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Federal Reserve Board Oral History Project: Interview with Donald L. Kohn Federal Reserve Board Oral History Project Interview with Donald L. Kohn Former Vice Chairman, Board of Governors of the Federal Reserve System Date: May 27, 2010, and August 5, 2010 Location: Washington, D.C. Interviewers: David H. Small, David E. Lindsey, and James Clouse Federal Reserve Board Oral History Project In connection with the centennial anniversary of the Federal Reserve in 2013, the Board undertook an oral history project to collect personal recollections of a range of former Governors and senior staff members, including their background and education before working at the Board; important economic, monetary policy, and regulatory developments during their careers; and impressions of the institution’s culture. Following the interview, each participant was given the opportunity to edit and revise the transcript. In some cases, the Board staff also removed confidential FOMC and Board material in accordance with records retention and disposition schedules covering FOMC and Board records that were approved by the National Archives and Records Administration. Note that the views of the participants and interviewers are their own and are not in any way approved or endorsed by the Board of Governors of the Federal Reserve System. Because the conversations are based on personal recollections, they may include misstatements and errors. ii Contents May 27, 2010 (First Day of Interview) ........................................................................................ 1 Background and Education ............................................................................................................. 1 Working at the Federal Reserve Bank of Kansas City ................................................................... 6 Moving to Federal Reserve Board in 1975 ..................................................................................... 9 Arthur Burns ................................................................................................................................. 12 Working in the Government Finance Section ............................................................................... 15 Publicly Communicating Policy Changes Starting in the Second Half of the 1970s ................... 15 Working in the Capital Markets Section ....................................................................................... 17 Writing the Bluebook .................................................................................................................... 20 Steve Axilrod ................................................................................................................................ 22 Volcker: The New Operating Procedures and Credit Controls ................................................... 24 Working with Chairman Volcker ................................................................................................. 32 February 1986 Board Vote on the Discount Rate ......................................................................... 40 Stock Market Crash of 1987 and Issues of Financial Plumbing ................................................... 43 Monetary Policy in the Late 1980s and the Early 1990s .............................................................. 49 The Productivity Boom ................................................................................................................. 60 Director of the Division of Monetary Affairs ............................................................................... 64 FOMC Meetings ........................................................................................................................... 68 Greenbooks and Bluebooks .......................................................................................................... 71 Summary of Economic Projections .............................................................................................. 75 Asset Bubbles ............................................................................................................................... 78 Supervision, Unconventional Policy, and Mission Creep ............................................................ 82 Basel I and II ................................................................................................................................. 85 Bank Supervision .......................................................................................................................... 86 iii The Role of Reserve Banks .......................................................................................................... 88 Composition of the Board of Governors ....................................................................................... 90 Managing at the Fed ..................................................................................................................... 92 The Structure of the Federal Reserve System ............................................................................... 96 August 5, 2010 (Second Day of Interview) .............................................................................. 104 How the Macroeconomy Works ................................................................................................. 104 Financial Institutions and Markets .............................................................................................. 112 Fed Independence ....................................................................................................................... 117 Central Banks and Banking Supervision .................................................................................... 119 iv May 27, 2010 (First Day of Interview) MR. SMALL. Today is Thursday, May 27, 2010. This interview is part of the Oral History Project of the Board of Governors of the Federal Reserve System. I am David Small of the FOMC (Federal Open Market Committee) Secretariat in the Board’s Division of Monetary Affairs (MA). I am joined by David E. Lindsey, who was a deputy director in MA when he retired in 2003. Also present is James Clouse, currently a deputy director in MA. We are conducting this interview with Donald L. Kohn, the current Vice Chairman of the Board of Governors of the Federal Reserve. Don started his career in the Federal Reserve System in 1970 at the Federal Reserve Bank of Kansas City. This interview is taking place at the Board of Governors in Washington, D.C. Don, thank you for taking time to participate. All of us here, for significant parts of our careers, worked for you. It was a pleasure, and thank you for that experience. Background and Education MR. SMALL. Let’s start with your family background, early education, and the training that led you to the Federal Reserve Bank of Kansas City. MR. KOHN. I grew up in the northern suburbs of Philadelphia, Cheltenham Township, and attended Cheltenham Township public schools: Schumacher Elementary School, Elkins Park Junior High School, and Cheltenham High School. Both my mother and my father worked in the nonprofit public-service sector. My mother was an elementary school art teacher, and my father worked for the YMHA, or the Jewish Community Centers of Philadelphia, as the comptroller. I have two siblings. My sister is a recently retired public school teacher; she taught in the suburbs of Detroit. My brother is a refugee from the hippie generation. He was on a commune Page 1 of 124 Oral History Interview Donald L. Kohn in southern Oregon and ended up as an entrepreneur. He owns some shops that sell wood stoves, pellet stoves, and has a chimney sweep operation in south Oregon. I was an undergraduate at the College of Wooster in Wooster, Ohio. I was looking for a small liberal arts school. Wooster was a good school, and I was impressed when I went for a visit. Since graduating, I’ve been back every couple of years for one thing or another. I gave a lecture there once and was part of a symposium once. I received an honorary degree a couple of years ago. I went to the University of Michigan for my graduate studies. I liked Michigan because it had a policy orientation. Unlike many others, I came to economics from the softer side rather than the harder side. I wasn’t a failed physics major who ended up in economics the way so many people I know were. When I went to college, I thought I might major in history. I loved history, and I took a bunch of history courses. But when I got into economics, I really liked the idea of applying a disciplined and orderly way of thinking about problems to an aspect of human endeavor. And I liked the fact that you could apply that orderly, disciplined way of thinking about people’s behavior to public policy issues: how many people are working, how wealth is distributed, welfare, and that sort of thing. I took my first economics course as a sophomore, Intro to Economics. I had terrible teachers in my introductory courses, but I liked the subject. Paul Samuelson’s textbook attracted me. I ended up majoring in economics at Wooster, and I went to the University of Michigan in large part because it had a reputation of being a good school with a policy-oriented approach. Michigan sent a lot of people from its faculty to the Council of Economic Advisers. MR. SMALL. You’re known as a clear, precise writer. Were you always good at writing? Page 2 of 124 Oral History Interview Donald L. Kohn MR. KOHN. No, I wasn’t. I remember turning in the first draft of my dissertation and getting back a comment from my adviser saying, “I think all the things you need
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