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The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies. Federal Reserve Bank of St. Louis  Volcker Correspondence -- 1971  Collection: Paul A. Volcker Papers Call Number: MC279  Box 23  Preferred Citation: Volcker Correspondence, 1971; Paul A. Volcker Papers, Box 23; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: and  The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis  DEC k.,7 1971 THE CHAIRMAN OF THE COUNCIL OF ECONOMIC ADVISERS WASHINGTON  December 22, 1971  Dear Paul: That party at the State Department last evening was a wonderful event, and Ruth and I are deeply grateful to you for having been a host. The Revere bowl will long serve as a tangible reminder of that lovely evening. We shall forever remember these as another expression of those warm friendships which have made this Washington tour of duty so rewarding. Best wishes for the new year. Regards,  Honorable Paul Volcker Under Secretary for Monetary Affairs Department of the Treasury Washington, D.C.  FEDERAL RESERVE BANK OF NEW YORK NEW YORK, N.Y. 10045 AREA CODE 212 732-5700  December 16, 1971  The Honorable Paul A. Volcker Under Secretary of the Treasury for Monetary Affairs Room 3312 Main Treasury Building Washington, D. C. 20220 Dear Paul: I want to thank you for your thoughtfulness in sending Donald Hunter such a nice note on his retirement. We presented it yesterday to Donald at a special luncheon attended by almost 50 of Donald's friends. A number of your old friends were there--Bob Stone, John Larkin, Ed Geng, Bill Crotty, Pete Hansen, and Ernie Bloch, who represented the academic alumni. In making the presentation of the letters, I took the liberty of reading yours to Donald and the group. It served as a fitting highlight of the occasion. Donald was enormously pleased. Again, thank you for your notable contribution to Donald's day. I am sure that that volume of letters will have an honored place in his new home in the Florida lake region. Federal Reserve Bank of St. Louis  Best regards. Sincerely,  Paul Meek Assistant Vice President Federal Reserve Bank of St. Louis  November 3, 1971  Dear Mr. Rover: You may, indeed, publish my letter to you of September 8, 1971, in your local Scout Newsletter. Sincerely yours,  Paul A. Volcker  ; Mr. Joseph Kover  S I.  J- OSEPH KOVER  No 1-4e7  AA  DEAR  v ol, R --  /  PlaSi 0/-/ 7-°0  PLig1,aki Federal Reserve Bank of St. Louis  /  a 4it  12-4'I-1/J sji let//44_  Ace°  v.& zi v  rEieEr7",c1.1i.7/  September 8, 1971  Dear Mr. Kover: I am sorry to report that I was not directly affiliated with the Boy Scouts. I did, however, have a chance to observe, when my son was a Cub Scout, some of the benefits of the scouting movement.  Cub Scouting did provide a most welcome opportunity for developing interests with other boys in areas where he could participate. My daughter, for a number of years, was a Girl Scout, and I know that she not only enjoyed the experience but it assisted her in learning to work with other girls on a variety of projects. I hope, in the process, scouting taught her something of the need to accept her share of the responsibility, if the group as a whole was to function effectively. While understand there may be decreasing emphasis on "camping" in scouting, in her case I think the traditional experience of camping and outdoor activity was particularly useful. It was the type of activity with which she would otherwise have had little contact. Thank you for writing, and all my best wishes for success in your efforts. Sincerely yours, (Signed)  Ag,VolckA1  Paul A. Volcker Mr. Joseph Kover Federal Reserve Bank of St. Louis  - OSEPH KOVER J  A v6-‘15-r rRiL  A  fu9Cr  1 4.? -1 Atot-S-TER 5co/  ki/V  CV /%-1  e4:-LT'rf  A"AO ci772n7.1SA, ii  F. v  vAil7  S'CIO  /VA -7i "/. 1-147 itfro  vER  Sceo Q-7.1  tK  M r1 1.,/0 v re°1-1• 0\) 6,4fez_ rAr2 E",^16"  reo ez../AsEa Federal Reserve Bank of St. Louis  v \yetAc-  icvv  7-7'E;(  G---0  ( +-P/Y 1-1'q Al0 iCE-1 . 40  /41  ivervT  z  ‹z2  Ic4 efigetfil74" /9-.r  g vi i-i,J To  /77/  VoLc IcEe Ag  W  2,,  S-c0 C/-77-2.0‘4r.  2.0 C-73 Lrrf gi  if0 /  L'? Federal Reserve Bank of St. Louis  November 3, 1971  Dear Bob: I hope the remaining problems with IRS get solved promptly.  Some  day, I need an excuse to get to the Bahamas! Sincerely, 1 slfmcia) : Paul A. Volcker Mr. Robert W. Cavanaugh Chairman and Chief Executive Officer The Chase Manhattan Trust Corp. Ltd. P. 0. Box 1543 Nassau, Bahamas  THE DEPARTMENT OF THE TREASURY  DATE TO  10/27/71  Mr. Volcker  Mr. Cavanaugh's leffEr of October 21, concerning his 1969 income tax return came in today. You have seen his letter of October 22, which indicated the matter had been taken care of.  /?1/1 ndr /Vietee xuyetAd Room 3312  PAUL A. VOL CKER wekt,e, A Ext. 5635 Federal Reserve Bank of St. Louis  6etititANAPt  OCT 27 ii71 THE CHASE MANHATTAN TRUST CORPORATION LTD. P. O. Box 1543 Nassau, Bahamas ROBERT W. CAVANAUGH Chairman and Chief Executive Officer  October 21, 1971  Dear Paul: Reference: 1969 Federal Income Tax Return of Robert W. and Ruth Paul Cavanaugh Social Security P.O. Box 1543, Nassau, Bahamas I know you are extremely busy and regret bothering you, but we do need some help to get our money back from Internal Revenue Service. Would you please pass this on to the appropriate person. As partial payment for our 1969 income taxes Ruth and I made three estimated tax payments of 17,647.34 in April, July and September, 1969 and we requested that an overpayment of S269.00 on our 1968 taxes be applied against our 1969 return. We made other payments also, but these are not in question. The Internal Revenue Service Center in Philadelphia has lost track of the three payments and the overpayment credit and have been billing us for penalty and interest whereas, in fact, a refund was due us of S2,378.00 on the 1969 return. To compound the problem they have also taken a refund of 82,969.00 due us on our 1970 tax return and applied it against our 1969 return. We have twice sent them copies of our three cancelled checks showing their endorsements and have referred them to our 1968 return for the overpayment credit due. Also, we have twice sent them a copy of their own form 1124C which we received from them at the end of 1969 and which lists the three payments in question. Our last letter was dated August 25, 1971 and addressed to Mr. Vincent DeBlasio, Internal Revenue Service Center, Philadelphia, Pennsylvania 19155. We have had no reply. We would, of course, like to receive the S5,347.00 of refunds due us as soon as possible and would very much appreciate any assistance you can give. Best personal regards. Sincerely,  Hon. Paul A. Volcker Under Secretary of the Treasury 15th Street and Pennsylvania Avenue N.W. Washington, D.C. 20005 Federal Reserve Bank of St. Louis  co Z E by Ur. *tea — THE CHASE MANHATTAN TRUST CORPORATION LTD. P. 0. Box 1543 Nassau, Bahamas ROBERT W. CAVANAUGH Chairman and Chief Executive Officer October 22, 1971  Dear Paul, Reference is made to my letter to you of yesterday, October 21st concerning our 1969 taxes. Today we received a refund check from Internal Revenue. It is not the full amount due to us; however since they are taking some action there is no need for you to get involved. I will write them to try to straighten out the amount questioned. Best wishes and best personal regards. Sincerely,  Tx), Hon. Paul A. Volcker Under Secretary of the Treasury 15th Street and Pennsylvania Avenue N.W. Washington, D.C. 20005 Federal Reserve Bank of St. Louis  ii  THOMAS F. EAGLETON MISSOURI  ',Uniteb  Zertafe  WASHINGTON, D.C. 20510  November 3, 1971  Mr. Paul A. Volcker Under Secretary for Monetary Affairs Treasury Department Washington, D.C. 20220 Dear Mr. Volcker: Thank you for your very gracious response. I write nasty letters to "Dear Abbie" and to Nixon appointees. I have fulfilled my quota for the rest of the year. Again, your letter is much appreciated. Yours very truly,  THOMAS F. EA LETON United States Senator TFE:rh Federal Reserve Bank of St. Louis  November 3, 1971  Dear Senator Eagleton: However totally blank my mind must have been on Senatorial elevators, your message yesterday came through loud and clear. I can't judge the precise mixture of anger, frustration, or sheer incredulity in your mind. In any event, there is no way for an "instant replay," with my head and mind out of the clouds. The nearest I can come, now that I am out of my personal space capsule, is to apologize for my ham-footedness (and I know it is a large and heavy one) and ham-headedness. I can only ask, for my peace of mind as well as theirs, that my personal pecularities and gaucheries not be attributed to all Administration Congressional relations -- or vice versa! About that foreign aid bill -With apology,  (Signed) Pa-.12. A.  