[독서노트] Keeping at it - Paul Volcker

Review

Recently, I've only been reading books from a narrow range related to my career or self-help. So it wasn't easy to read this book filled with economics concepts that I learned long ago in college and forgot about. While I wasn't able to finish the book, I still enjoyed learning about the author's vision and how he tried to apply that in his esteemed roles. The book also felt more relevant and useful to me as I have started to invest since Covid. 

 

The first few chapters highlighted how price stability was emphasized in the author's courseworks and by his colleagues. It was impressive how he tried to convince people to change the fixed exchange rate framework that was agreed upon by Post WWII allies. I enjoyed how the author detailed the process of negotiation and discussions with other countries. Contrary to my preconceptions, the process of changing the exchange rate and dollar price of gold seemed more arbitrary--I thought it was something that was based on an automatic formula, rather than behind-the-table conversations or over-the-table collaborations. The concept of value of money was more fickle than I thought. To some extent, now I kind of get why some people love Bitcoin/cryptocurrencies (I never really understood why they were telling me that money is just a concept that people agreed on to put value).

 

The economic vibe feels quite similar to what we are experiencing today--high inflation, rising interest rate and oil prices. Now I understand why the Fed and other economists in government have to raise interest rates, despite the pain that everyday people will face. The lesson is quite applicable in our daily lives too--you need to do what needs to be done, even if it’s painful. The longer it waits, the greater the risk. I was also impressed by the scene where Paul meets the community housing leaders who showed up to complain about the rising interest rate. It was admirable that he faced the people who blamed him, and tried to explain to them why it needed to be done.

 

Notes from the Reading

• “Volcker Rule”
• Memoir
• Breakdown of effective governance in the US
• Need to restore trust in our government

Chapter 1: Growing Up

• New Jersey
• His father: Teaneck City Manager/Engineer —did a great job; US Army selected as Model Town

Chapter 2: Getting an Education

• School of Public and International Affairs (Later Woodrow Wilson School @Princeton)
• Was good at Math and Science too
• Did not major in Economics or take Econ 101; took more advanced classes though
• “Economic laws cannot be depended upon if we disregard psychology” - handwritten note from Mom’s textbook
• Prof. Frank Graham (Thesis Advisor): Price stability is key objective to public policy
• Banks hesitate to deal with inflation at early stage
• Summer internship at Fed Reserve Bank calculating “Federal Reserve Float” or “currency in circulation”: These directly influences money supply and indirectly influences short term interest rates
• Political Economy PhD @ Harvard
• Currency speculation, international capital flows

Chapter 3: Early Experience

• Works at New York Fed
• Stability of Currency
• Supply of money is related to inflation process
• Trading desk (where Fed bought or sold treasury securities) was where policy met market
• Job as Chief economist at Chase Bank

Chapter 4: Off to Washington

• New President: JFK
• US was spending more money abroad than it was getting back; foreign governments were demanding that USD convert to gold
• Big question for administration was tax reform and reduction
• Paul did economic forecasting
• His analysis suggested tax reduction will boost consumption and surge in investment
• US Gold ($17M) no longer covered foreign dollar holdings ($23B)… and kept dropping
• Foreign currency swaps
• “Roosa Bond”
• Short-term capital was exempted
• Building world trade center; Port Authority needed to know if bond offered would be tax exempt
• New international reserve asset to complement and eventually substitute gold, and thus reduce pressure on the dollar
• December 1965, Fed raised discount rate to 4.5% from 4%
• Beginning of the crippling Great Inflation of the 1970s
• Paul returned to Chase in 1957
• Chase was strong in domestic lending and relations with regional banks, but fell behind Citibank in developing world

 

Chapter 5: “The Best Job in the World”

• Granted responsibilities for both domestic and international finance
• Liabilities to Foreigners were 4 times the gold reserve at this point
• Gold’s “market” price vs “official” price ($35/oz)
• Economic advisors call to allow more fluctuation between currencies
• Milton Friedman (freely floating exchange rate) vs Bob Roosa (floating exchange rate will create instability)
• 1969: Gold reserve was 25% of foreign dollar liabilities; analysis reinforced the need for changing the fixed exchange rate framework
• Objective: Reducing the dollar’s value relative to other currencies to help boost exports, reduce imports, and narrow balance of payments deficit
• “paper gold”
• Approach: 1) suspend gold convertibility 2) explain exchange rate changes 3) impose 3 months wage and prize freeze 4) only after exchange rate negotiations could we consider a more reformed system
• Nixon and Connally added: 10 percent surcharge on imports, tax cuts and credits, trade restrictions

Chapter 6: Monetary Reform Frustrated

• Nixon: taking “bold leadership” to “create new prosperity without war”
• Stocks soared
• Connally: political instincts
• Agreement with France; gold USD price raised to $38/oz but Franc remained (Depreciated USD)
• Smithsonian Agreement: Most G-10 countries agreed to appreciate their currencies
• “temporary” agreement on floating still remains today
• Nations want 1) full control of their own monetary and fiscal policies 2) benefits of free flow of capital cross nations 3) stable/predictable exchange rates
  • But often they need to pick 2 of 3
• Fannie (est. 1930s) support long term residential mortgage market; privatized in 60s; run up of 2008 crisis
• watergate scandal; Paul leaves treasury in 1974

Chapter 7: Back to the Beginning

• Paul joins New York Fed again, starting 1975 (as President; fyi it was first job as economist)
• Animosity within New York Fed’s leaders
• Spent interlude at Princeton; not enough teaching in public management
• Hoped to bridge the board and the bank
• Bureaucracy still remained
• Lagged in efficiency on routine operations
• Concern: growing volume of bank lending to Lat Am countries
• Ambiguous indicators of risk
• Citi was leading lender; their approach was that countries could not go bankrupt
• Citi fined for falsifying bank’s book ($1MN); disguised cost of gifts for opening account in their internal account
• Became concerned about monetary policy being overly easy

Chapter 8: Attacking Inflation

• Inflation in part driven by the oil crisis
• Meeting Jimmy Carter; three points: 1) independence of Fed Reserver 2) Fed would have to deal head on with inflation 3) tighter policies
• Paul became Fed’s Chair
• Much lower salary then New York Fed president
• short term market interest rate change was too small; too little, too late; needed new approach
• Simply, Fed would control money supply rather than price of money (interest rate)
• Long term rates mirrored short term rise; Fed didn’t intervene; 3mth treasury bills rate exceeded 17%
• HIGH interest rates
• Paul met community leaders (concerned for community housing projects; needed interest rate breaks)
• Recession in full force 1981
• President Reagan visits Fed to meet Paul
• Home builders hate Paul
• Finally Summer 1982 inflation fell
• Basic anti-inflation policy hadn’t changed; it was a matter of tactics
• Reappointed
• Lesson: you need to do what needs to be done, even if it’s painful; the longer it waits, the greater the risk
• “Inflation is always and everywhere a monetary phenomenon”
• 1984: Reagan orders to not raise interest rates before the election
• ??
• Just left lol
• Reminder of pressure that politics can exert on the Fed as elections approach