Volcker (14 page)

Volcker noted the president's attention to detail, especially when it bordered on the absurd. Nixon's obsession began with instructions that every person sign the guest book as they entered Aspen Cottage on Friday afternoon, August 13, and ended on Sunday morning, with detailed directions during the final picture-taking ceremony.
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Volcker smiled, recalling how Nixon exhorted his valet, “Manolo, quick, Manolo, bring in more chairs, we need more chairs for the picture.”
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The president understood the historic significance of the unfolding events, and participated in every substantive decision.

The joust with Arthur Burns over the wisdom of gold suspension, with the president as referee, dominated Volcker's thoughts. Burns had not minced words.
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“Volcker and Connolly may be right about closing the gold window, but I think they are wrong. We are taking dramatic steps … the
wage-price freeze, the border tax, and the government spending cuts. They will electrify the world. On the other hand, there are grave risks in closing the gold window. First, political … Pravda [the Communist Party newspaper] will headline this as a sign of the collapse of capitalism. The second risk is economic … world trade will suffer. Foreign exporters will clamor for action—”

Connally interjected, “So the other countries don't like it, so what … We'll go broke getting their goodwill.”

Burns protested, “They'll retaliate.”

“Let 'em. What can they do?”

Volcker cringed, having spent the better part of his professional career nurturing America's international relationships, but said, “I hate to do this. All my life I have defended Bretton Woods, but I think it's needed … we cannot continue this way. But let's not just close the gold window and sit. We need to negotiate a new set of exchange rates. This is an opportunity to repair a system that needs fixing.”

Paul McCracken offered some balance: “People's reaction to closing the gold window could be negative. On the other hand, they could see it as part of a program of strong action on wages and prices.”

Volcker tried some historical perspective, “There is a certain public sentiment about a ‘cross of gold.'”

Paul realized his error too late—a misplaced reference to the denunciation of gold by presidential candidate William Jennings Bryan at the 1896 Democratic convention.

Nixon put Volcker in his place: “Bryan ran four times and lost.”
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Arthur Burns's special relationship with Richard Nixon, extending back to the Eisenhower administration, might have carried the day. His warnings about the dire consequences of suspension worried the president. But Connally's tongue and Volcker's expertise won Nixon over. Volcker had lugged a fat briefing book to every meeting, just in case he needed to consult the black loose-leaf binder containing the plans. His preparation paid off. No one else could muster an answer when the president asked how much revenue the import tax would generate.
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Volcker grounded all his calculations in economic analysis, despite the skepticism he had learned from Morgenstern at Princeton.
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He knew this precision gave him the credibility of a surgeon, but he also recognized
the downside. His numerical skills left him vulnerable to being branded an idiot savant.

Not after his mission abroad.

The roar of the engines buzzed in Volcker's ears as the military transport plane, without windows, lumbered into the air. He could hardly believe that he had returned by helicopter from Camp David just a few hours earlier, had stopped at the Treasury to prepare the press release describing the new program, and was now off on a transatlantic journey. He worried about delivering the proper message, considering that the draft apology for abandoning gold he had given to William Safire, the president's speechwriter, had disappeared entirely from Nixon's televised talk. The president had written much of the speech himself and turned over detailed notes to Safire with explicit instructions to avoid “the gobbly gook about crisis of international monetary affairs … which seemed to be the thrust of Volcker.”
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Nixon told H. R. Haldeman, his chief of staff, “Don't circulate the drafts of the speech. Show the other people only the sections that concern them. I want it to be a surprise.” It was.

Volcker marveled at what a master politician could engineer with the proper turn of phrase, like the sweep of a magician's wand. During the first minute of his talk, Nixon had transformed three days of anxiety into victory. “The time has come for a new economic policy for the United States … We must create more and better jobs. We must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators.”
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Volcker knew that Americans would respond well to thwarting unprincipled speculators. He wondered how that would play in London.

The New York Stock Exchange greeted the president's plan with thunderous approval, jumping more than 3 percent on Monday, August 16, the first day of trading after the president's talk.
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The surcharge on imports, raising the cost of Volkswagens and Toyotas, buoyed domestic automakers. Eager buyers pushed up the shares of Chrysler by more than 15 percent, while the larger companies, General Motors and Ford, rose 10 percent each.
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Gold mining stocks declined, suffering from
Nixon's edict, which diminished America's need to replenish its stock of the precious metal.
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Nixon won new friends among investors. Clarence Netherland, a petroleum engineer watching stock prices flash across an electronic screen in a Merrill Lynch brokerage office in Dallas, said, “There's a hell of [a] lot more confidence in the economy now. We have begun to face up to realities.”
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Frederick Papolos, a retired Florida businessman, added, “Mr. Nixon has proved himself to be a real statesman. I'll vote for him in 1972, although I didn't in 1968.”

Consumers went on a buying spree as well.
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Martin Spenser, a personnel consultant in New York City, visited Sherry-Lehman, a fine wine and liquor store on the Upper East Side of Manhattan and bought a case of Château Lafite-Rothschild. “A wise decision,” said the store owner, Sam Aaron. “I assume retailers and restaurants will be buying madly … until present supplies … run out.” Louis Evans, the president of Evans Motor Company in the Forest Park suburb of Atlanta, reported that several people had shown up early Monday morning to buy Toyotas, and he suggested that “the surcharge announcement was the reason.”

The
Wall Street Journal
delivered a lecture from its editorial page pulpit, preaching against the inflationary consequences of the wage-price freeze and the foreign exchange uncertainty triggered by gold suspension.