Paul A. Volcker  The Honorable Thomas F. Eagleton United States Senate Washington, D. C. Federal Reserve Bank of St. Louis  NOV 2 1971 THOMAS F. EAGLETON MISSOURI  11Cnifeb Ziatez Zertafe WASHINGTON, D.C. 20510  November 2, 1971  Mr. Paul A. Volcker Under Secretary for Monetary Affairs Treasury Department 15th and Pennsylvania Washington, D.C. Dear Mr. Volcker: Having worked very closely with the Treasury Department on the Railroad Retirement Bill a year or so ago, I was most appreciative of the dispassionate treatment I received from you and your staff when you charged on the Senate elevator yesterday at the noon hour and shoved me and my staff to the rear. Although you stared blankly at me, I am pleased that you did recognize my feet by stepping on them. The Nixon record on Congressional relations continues unblemished by one ounce of personal warmth, charm, or fundamental cordiality. Who knows, with your finesse, perhaps they will put you in charge of lobbying for the next foreign aid bill. Yours very truly,  RJ THOMAS F. EAGLE ON United States Senator TFE:rh Federal Reserve Bank of St. Louis  OCT 2 9 1971  Dear Senator Javits„ Thank you for forwarding to mai the lett er you received from 4r. Fred Cartoun. his suggestio n that a deValuatiou of the dollar against gold be undertaken on a gradual basis so that the benefit to gold holders is less per year than the benefit that could be gained through int erest ot other investmenta, while not unfamiliar, is interesting. As you know, we believe the role of gold in the system should be diminished rather than exp anded, a view I believe you share. I think any move to increa se gold's price tends to work against this trend. Obviously , the smaller, and, in the CASA of Mr* Cartoun's suggestio n the more gradual, the change the more thiu argument is dim inished. It remains a fact, however, that some interest con tinues to be shown in gold by 4 member of people, even at the present high price and fregosiatly high interest costs of regent times. A wove such as Mr. Cartoun suggests encour age it redeem; the economic cost of gold s this tendency because speculation even though it would not rove it completely. If the situation were such that universal belief that exchange rate there were a fairly adjustments would take place only on a very gradual bas is, the viability of such movements would be enhanced. At the there is a need for a rather sitonifi present time, however, cant restore equilibrium. The position take realignment to n by a number of other countries that the United States shou ld participate in this realignment envisages something mor e and it is doubtful such a gradual movthan a gradual movement e would significantly improve our negotiatiug position eves were we prepared to engage in it. Rather intense consideration WAS giv en several years ago to various proposals that may be lump eU under the heading of crawling pegs. One issue in these con siderations was whether the dollar itself should crawl. Wer e it to do so, the system would be essentially similar to tha t suggested by Mr. Cartoun. While there was a general recognit ion of the need for greater Federal Reserve Bank of St. Louis  1111110,  exchange rate flexibility, a systegl of crawling pegn as 3uca found little support, although the idea *it, of course, be revived alonq with other suggestions as consideration of future changes in the monetary system progresses. Thank you again for forwarding Mr. Cartoun's letter. With best wishes, Sincerely,  -  gcuJ Paul A. Volcker  The Aonorabie Jacob K. Javits United States Senate Washington, D. C. 20510  OASIA:TPNelson:EB Federal Reserve Bank of St. Louis  10/27/71  iAtosaitt 11;4144-4-iebt.404,,e 047,1i4 ' SMITH, BARNEY &CO INCORPORATED  TIWA 45 AVENUE OF THE AMERICAS  WILLIAM R. GRANT PRESIDENT  NEW YORK, N. Y. 10019  October 5, 1971  The Honorable Paul A. Volcker Under Secretary for Monetary Affairs 15th Street & Pennsylvania Ave., N.W. Washington, D.C. 20220 Dear Paul: I was pleased to meet you at the dinner last Sunday night for Baron Snoy. One of the pleasures of my position at Smith, Barney is such an opportunity. We chatted briefly about some changing economic trends destined to influence the dollar from the private sector viewpoint. In summary, as we see it these are: 1.  A declining rate of capital spending by U.S. corporations, first in South America, now Europe and soon the Middle East. The OPEC demand for 20% of corporate assets virtually guarantees the latter trend.  2.  U.S. corporations and a rising number of foreign ones are looking at the U.S. economy as having more relative attraction than in the last decade.  3.  Foreign investment in U.S. equities will accelerate as earnings of U.S. corporations continue to recover while foreign earnings decline.  When combined with the public sector these factors could well produce a worldwide demand for the dollar relative to other currencies as 1972 rolls on. Federal Reserve Bank of St. Louis  I thought you might find the enclosed propaganda of interest.  2  The Honorable Paul A. Volcker  October 5, 1971  I would like to discuss a personal matter with you which would be of some interest for both of us. Please let me know what is a convenient time. Sincerely,  Wi liam R. Grant WRG:ecm Enclosures Federal Reserve Bank of St. Louis  alb  HARRY P. HILLEN  zeis) 19.e/ 114)01 Ge44.l 0(.  r--)  -0)  -e  c, .4 )  ,  14-  ;2e 1-e  -797 ,e.e.‹, 4 9y  _  L  e  / Federal Reserve Bank of St. Louis  co—cd  eZ4 Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis  September 20, 1971  Dear Harry: Thanks for your note. to hear from you.  It is good  We don't print big  notes, by the way, but retire them only as received in the normal course. Sincerely,  Paul A. Volcker  Mr. Harry P. Hillen Federal Reserve Bank of St. Louis  September 7, 1971  Dear Sven: In Paris on Friday, I was happy to hear that you are coming along even faster than anticipated. It was very good news for us all. We hope to see you back in circulation in the shortest possible time. I will admit there is a certain amount of work to be done in the international monetary area, but we promise not to leave too much of it to you! Sincerely,  (signed) ' 7 11 Paul A. Volcker  Mr. Sven Joge Deputy Governor Bank of Sweden Box 2119 Stockholm 2, Sweden  August 12, 1971  Dear Bill: Many thanks for sending me your thoughtful piece on international economic affairs. I might differ on some of the technical possibilities, but your concern and sense of frustration is widely shared. I feel we are at a turning point where U. S. leadership needs to be forcefully executed if forces of "retreat are not to hold sway, and we will need the influence of you and others to keep us on the trail. Sincerely,  Paul A. Volcker  Mr. William Blackie Chairman Caterpillar Tractor Co. 100 N. E. Adams Street Peoria, Illinois 61602 Federal Reserve Bank of St. Louis  CO  CATERPILLAR TRACTOR //1 • -  Peoria, Illinois 61602  Chairman of the Board August 3, 1971  The Honorable Paul A. Volker Under Secretary for Monetary Affairs Treasury Department Washington, D. C. 20220 Dear Paul: As you know, I am not a "money man" and this undoubtedly contributes to both the concern and frustration which I feel about the current course of events -- and particularly about the counterproductive trends in matters of international trade and investment. My ignorance has not, however, inhibited me from having ideas -- or even voicing them as I do in the enclosed copy of a letter to Mr. Pierre-Paul Schweitzer, Managing Director of the IMF. You, on the other hand, are both more knowledgeable and much more influential. I trust, therefore, that you will be sympathetic enough to give my thoughts some consideration -- and then improve upon them. If we who are in the business of making, buying and selling "things" are to be of maximum benefit to our country, we need help -- especially in those matters which are beyond the power to influence them. Among these, none is more important at this time than such modification of the international monetary system as will permit, encourage or even force the participating subscribers to act responsibly on the basis of "all for one, one for all." Regards. Yours c.Ordially,  WBlackie er enc. Federal Reserve Bank of St. Louis  CO.  vd.  