982, OA10972, RRPL; William Poole, Memorandum for CCEA, “Market Expectations and Monetary Policy in 1983,” 3 February 1983, and Beryl Sprinkel, Memorandum for CCEA, “Monetary Policy and Interest Rates: The Near-Term Outlook,” 17 May 1983, WHSOF–William Poole Files (hereafter WPF), OA10699, RRPL.

73. William Poole and others, Memorandum for T-1, “Forecast,” 3 December 1982, WHSOF–CFF, OA10972, RRPL; Martin Feldstein, Memorandum for the President, “The New Economic Forecast,” WHSOC–Martin Feldstein Files (hereafter MFF), OA9815, RRPL; Darman, Richard, Who’s In Control? Polar Politics and the Sensible Center (New York, 1996), 118.Google Scholar

74. Arthur Burns to Reagan, 20 January 1984, Reagan to Burns, 22 February 1984, PHF-PR, Box 8, RRL.

75. Volcker and Gyohten, Changing Fortunes, 178–79; Krippner, Capitalizing on Crisis, 96–97.

76. Martin Feldstein, Memorandum for CCEA, “Is the Dollar Overvalued?” 8 April 1983, WHSOF–WPF, OA10699, RRPL. For similar views, see William Poole, Memorandum for CCEA, “The Real Rate of Interest,” 26 October 1984, and Minutes of CCEA Meeting, 30 October 1984, ibid.

77. Destler, I. M. and Randall Henning, C., Dollar Politics: Exchange Rate Policymaking in the United States (Washington, D.C., 1989)Google Scholar (quotation, 29); “Why the Big Apple Shines in the World’s Markets,” Business Week, 23 July 1984, 101; Taggart Murphy, R., The Weight of the Yen (New York, 1997).Google Scholar

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85. FOMC Transcript, 31 March 1987, 2 (quotation); “Monetary Policy: Summary of Discussion,” 161; Axilrod, Stephen, “The Role of Interest Rates in Federal Reserve Policymaking,” 70–75, in The Evolution of Monetary Policy and the Federal Reserve System over the Past Thirty Years: A Conference in Honor of Frank E. Morris, ed. Kopke, R. W. and Browne, L. E. (Boston, 2000).Google Scholar

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