When Volcker Ruled

WSJ ^ | 9/7/2012 | JOHN B. TAYLOR

[bruinbirdman]

Volcker: The Triumph of Persistence

By William L. Silber Bloomsbury, 454 pages, $30

On Sunday evening, Aug. 15, 1971, President Richard Nixon announced that the United States would no longer sell gold to other governments at $35 per ounce—the dollar would no longer be convertible into gold at all. Although no one quite realized it at the time, the era of fixed change rates was over. In memos and briefing books, Mr. Volcker, an undersecretary at Treasury, had been arguing for an end to gold convertibility. He had persuaded his boss, Treasury Secretary John Connally, and Connally, in turn, had persuaded President Nixon. As Mr. Silber puts it, Nixon "would turn Volcker's proposals into law."

The Nixon Shock, as the Aug. 15 announcement would come to be called, was startling in other ways. In the same speech, Nixon declared a wage-prize freeze. Mr. Volcker had recommended that course of action too. He was backed in this case by Arthur Burns, the chairman of the Fed, and by other White House advisers, who saw the move as a way of counteracting any temporary inflationary effects from untethering the dollar from gold.

The freeze, though, was an extreme measure, at odds with economic logic, and it took policy in a highly interventionist and damaging direction. George Shultz, then heading up the Office of Management and Budget, had argued against such controls but had lost the battle. It is indicative of how quickly Nixon was veering away from free-market principles that, when the president told Connally to brief Mr. Shultz on the plan, he added: "Tell Shultz that he cannot talk with Milton Friedman."

At that time no one knew what exactly would replace the Bretton Woods system. In December 1971, the U.S. and other countries agreed to continue with fixed exchange rates,

[reefdiver]

Too much power is in the hands of a President.

[count-your-change]

Too much bad advice in the officee of the prez. The price controls were a colossal failure and no one was surprised when they distorted the markets beyond recognition.

[Freedom4US]

Keeping interest rates at unprecedented lows for an extended period, isn’t this a type of price control as well?

At the time of the “Nixon Shock” America was a creditor nation, with a strong manufacturing base and middle class. It’s not as if the Fed can raise interest rates to 20%, in fact, even “normal” rates of 4%-6% would be a big problem.

[BfloGuy]

Too much bad advice in the officee of the prez.

I hadn't known that Volcker was so instrumental in creating the situation he would eventually end up fixing.

[count-your-change]

Do you remember when the prime rate was over 20%?