CATERPILLAR  Chairman of the Board  TRACTOR  CO.  Peoria, Illinois 61602 August 3, 1971  Mr. Pierre-Paul Schweitzer Managing Director International Monetary Fund 19th and H Streets, N. W. Washington, D. C. 20431 Dear Mr. Schweitzer: The forthcoming September meeting of the IMF could be and should be made the most important since the Bretton Woods meeting in 1953. At that time exchange parities were established for the currencies of the major countries of the free world and, on the whole, the system then established has stood up fairly well. Until now: During the course of time since 1953, there have been adjustments in some parity rates. For the most part these were made under the compulsion of crises generally brought about by failure of the responsible parties to act -- appropriately and timeously -in recognition of the demonstrable fact that, in the processes of industrial and economic change, earlier fixed parities had become so outdated that they were distorting and impeding important aspects of international trade and investment. And the primary purpose of money is, of course, to aid and facilitate trade and investment. This is a subject in which I, as a responsible officer of a so-called multinational corporation, have a deep concern, and I have taken a number of opportunities to speak on it to our shareholders and to others. As an example of the latter, I am taking the liberty of enclosing a copy of an address which I delivered in June in both Belgium and the U.K., but would refer you only to that part of it dealing with international monetary matters, beginning at page 10. The principal effects of disparities in exchange rates are felt by concerns such as ours in changes in the patterns of (1) imports and exports and (2) the location of capital investments in manufacturing facilities. As international trade has evolved Federal Reserve Bank of St. Louis  CATERPILLAR  TRACTOR  CO.  -  2 -  and expanded, it has been followed by a related internationalization of production. This has generally been undertaken for either or both of two major purposes: (1) to meet international competition and (2) to obtain the comparative advantage of leastcost sourcing. As is mentioned in my address (page 5) "This emergence has in turn produced counterreactions reflecting the fact that if manufacturing survival based on least-cost source were to be carried to an extreme there would be a generally unacceptable relocation of investment, production, employment, profit and taxes." In the judgment of certain industrial, labor union and political forces within the United States, the point of such unacceptability has been reached. Evidence of this was shown in the proposed Trade Act of 1970 -- directed primarily to the imposition of quotas on imports of textiles and shoes but also having some other even more dangerous provisions. Though aborted by due parliamentary process, the support for that bill nevertheless indicated the extent to which those smarting from imports -including labor unions -- could obtain protectionist "sympathy" in the Congress. Now this movement away from that liberalization which has so successfully fostered trade and investment is about to come under more intensive attack from American labor unions claiming harm to their members not only from imports but also from the so-called "export of jobs" -- alleged to arise from foreign direct investments by U.S. industry. And this attack comes, it should be noted, when U.S. unemployment is undesirably high -and also at a time when certain legislators become more sensitive to the fact that their future may depend more on the votes of their particular constituents than on any adherence to economic principles about international trade and investment. Apart from their direct claims for "protection" against imports, major U.S. labor unions are now pressing for governmental measures which would: Federal Reserve Bank of St. Louis  1.  Stop helping and subsidizing U.S. companies in setting up foreign subsidiaries.  2.  Curb U.S. corporate investment overseas.  CATERPILLAR  3.  TRACTOR  CO.  -  3  Regulate and control the operations of U.S. based multinational companies following a Congressional investigation.  4.  Repeal Section 807 and similar provisions of the U.S. Tariff Code "which encourages the export of American jODS through special low tariffs on imports of goods that are partially foreign produced."  5.  "Enforce U.S. laws on unfair competition and antitrust, as they apply to imports."  6.  "Examine methods to bar the use of U.S. trade and investment policies for strikebreaking and the undermining of American labor standards."  7.  Renew and expand trade agreements for "industries and for products sensitive to disruption by rapidly rising imports and unfair competition."  8.  Provide "minimal" extensions of tariff cutting authority and none if methods of import valuation, e.g., American selling price, are to be changed.  9.  Seek development of "workable international fair labor standards."  10.  Promote export expansion but without tax incentives or subsidies to business.  11.  Require labeling of foreign products and foreignmade components.  12.  Require collection and publication of adequate data on the activities of U.S. based multinational companies.  These twelve proposals are excerpted from a speech by Mr. Nathaniel Goldfinger of the AFL-CIO, and it will be noted that they tend to concentrate upon the activities of the multinational corporation. In a change of policy, it is now reported Federal Reserve Bank of St. Louis  NI1111111111,  CATERPILLAR  TRACTOR  CO.  4  that the UAW is also about to adopt more restrictive policies and to advocate government licensing of all U.S. capital investment abroad through a new Foreign Investment Licensing Board. This union was formerly on the side of expanded liberalization but has reportedly reached a conclusion that the combination of incoming automobile imports with the outgoing overseas investment by U.S. manufacturers is not in the interest of its members usually described as "the American people" (and presumably excluding those 15% who purchase foreign cars). When such pressures are compounded with U.S. deficits in trade, payments and national budget, ana with fears of further inflationary devaluation of the dollar, it will be fairly apparent that the United States is rapidly approaching a crossroads in its foreign economic policy. To be sure, there is a need for more constructive domestic measures -- and hopefully these will be delineated in the forthcoming report of a presidential commission established to make recommendations on the subject. But in an interdependent world, one country can only do so much, and this is particularly true in the workings of the international monetary system. Responsibility there rests, more than anywhere else, on the IMF and that is why I write to urge that the serious consideration which I know will be given to the subject be followed by speedy action. It is no longer appropriate just to consider how the international monetary system might be modified to avert or meet emergencies. There must also be definitive action which would recognize that, unless appropriate measures of a continuing nature are adopted to further rather than impede world trade and investment, the forces which have worked so effectively for liberalization are in danger of a setback which could jeopardize international relations on a scale which would seriously retard the more important pursuit of human welfare. Yours sincerely, ,-)  I  .  