Federal Reserve Board Oral History Project Interview with Paul A. Volcker Former Chairman, Board of Governors of the Federal Reserve System Date: February 25, 2008; January 28, 2008; July 22, 2008; July 28, 2008; October 23, 2008; October 24, 2008; December 29, 2009; and March 24, 2010 Location: Washington, D.C., and New York, New York Interviewers: For February 25, 2008, David Skidmore and David H. Small; for January 28, 2008, Donald L. Kohn, Lynn S. Fox, and David H. Small; for July 22, 2008, Lynn S. Fox and David H. Small; for July 28, 2008, David H. Small, Lynn S. Fox, and Robbie Colby; for October 23, 2008, Lynn S. Fox, David H. Small, and Cynthia Rotruck Carter; for October 24, 2008, Lynn S. Fox, Cynthia Rotruck Carter, and David H. Small; and for December 29, 2009, and March 24, 2010, David H. Small and Jeffery Ernsthausen 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 February 25, 2008 (First Day of Interview) ................................................................................ 1 Family Background ......................................................................................................................... 1 January 28, 2008 (Second Day of Interview) ............................................................................ 29 Education and Early Training ....................................................................................................... 29 At Chase Manhattan Bank ............................................................................................................ 42 From Chase Manhattan Bank to the U.S. Treasury ...................................................................... 47 Becoming Undersecretary at Treasury ......................................................................................... 57 New York Reserve Bank President: 1975–79 ............................................................................. 64 Chairman of the Federal Reserve Board: August 1979–August 1987 ......................................... 72 July 22, 2008 (Third Day of Interview) ..................................................................................... 84 The New Operating Procedures: October 6, 1979 ....................................................................... 84 Relationship between Chairmen and Vice Chairmen ................................................................... 87 Working with Other Governors, Reserve Bank Presidents, and Board Staff ............................... 89 Relationship between the Fed and the Congress ........................................................................ 102 Volcker Constituency and Advisers during the Inflation-Fighting Years .................................. 114 July 28, 2008 (Fourth Day of Interview) ................................................................................. 119 Pressures on the Chairman .......................................................................................................... 119 Financial Crises in the 1980s ...................................................................................................... 132 1980 Credit Controls ................................................................................................................... 133 More on the Volcker Chairmanship: Leading Up to the 1984 Presidential Election ................ 142 The Chrysler Bailout ................................................................................................................... 148 Air Traffic Controllers Strike ..................................................................................................... 154 The Hunt Brothers and the Silver Crisis ..................................................................................... 154 iii Penn Central, Lockheed, Franklin National, and Other Crises ................................................... 157 Octover 23, 2008 (Fifth Day of Interview) .............................................................................. 160 NY Fed Presidency and Banking Regulation ............................................................................. 160 Investment Banks ........................................................................................................................ 170 Too Big to Fail ............................................................................................................................ 171 Financial Crises ........................................................................................................................... 171 Mark-to-Market Accounting ....................................................................................................... 179 E. Gerald “Jerry” Corrigan ......................................................................................................... 182 Management Philosophy and Issues ........................................................................................... 183 Banking Liberalization ............................................................................................................... 185 Regulatory Agencies ................................................................................................................... 188 Penn Square and Continental ...................................................................................................... 190 Current Financial Crisis .............................................................................................................. 197 October 24, 2008 (Sixth Day of Interview) ............................................................................. 198 Breakdown of the Bretton Woods System in 1971 and the “Volcker Group” ........................... 198 Capital Standards ........................................................................................................................ 201 Bank for International Settlements ............................................................................................. 205 Are Banks Special? ..................................................................................................................... 210 Efforts to Change the Regulatory Structure of Bank Supervision .............................................. 212 Texas Bank Failures .................................................................................................................... 216 The Perfect Regulator ................................................................................................................. 217 The Fed’s Role in the Payment System ...................................................................................... 220 Financial Crises ........................................................................................................................... 222 Fannie Mae and Freddie Mac ..................................................................................................... 230 iv Latin American Debt Crisis in 1982 ........................................................................................... 232 More on Too Big to Fail ............................................................................................................. 253 December 29, 2009 (Seventh Day of Interview) ..................................................................... 258 International Monetary Policy after the Demise of the Bretton Woods Agreement .................. 258 Chairman Volcker Outvoted on the Discount Rate: February 24, 1986 .................................... 268 Board Committees ...................................................................................................................... 276 Board’s Responsibility for Consumer Affairs ............................................................................ 276 Elections to the Board of Directors at the Reserve Banks .......................................................... 277 Supervision and Regulation at the Board and Reserve Banks .................................................... 279 Regulation in the Current Structure of Financial Markets and Institutions ................................ 284 March 24, 2010 (Eighth Day of Interview) ............................................................................. 292 Paul Volcker for Fed Chairmanship in 1965? ............................................................................ 292 Working at Wolfensohn and Company, LLC ............................................................................