President Nixon has revealed in his two and a half years in office a predilection for the grandstand play … So it should not come as a surprise that he responded to his growing problems with the U.S. economy as he did in his speech Sunday night … [But] grandstanding is … more likely than not to fail in meeting the popular hopes that it raises … A wage and price freeze could result in rather panicky return to price inflation after it is lifted … The import surcharge and a floating dollar will initially produce confusion; what comes out of it could be better or worse.
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Both were valid concerns.

The suspension of gold convertibility brought foreign exchange
markets to a standstill, except for small retail transactions. In London on the day after Nixon's speech, the press reported a “bewildering variety of exchange rates for tourists … The London Hilton would change up to $50 for a person at $2.60 [per pound sterling] during the morning, but it switched to $2.80 a pound during the afternoon.”
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In Milan, Dr. and Mrs. Lawrence Gould from New York City “were just shocked” when their dollars could not buy them even an ice-cream cone. “Fortunately our trip was ending,” they said, “and we had enough foreign currency to see us home.”
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Confusion reigned in foreign exchange because Nixon had upended a key pillar of the Bretton Woods edifice: the link between the U.S. dollar and gold. Until Sunday night, August 15, 1971, the U.S. Treasury permitted foreign central banks, such as the Bank of England or the Bank of Japan, to exchange dollars for gold at the official rate of thirty-five dollars per ounce. And because they could exchange dollars for gold, these central banks felt comfortable using dollars as reserves to establish fixed exchange rates for world travelers.

The Bank of England, for example, would intervene in the market by buying and selling pounds versus dollars, as necessary, to maintain the exchange rate at $2.60 per pound. And the Bank of Italy would intervene in the market by buying and selling lira versus dollars, as necessary, to maintain the exchange rate at 600 lira per dollar. The fixed exchange rate between the dollar and the pound meant that American tourists knew how much they needed to pay their bill at the London Hilton. The fixed exchange rate between the lira and the dollar meant that Dr. and Mrs. Lawrence Gould could enjoy gelato for about fifty cents while on their way to the Milan airport.

Americans did not care that President Nixon had suspended the convertibility of dollars into gold, having been barred from holding the precious metal since 1933. They cared only about fixed exchange rates and what the dollar would be worth in terms of the pound, yen, and lira. But suspension flustered foreign central bankers because many held dollars as reserves, assuming they could exchange their greenbacks for gold.
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Now that the dollar was no longer convertible, at least some members of the exclusive club might stop intervening in the foreign exchange markets, allowing the dollar to float with supply
and demand. The financiers worried that the ensuing chaos would immobilize international trade.

Treasury Secretary John Connally tailored his press conference on Monday morning, August 16, to the domestic side of the president's speech. He understood that the upcoming presidential election, less than fifteen months away, began at the supermarket checkout counter. He promised that the new Nixon policies would fill the shopping cart. “The programs are designed to create more jobs and reduce unemployment … to stimulate car sales … to bring inflation under control … [and] to give the American worker a chance to increase his productivity.”
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Connally knew that George McGovern, at the time the only declared candidate for the Democratic presidential nomination, had disparaged Nixon's international program immediately after the president's speech: “It is a disgrace for a great nation like ours to end in this way the convertibility of the dollar.”
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Connally deflected the criticism with a humorous aside: “I am not prepared to say what is going to happen in the international money markets … [but] there is no question that we shook them up.”
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Connally then withdrew from the fray by publicly designating Paul Volcker as the point man for all matters international. “I want to say to those of you who do not know, that about midnight last night, Undersecretary Paul Volcker left with Dewey Daane of the Federal Reserve Board to go to London. A meeting will be held this afternoon at the American embassy at four o'clock with representatives of our principal trading partners … So our people are there. They are already talking. But so far as the reaction of the central bankers in Europe, frankly I am unable to tell you.”
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It was past four o'clock in London when Connally made the announcement, and Volcker had already engaged a pride of financiers at Wychwood House, residence of the American ambassador to London. He knew most of these veterans of earlier crises, including Otmar Emminger of the Bundesbank, Jeremy Morse of the Bank of England, Rinaldo Ossola of the Bank of Italy, and Claude Pierre-Brossolette of the French Ministry of Finance. Two representatives from the Bank of Japan who happened to be vacationing in London at the time were
pressed into service. They should have known that summer in the British capital rarely lasted more than a day.

Volcker summarized the proceedings at a press conference after the meeting, offering few details while remaining faithful to the substance.
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“I came for consultations, not negotiations, but we want to return to a stable system as soon as possible.” When asked whether he still dismissed floating exchange rates as ivory tower scribbling, he smiled. “I don't think we can object to anything as an interim solution … and we do not have a blueprint going forward. But long-term monetary reform will be a slow process.”

Behind the closed doors of the meeting, Volcker had already embraced floating exchange rates as a means to accomplish a noble cause: a revitalized Bretton Woods System. “Letting the markets determine a credible set of exchange rates might not be entirely bad … We do not want to jump from one crisis to another.”
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His flexibility elicited concern from the Bank of England's Jeremy Morse; “It might be difficult to get back to a fixed parity system.”
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Volcker seemed prepared to take a calculated risk, a characteristic that would serve him well in the future. The press commented favorably: “Mr. Volcker, despite his reputation for conservatism, is open to persuasion.”
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Volcker invoked a higher authority during the news conference when it came to gold. “The President would like to see a further diminution of the role of gold in international finance.” He had been even more explicit about Nixon's preferences during the meeting with the central bankers, saying that the president did not want to raise the price of gold, even though that would be “a quick and easy solution” to the excess supply of dollars abroad.
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