WBlackie hw enc. I am taking the liberty of sending copies of this letter to several of our mutual friends who are much more knowledgeable on the subject. Should any of them differ with the thoughts I express,  P.S.  I hope that they will so advise you. Federal Reserve Bank of St. Louis  WI3  Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to copyright protections.  Citation Information Document Type: Speech Citations:  Number of Pages Removed: 20  Blackie, William. Address before the American Chamber of Commerce (United Kingdom). Glasgow, Scotland. 22 June 1971.  Federal Reserve Bank of St. Louis  THE ASSISTANT SECRETARY OF COMMERCE Washington, D.C. 20230  Mr. Paul Volcker Under Secretary of the Treasury for Monetary Affairs 15th Street az Pennsylvania Avenue, N. W. Washington, D. C. 20220 Dear Paul: As you know, the President has accepted my resignation as Assistant Secretary of Commerce for Domestic and International Business, effective August 15. I am rejoining FMC Corporation and will be living in the Chicago area. Certainly one of the benefits of government service is the opportunity of meeting and working with others in a common effort. It has been a personal pleasure to have known and worked with you on a number of occasions, particularly during my brief tenure on the OPIC Board of Directors. I truly wish you success in your continuing endeavor, and hope that our paths will cross from time to time permitting us to renew our acquaintance and friendship. Sincerely,  Robert McLellan Federal Reserve Bank of St. Louis  tivolok-  t;  New Address of: ROBERT McLELLAN  Office:  Home: Federal Reserve Bank of St. Louis  FMC Corporation Prudential Plaza Chicago, Illinois 60601 Tel.: (312) 346-1800 Federal Reserve Bank of St. Louis  August 12, 1971  Dear Bob: I was surprised and disappointed to hear of your leavetaking -- probably the last fellow in Washington to have heard. We will miss your strong support for the right! But we will see you in private life as well. Sincerely,  Paul A. Volcker  The Honorable Robert McLellan The Assistant Secretary of Commerce Washington, D. C. 20230 Federal Reserve Bank of St. Louis  August 12, 1971  Dear Bob: I was surprised and disapp ointed to hear of your leavetaking -probably the last fellow in Washington to have heard. leve will miss your strong sup port for the right: But we will see you in private life as well. Sincerely,  Paul A. Volcker  The Honorable Robert McLell an The Assistant Secretary of Com merce Washington, D. C. 20230 Federal Reserve Bank of St. Louis  August 12, 1971  Dear Bob: I was surprised and disappointed to hear of your leavetaking -- probably the last fellow in Washington to have heard. We will miss your strong support for the rights But we will see you in private Life as well. Sincerely,  Paul A. Volcker  The Honorable Robert McLellan The Assistant Secretary of Commerce Washington, D. C. 20230 Federal Reserve Bank of St. Louis  August 12, 1971  Dear Bob: I was surprised and disappointed to hear of your leavetaking -- probably the last fellow in Washington to have heard. We will miss your strong support for the right! But we will see you in private life as well. Sincerely,  Paul A. Volcker  The Honorable Robert McLellan The Assistant Secretary of Commerce Washington, D. C. 20230  TREASURY DEPARTMENT OFFICE OF THE SECRETARY WASHINGTON. D.C. 20220  /  /744idea  , P'‘.  /. r-2'...sS / .7-., x  evr-e-ct h, -)7,  ir , t  ig itt,i,  • L-L A-4,-t,‘C  let  1.e_te/  ai-ta-ka  ezi5. a , r  /  1---kr-2.  ym  4k7y  /77  if7 -4 0"  /  .4ss W,tk óCdff' Az Federal Reserve Bank of St. Louis  Ve4-7 4  7-,WL  etpre-7-  di„c Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis  August 3, 1971  Dear John: I appreciate the thoughts in your letter. I suspect this is, in part, another symptom of the fact that Treasury financing just doesn't occupy the same place in the order of priorities it once did -- partly because the debt is (relatively) smaller and partly for wrong reasons. Your comment will be the subject of discussion here and with the Fed. So far as the last paragraph is concerned, passes all understanding! Sincerely yours,  Paul A. Volcker  Mr. John H. Perkins Executive Vice President Continental Illinois National Bank and Trust Company 231 South LaSalle Street Chicago, Illinois 60690  JR,  JUL 30 1971  N4TIONN4 Wain Titustr Cozowiaiir or CluszAGo  CoALILLINOIS 231 SOUTH LASALLE STREET  CHICAGO, ILLINOIS 60690  July 29, 1971 JOHN H. PERKINS EXECUTIVE VICE PRESIDENT  TELEPHONE: 828-7701  4f Mr. Paul A. Volcker Under Secretary for Monetary Affairs Department of the Treasury Fifteenth Street and Pennsylvania Avenue Washington, D. C.  mag' i t1/4,1r  Dear Paul: I was thinking about all of the unfortunate circumstances that develope to hurt what seemed to me a well conceived and initially well received financing.  tp  \)\,1  One thought that comes to my mind is this has nothing to do with the Burns ‘\,, versus Treasury affair, although these are the people involved. For many years it seems to me it was always understood that senior Treasury officials and also senior Federal Reserve officials would be very circumspect about making any statements that would affect a financing while the books were open. I am sure you recall certain times when some official, such as the New York Federal Reserve, made a statement that did affect a financing and everyone assumed that this was a major error and certainly was a mistake. IN1 Obviously, in the long run, the success of a financing will be determined by the terms and basic underwriting conditions. However, you well know that the market psychology and attitude can change rapidly and is a very delicate type of thing. Thus in anything but a very strong market climate it does not take much to change the situation. All of this is by way of saying that the comment Chairman Burns made on Friday after the announcement turned the climate from a favorable reception 411. to a negative attitude. I am sure that Arthur did not mean to do this but on reflection I am wondering if people are not ignoring the old caution of avoiding such situations while the books are open. I recall several situations where the Treasury would make a special effort not to be in a position of testifying on the Hill while the books were open, and certainly the Fed 4A) over the years has always been very circumspect about this. All of this is by way of suggesting that perhaps the Treasury might give some thought to this and, if desirable, perhaps do something to get people thinking more about it. I could be very wrong, but I do have the feeling Federal Reserve Bank of St. Louis  CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO CONTINUED  Mr. Paul A. Volcker  -2-  July 29, 1971  that the need for such caution may not be as widely recognized as I think was the case in past years. Of course the comments on a possible Federal Reserve reorganization on the Ticker Wednesday needs little more comment than I am sure you have already received, as Don Miller and I discussed with Charly Walker yesterday. Best regards. Sincerely  JHP:P Copy sent to: Mr. C. Richard Youngdahl Federal Reserve Bank of St. Louis  IN\  •  THE UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS WASHINGTON. D.C. 20220  July 20, 1971  Dear Claude: As I mentioned in Paris, we have decided to go ahead and formulate in somewhat more detail the ideas on limited exchange rate flexibility which I outlined to you. I am enclog a copy of a statement on the subject by Mr. Dale at yesterday's meeting of the IMF Executive Directors. I don't underestimate the difficulty of introducing some limited flexibility into the international monetary system without jeopardizing the stability of the whole. But we have also been aware of another, different danger -in the absence of some consensus on appropriate rules of conduct, individual countries, in response to speculative pressures or otherwise, might revert excessively to use of exchange ratos as a supplementaLy Lool of domestic policy. With that in mind, we have attempted, without being narrowly confining, to put some emphasis on setting forth the circumstances appropriate to the use of any additional flexibility. In case of wider margins, the Fund could withdraw the option to use wider margins if a member were using this technique irresponsibly. In the case of transitional floats, a finding of fundamental disequilibrium (as with any exchange rate change) would be required, and a Fund review process is envisaged if the float continues. It seems to me there is considerable room for common ground here, once one makes the assumption (as I do) that some additional flexibility must be found if the system is not to be shaken apart by ad hoc responses outside of any agreed framework. We, of course, recognize that the EC faces special problems in dealing with the flexibility issue. But I do not believe the framework proposed presents any special difficulties, relative to other proposals in the same area, and could, in fact, be less disturbing. Federal Reserve Bank of St. Louis  2  At the same time, I would not pretend the approach we have outlined necessarily represents the final word on the subject. I would only plead that it attempts to be consistent with the general thrust and spirit of the Bretton Woods exchange rate objectives and rules. I will be interested in assessing the reactions of others, in the hope that a broad consensus could be reached. Sincerely,  Paul A. Volcker  Mr. Claude Pierre-Brossolette Director of the Treasury Ministry of Economy and Finance 91 rue de Rivoli Paris ler, France  Enclosure Federal Reserve Bank of St. Louis  • TREASURY DEPARTMENT OFFICE OF THE ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS  mAktv, da.  Date  19  ) i i vAhA.  501---1  v  Sam Y. Cross Director Office of Developing Nations Room 5050 Federal Reserve Bank of St. Louis  Ext. 5081  •  a•  DRAFT:SYCross 7/19/71 Dear  -.4 •  4,44 i4444  le  , we have decided to rormulate in somewhat more detail the CPe-gt141 ideas on limited exchange rate flexibility which I outlined I am enclosing a  to you in our recent-meeting-±n-ftrls.  copy of a statement on the subject by Mr. Dale at the July 19 meeting of the IMF Executive Directors. I don't unaerestimate the difficulty of introducing some limited flexibility into the international monetary system without jeopardizing the stability of the aatire.oyetem. danger-But we have also been aware of another,, different . ; . ‘ c - 1'244_ 2 ..g4t.te,g speculative that countries, in response to the2-imprratIve, pressures, might revert excessively to use of exchange rates .as a supplementary tool of domestic policy. With that in ';',17416 4e,4411-u4e10/ mind, we hay suggested rules which could -govern the use of any additional flexibility-4n case of wider margins, the Fund could withdraw the option to use wider margins if a member were using this technique irresponsiblyi-in the case of transitional floats, a finding of fundamental disequilibrium / ,would be required, and a Fund review process is envisaged which  tiro permit the  you].  establishment of conditions determined  necessary by the general members194117I --bellever-rma--tmr-tritiffments share a common desire  IA  to  hoXinternationally agreed rules and safeguards/govern the e ar4-41.-d_ekr 'F-A' /../Xt...4iresent we Ti-e-TECed rate flexibility. use of exchange 4,11,4-mott  /7,1   4:t Federal Reserve Bank of St. Louis  At 4  eyttild  NtAfre tGraf.4.4  /-t4,40.444 ARAAW Ape/  - 2 with a number of exchange rate practices whi .5b. were initiated o4side the scope of the IMF Articles and to which no such internationally agreed safeguards apply.  I believe that  changes in rules along the lines we are suggesting would im) and prove the effectiveness of international principles would do much to avoid the danger of a spread of exchange rate practices outside the scope of the present rules and possibly a Ireakdown-el the present system. We'recognize that the EC faces special problems in tittrt it may-wish to move toward narrower internal margins. We ' would hope that the framework we have proposed would not I inhibit any such move or seriously increase the problems oxthtodia of moving toward differential margins.  --„,(  The approach we have outlined do  :7L  represent the final word on this  (;J  7Lt'  omplex issue. -1 would—be  glad_to_hear any views or comments which you may have on the )/(4. subject. "W' 41, 4 Federal Reserve Bank of St. Louis  Sincerely yours,  PAV  epAiuu 4.04 Ad„„ ttiok. af, Gui 144 1,  JUL 2  1971  Dear Mr. Rutts: /Aave bawl asked to reply to your loiter. of .- ay 14, 1)71 to Vico rnisident Ages", contrernin.: the .-,%;notarv syste-. At tii,asi the strict metallic standards probably appear attractive as siler and mere dirct gechaslistiks for Jealiw. with problems of inflation, recession ana international paynts ir4ballancos. If we look ;-oro closely, t'notilh, those meehonislgs sold.= worked on textbook lines. When they did, it was often at a cost in terms of real incooe and personal eistazy for many pctople which woulkl not by tolerable th6jol to4ey. zior is the record of prico stability stan4ard is the U.S. any tab enviaLle it corl)arison with our per ormenee durin9 the last 25 yam. You will a4ree, 1 ;v1 sure, that our broad national econo.-14c ais of i=owth, prosperity, high ow=ployent, antl price stability are letlitiate oasts. Nearly all countries 41race similar goals, and nearly all have concicAed that modity stantlard which leave they are uaattainsble under a crv, the imonowy hiqhly exposed to outside c_iisturbancas and whieh akes extreQly difficult the conscious use of xionotary policy as a si9nificant alle flexible ecc4lonic instrunert. wbil Iwould not wont to make a came that 9overamentz -t:!einly responsible for tht wrld's rearkable been have econoTA.c 1:,rograss in the pest several ‘iecades, I do thing a,3aptab1e ;:onctary instrum*nte, though .i.perfect, have suFportRitd this aifivance and have helped to protect both tile d.orvstic and the intorntimal system* trout Aisturbances under-vetellic standards, right have been !-7A)re serious. It is tree that we have hod en mamelcoTre inflation in caveat years in the U.S. But it is also true that the Federal Reserve Bank of St. Louis  -2 _ ed to restoration of price cjoinara,=.e.nt is firsay coAltt . I tlelieve titat the stability and econolAc growth le policy which is notAtulnerab availability of a Ponetary allic standar6 is 414 important to the vicissitk.Ces of a met s. ain an sustain these obieztiva factor in ovr aiiity to att „7irtcre1y youro,  Paul A. Volcker  qr. John 1. 1-Altts  bcc. Mr. G. Anurew Lawrence Office of the Vice President  OASIA/IMS:TLeddy:pap Federal Reserve Bank of St. Louis  7/1/71  JUL 2  1971  0e4A. Mr1, Smith: This is in response to your letter of May 20, 1971, transmitting a letter from Mt. Gustav* E. Kidde of Pasadena, California, who offers a number of auwastions on the international monetary situation. The recent monetary disturbances were attributable to large flows of short-term capital into certain Luropean money markets. These movements originated with the appearance of significant interest rate differentials between the United States dnd wrope, particulcrly Germany, as domestic monetary conditions in the two areas began to diverge during 1910. Those flows continued during 1970 and into early 1971 mainly in response to interest rate differentials, but in late April and early May began to take on a speculative flavor. think it is important to emphasize that these shortterm capital movements were initiated by ditfering cyclical conditions in the t.•4() oreas and not an underlying payments imb;ilance between the United states and urope. When the cyclical positions of the two areas were just the opposite from the recent situation —that is, when there were reliitivaty tight monetary conditions in the U.S. amid relative ease in Europe during late 1963 and 1969--very large short-term capital flows in the opposite direction took place. e recognize that these large capital flows back end forth can present problems both for source countries and recipients. We are working with other countries in examining particular aspects of this question with a view to developing ways of dealing with these problems. Federal Reserve Bank of St. Louis  This discussion of short-term capital flows as the root cause of the recent problems is not intended to obscure the fact that the United States does have an underlying balance of payments deficit, on the order of $3 billion in 19:10. This record must be improved upon. $y view is that a restoration of domestic economic growth and price stability is fundamental to our efforts to improve our underlying payments position. We have experienced a long and difficult cooling of the economy, and I believe we are now well on the desired path. As regards the specific proposals offered by Mt. Treasury and the Export-Import leak have issued $3 billion of short-term securities on the Eurodollar merket, partly to help moderate large movements of dollars into the reserves of European central banks. In addition, the Treasury has recently announced the issue et longer-term securities to the German authorities to facilitate the investment of their dollar holdings. The Administration also intends to eliminate the Interest Equalization Tax and other restraints on capital flows Imposed for balance of payments purposes, when our balance of payments situation permits. We do not feel, however, that changes in the gold price or gold regulations as suggested by Mt. Kidde would be a useful or desirable step. Sincerely yours,  Paul A. Volcker  The Honorable H. Allen Smith House of Representatives tishington, D.C. 20515  OASIA:INF:TLeddy:bt 7/1/71 Federal Reserve Bank of St. Louis  4 14 /71  cofr ME-ZRs. eieoss,  4  in c0/14161f. , m  DR. OTMAR EMMINGER VIZEPRASIDENT DER DEUTSCHEN BUNDESBANK  6 FRANKFURT (MAIN) Taunusonlage 4-6, Telefun 2681  June 17, 1971 Mr. Paul A. Volcker Under-Secretary for Monetary Affairs, U.S. Treasury Washington, D.C. 20220  Re:  Meeting of Working Party Three on July 8 and 9.  Dear Paul: You will remember that at our last WP 3 meeting Mr. Dow and his associates in the Secretariat were asked to examine in greater detail, and drawing on the discussions in WP 3, the 'Problems arising from Mobile Capital Flows'. While a complete and finalised report could not be made ready before the autumn, Mr. Dow was invited to provide, if possible, a first rough draft or outline in time for the July meeting, so as to enable a group of senior members of WP 3 to have a private exchange of views on the subject. I have heard from Mr. Dow that he will be able to send out such a preliminary outline next week. It will be sent only for the private information of those members to whom this letter is addressed, and the draft outline has as yet no status and should therefore not be circulated to others at this stage. I suggest that we have the official meeting of WP 3 on Thursday July 8th and in the morning of Friday July 9th Federal Reserve Bank of St. Louis  2  -2  (cloning at 12.0), and that thereafter a group of senior members should have a working luncheon at the Nuette, to be followed by a few hours of private discussion. We may set ourselves a time limit, e.g. up to 5.00 p.m. I would like to invite you to the luncheon on July 9th, it being understood that this is a personal invitation which should not be transferable. Would you please inform me as soon as -possible whether you would be able to attend the luncheon. have heard from Hr. Ossola that he does not plan for a meeting of the Deputies on July 8/9. Federal Reserve Bank of St. Louis  Sincerely yours  JUN 21 1St  6/17/71  Paul Volcker,  Since talking with you briefly at the recent "Mater Del Father and Son Dinner" I have put together some thoughts on our U.S. monetary situation which may possibly have some merit. (please read PEP attached)  Although many economic and political notables have proposed tax reductions to spur the economy; I have not heard about any proposals for "special tax deductions" as I mention in my paper. Just flat tax reductions would do little overall good if the tax pars use their increased bving power far_purchasi_n_g_mpre_foreign made items.  However, if we subsidize products made here with U.S. labor by allowing special tax deductions to encourage the purchase of such items; then imports will decrease, U.S. employment will increase, our GNP will increase and dollars will stay at home. Hence, our balance of payments position will be greatly improved and the dollar will be firmly established as the base for worldwide monetary systems.  I realize the situation is much more complex than my simple diagnosis and solution presented here; but if any progress is to be made in solving the problem then the first step in the right direction might have to be a simple one "special tax deductions"  Please don't generate any correspondence to me, but if you can find time to read my paper a phone call at my office would be welcome. ; 2 Carl F. Steinmetz Federal Reserve Bank of St. Louis  962  6  May 31, 1971  C. Steinmetz  Phone: 962 4766  PEP PERPETUAL  ECONOMIC  POLICY  I believe that if we modified our current internal revenue system to encourage "Buy American" by allowing tax deductions for the purchase of products made in the United States (that have equivalent foreign-made products selling here for less) we could improve our balance of payments position, reduce unemployment, perpetuate economic growth, and actually realize an increase in net tax revenue. My contention is based on the premise that if tax deductions were allowed for the purchase of products made in the U.S., our dollars would stay here and would not be lost to us as is the case when we purchase foreign-made goods. We would realize fuller employment and our G.N.P. would increase. As it is now we are aiding foreign countries in increasing their employment and their G.N.P. It is not necessary to change the value of the dollar, but merely to control its circulation. If we can keep the dollars recirculating within the U.S. then our money will expand and our economy will grow. What I propose is to support the dollar with the dollar by using tax dollars to encourage spendima4 resulting in increased demand for more products which would require more employees who have more to spend. Just reducing taxes would not suffice as such money might be spent on vacations out of the U.S., on more foreign items, or just banked. The "tax deduction money" must be spent for products made here so that the system will perpetuate itself. Their is plenty of money around now in the oanks, but people are not going to spend it because they are acared of the unemployment situation. People whogare unemployed or think they may be out of work don't buy houses no matter how low the interest rate is. Hence, there needs to be an incentive for spending created, which will result in increased employment to relieve fear and build up confidence. Why not subsidize American products that are being undersold here by equivalent foreign-made items? For instance consider the small car market where V.W.,Toyoto and other foreign car sales are still increasing and are taking more and more of our dollars out of the U.S., inspite of the fact that we do now have equivalent cars in all aspects ,that is except one...Price. I believe people would like to buy an American small car, but why should they pay more than necessary? Considering the price of a Pinto at about $2,600. with the same equipped V.W. at about $2,300.; why not allow the buyer to deduct the full $2,600. from his taxable income to give him a real incentive to buy the home item? If he is in the 20% tax bracket he would save about $400. to $ taxes. Federal Reserve Bank of St. Louis  The Pinto would actually only cost him about 12,150. and therefore becomes a much more attractive purchase than the V.W. Furthermore, who can resist the psychology of a tax break anyway? Not only would those who need cars buy them, but also those who had a good year and are looking for additional tax deductions. Now then the question arises, what about that loss in tax revenue ($400.) to "Uncle"? WrU, I don't think there would really be any lone—but in fact a "net tax gain"; because there would be an increase in demand for U.S. made cars. Consequently, the manufacturers would make more money and would nay more taxes; so would the car Healers and all others in related fields such as; tires, glass, plastics, etc. Furthermore, because of the increased demand for cars more people would be employed who would be naying more in taxes and buying more products because they would then have money to spend. They would also take advantage of the tax deduction break and hence, the system would perpetuate itself resulting in a growing healthy economy. Many of those who had been unemployed liabilities would soon become employed assets contributing to the tax revenue coffers. Just giving industry a tax break for building more plants to increase production won't help because there must be an increase in demand for a product before there is any justification for increasing supply. As long as other countries can undersell us with an equivalent in our own backyard our part of the market will keep getting smaller. We must think in terms of a "World Market" not just a U.S. Market and we need to get a bigger piece of that world market if only recapturing that nart of it which has eroded over the past several years. It is doubtful that the foreign countries could counter our tax deduction policy in the same manner, because our products already cost more than theirs and they don't have a large high tax paying middleclass. Furthermore, losing anyone of the foreign markets is not as critical to us as would be losing the American Market to anyone of those countries. Being further down the "capitalistic Dike" than are our foreign friends puts us at some disadvantage as regards inflation, etc.; but inflation is a communicable disease and it won't be long before other nations start feeling the nain.l.f we can recanture most of the American Market that has Lone astray. Once that begins unemployment in those countries will turn upward and the nressure on the dollar will subside.As the world seat of capitalism with the greatest production capability and largest consumer market, we should be able to control world-wide economics. It is hip time that "the tail stopped wagging the dog" _ Federal Reserve Bank of St. Louis  -2  •  For any world-wide control to be usable it must be both economically effective and politically feasible, tiehda it must be flexible and not just a one way device. The control method suggested here would be applied to any and all imported products that might effect our balance of payments position and tax deductions would be set and adjusted according to changing conditions. Nany corrective measures taken in the past have been negative in overall effect such as, the tight money policy which adversely effected the market and employment. The system suggested here is not a "one way dole", but is reciprocating in that the only wey to get the tax deduction is to spend more than the amount of the deduction, since the amount deducted is a percentage of taxable income. Furthermore, it gives to those who deserve it, our tax payers, and is not a free handout to those who are not contributing to our economic growth. Those who will benefit by this system are those who will be able to pay their bills. Once other nations realize we have enough flexibility to completely control the "import/export ratio the dollar will become undisputed base for world-wide monetary systems. This system might even help control inflation as deductions might be reduced at times to allow the import of more widgets if the cost of home made widgets gets to high. Actually inflation should not be feared ...but merely geared to suit our overall bast interests. Although inflation may be critical: deflation could be terminal. We can't ever expect to return to the past and shouldn't want to. The person making $10,000. a year ten years ago who bought a house and started making P.&q. payments of $200.per month is much better off today, because he is probably making 820,000. a year now, but his monthly payments are still the same and hence much easier to make now than they were when he first started. Should we experience deflation/depression he might very well be making only $5,000. a year or nothing and would soon lose his house and all his equity because he could not make the payments. Once other nations face realistic price competition the squeeze will be on them and they will feel the pain of unemployment/inflation. We can't ever turn the clock back ten years without suffering deflation, depression and maybe even disaster. We are a "credit society" and people can never be expected to make payments incurred today on salaries of ten years ago. Consequently, If we can't get skinnier...then we must take the only other approach to equalization...make the other guy fatter. In summary what I propose is fuller utilization of our total U.S. dollars, by keeping them circulating inside the country and allowing fewer to escape. I don't propose a flat reduction in taxes which might not have any reciprocating effect, but only a deduction that will generate spending for products made by U.S. labor; which will in turn result in increased employment and more spending, hence...a "perpetual economic policy:' Federal Reserve Bank of St. Louis  -3  4e ,  0- 472_  ,rJL /2 ,41  (/'We rryr  h/' Va /efFy  0__  d  77k Cffic /),e,  6e14 PciteAAcePurr4Ad ,  e-rf  ) /11-(ce_5 (e5 ,r7,  9xitoce/  /14(  "It tie5  124-n-. >  vt  (kvta ity - C0-0 eix W cif el ectad ock Ccw  tfA  Vk /7,i-ic&  trYF  Ti: eLe) -r+t-iviii  cvvin  (IA  71-(AT  774-C efIrre  (4-4 ex-LT5 e I Tkie  e - noA'Li Ppm rtkt  '="-  Se-4--7-r  e-cyt Wait%  eiA) rty  keye)5  ocroAcal,  KA elk ei °Luz 5 —  Li1 Tht  ittg t &A)e  e 2i  P  Wait_  4 61471+  All'efxr Iv\  )Iç cau caq  i fiettj  ,14( -r-e_d  Ok_  e 19a I  142-rek  Tettec11r(L Federal Reserve Bank of St. Louis  c%  6itt-co IA curt 42&Lette-p cr  AIA vx-r  azt-p2-L  eta  chANk.a,c/ CA,Cet TC__d p_ I  62 4tt-ta r I  77-k_  OF ivit  714-c/a 1 5 114 F Lav ez-k Ct4 11  0tkil F -CULa ,"  )-re (1 t1/4i  eye Fti4  Jçj 7r-va 9 et Aka.t. 1ATI f 1314J-7-- (14, — F (14 r---u Ticrl-\ :• °( e—e-4-10 e.‘0E7714 P  eko Ivi CP( 0  cLut cF  Li/et-1177(.4.,  Ft/7  Pi #4 f  c-tA AA& d  eIto  —ety  WI/4-vrIei.,i ct"Le  orov tri tAx  gpoviR  (-)L  OF  /V-a&re ett  kvtavcr Weg-e 6exc iwc,  of(ctS do tt_ci-  f Aki-/%4-(77,rf1't 1/  FFeg..4 -3  .2T Vi  r t , /p- 7k Fuy 47,  7  2, / a7  te_  7  k11, 14it1A/ /2--j-ri-r- pill a /Li Q Purti 7- 77-14.--  /77;49  7-0  )OpFe4e mA4,34.  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V  71  frp_L4  110  t  ill  pv)v 879i vi  QL  ryv  -1-LPLL v-p14  2-Ye  Wi/t  (7 I -1-117  ro  71,4/(7  p-7 n:ir„  .(2-17/  Q  ft1-  D-A)  -7,-2 0.1  .srtinasmio  Tr Yv  di  — muvi -71-7_L  / 1/ P.J 14!,?0  vlsiil-ZrY)I  a )o -vi 0-Y4  rYa. _LrY1z1  p-Y0I-LoLLI-J-Tdrv 11,0,6 4  Pwv /Jo -P  JY)  4(14/11  p  /7/tdr)d af-LL p-)4  • Mr;ki(L07,/  711 131 / Federal Reserve Bank of St. Louis  >fit  G-1-1112(11  °11-1(ni  < D4  J-r)11-fni J-v" 06f  v-A-yylov  -1/TV  _L I  jij_ 01  --/-1,14)/K  `a  CroofK  I41•  ) 4  ----t  0-0  Jclx3-0--q m-11, --2)?ftfrur),/ Q va Won Tv rryp "),-Ird-ii JO 4 / -va-02 Sc,-D-i -12_,)-vi ojk/ _ --y) i wi,i77--1 , .. 4 1 ( 2-1- i r --Divd od -v , mild - )9-g'J.)1904  g  fr , Y4Valf\l/ - Vd-a--9  fl-,-91/7-fr  I 1 CP  -0 at-,-V-I  c)  el•f-Lt  T? li lie__1T ?)  )v1  0714 .1_1_  Aptes Spain  Siestau 16 April 1971  Dear Paul, I see by the papers that our gallant economic helmsmen have not yet succeeded in steering the ship of state offthe course of inflation. I suppose it is too much to expect, after a mere thirty years of purchasing-power economic management, with an accompanying thirty years of rising prices, that someone in Washington would begin to sense a correlation. I have often wondered at what has seemed to me to be an extraordinary obtuseness in our mandarins, and I have postulated theories: that it is really I who am obtuse; that our appointed officials are in the pay of the enemy; that they can't see the woods for the treeAs; etc., etc. But last night, in a dream, what was supposed to be the correct solution came to me. An angel, lately arrived from a seance in the Middle East with a chap named Abou ben Adhem, appeared and said: " Sir, the entire present generation of economists has been trained, to know anything else. They a man, in the Keynesian metaphysic. They S. are hooked, color-blind, doctrinaire Fachidioten. They are like the IS military dugouts whom Charles de Gaulle, as a young officer, tried fruitlessly to convert to Panzer concepts; because their minds were supersaturated with a single i6ea, they had no place for any other. Perhaps it was their purblindness that lost France the war. Trying to get your Keynesian economists to be objective about Neo-Keynesianism is like trying to persuade the Politburo to join Rotary International." Maybe the angel was right, and maybe the economists have really painted us all into a corner, but, always the optimist, I shall offer suggestiSns. I shall begin with cheap money. The latest issues of the Treasury Dept. printing press have found much of their way into savings. Is anybody surprised? I haven't got the figures, but what percentage of the whole, hopeful cheap-money issue of the last thirty years has actually resulted in social product, and what percentage has gone into senseless military pyramids, into lunar boondoggles, and, especially, into the speculative bidding-up of the prices of shares, real property, ob'ets d'art, and other storers of value? And with what disastrous socia consequences? A great nation is now nearly finished. And why? Washington swallowed the Keynesian bait, hook, line and sinker, and as if that were not enough, ran away with the line and the tackle, too. They took a palliative and made a theology of it. Keynes never intended for hfs theories to become the handy rationale of political expediency. He thought that - maybe - he had found a way to retain some of Western freedom by marrying what was left of the histor6ically rather obsolescent pre-established harmony, to adroit financial steering from the top. Keynes (and his critics) realized that the test of the method was not in awakening a dormant economy but in cooling an overheated one. The U.S. economy, however, isn't going to IS least not with Neo-aeynesian "techniques." It may cool with total management, but only provided that it can be brought to overall control gracefully and quickly -- before it simply careens into the total and frightful Ilitical consequences of Twentieth Century Populism. It should be quite clear by now, as I have suggested, that the suploly of money is not identical with the demand for goods and services, except, perhaps, in particular historical circumstances. One can qualify purchasingpower aausality by using various "propensity" devices, which may make sense in a thoroughly-managed economy. But not in ours, with its lop-sided d ribution of incomes and opportunities. If the "purchasing power" of the last thirty or even the last ten years had gone into decent housing, education, anS economic opportunities for the poor, there might be some financial and political balance in Washington today. But it did not -- not enough of anyway, because nobody has the politics to initiate the inevitable restructuring. It wellt; as I have said, into speculative excrIss, Federal Reserve Bank of St. Louis  LT  and often bizarre -roduction. Some of the money input turned out well, but I should like o see figures on the total social opportunity costs of the Gross National Social Product. (GNSP: Gross National Social Product -7, GNP - GNW: Gross National of Waste. Gross National Waste is the total of the costs of "ovarkill much of the "defense" payroll, both military and industrial; of much space exploration; of much consumer advertising - especially of identical products, and of non-functional promotional gimmicks like over6sized automobiles, tail fins, yearly model changes, and the hundred thousand other kinds of doodadism that flourish in the American consumers' paraSise.) Nor will escape from the Indochina wars provide, in itself, escape from "inflation." Unless the resources of human, natural, and mechanical energy which are released are (1) not simply diverted to some other inter,national trap chosen by the Russian or the U.S. military, and (2) channeled by carefUl politico-economic planning for two hundred million citizens, into social production, the USA will be right back to the old round of chasing its tail, again; "Growth," "Full employment," and "Stable prices" in a social vacuum. Growth? Growth of a destructive war maohine, of unliveable urban monstrosities, and of ecological ruination. "Full Employment ? Women in offices and factories, taking scarce jobs from able-bodied male heads of households, feeding their families TV-dinners, and neglectin their children. A ration not of citizens but of employees. As for stable prices, there will be none without a stable society, and there will be no stable society without leadership, planning and moral discipline. The Washington economists would be well advised to get their noses out of their statistics anS look at the real world around them. Spain, for all its "totalitarian,ism" and its faults, has not forgotten that the success of any society and of the government responsible for that society is measured by the health, happiness and stability of its people, and not just by the economic waystations on the road to these goals. The USA and other overindustrialized, over6-economized, and overh-technologized entities have simply been diverted from the main task, and economism is not the way back to sanity. I shall now try to be constructive: First, since economic management by political expediency is proving to be such a failure (and you aint seen nothing yet!), wouldn't a little research into the possibilities of reno.5 game be appropriate? The theory of the gold vating the old 55 standard was that it worked "automatically" enough to preclude the worst consequences of management by raw political expediency. Its defenders say that it would have worked if it had been allowed to but that it was scuttled by politicians in a funk. We cannot avoid politics entirely, but, surely, we can modify their impact. Isn't a careful, unbiased study of the possibilities of a rather politics-free system of economic management worth a little time and money? Perhaps we threw out the baby with the bath. As shaky as the world may have been before 1914, it made much more sense than it does now, and if the gold-standard game was not all the aause of the relative harmony, perhaps it was some of Incidentally, in this connection, you coulC do worse than read an old Chase Economic Bulletin of the late Twenties or early Thirties, called o New Eras Compared." My main oint is that in economics, as in ladies' footwear, there are fashions and•unctions. When fashions in shoes become too much divorced from functions, feet begin to hurt, headaches and strange malgdies appear, and sometimes the girls can no longer walk. In economics (and politics) It is the same, and I think we are miredfashion today. The remedy, first, is that commonsense which tells us that we do live in a somewhat historicallydetermined world, to whose inevitable changes fashions in policy must adapt themselves; and, second, that further comreonsense which tells us that as there isn't much new under the sun: we should keep in mind the old, so as to be able to apply it efficaciously when the cycle turns. Yr. Obt. Svt., Federal Reserve Bank of St. Louis  AA,  11111,  HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS  326 LITTAUER CENTER CAMBRIDGE, MASSACHUSETTS 02138  GOTTFRIED HABERLER Galen L. Stone Professor of International Trade  March 24, 1971  H/B  Paul Volcker Undersecretary of the U.S. Treasury Department Washington, D.C. 20220  Dear Paul,  Tried] and I are coming to Washington on April 4th_and_shall stay through the week. Since we have decided to drive down and take our dog along we thought it will be better to go to the hotel. But if I are in town we would like to see you and your wife. I shall give you a ring on the 5th of April to find out when you would be available. Federal Reserve Bank of St. Louis  Best regards. Sincerely yours,  4  1,, , '  \  ttfried Haberler  L /no 7"-ce  otAit M  1P71  MANUFACTURERS HANOVER TRUST COMPANY 350 PARK AVENUE, NEW YORK, N.Y. 10022  March  8, 1971  TILFORG C. GAINES VICE PRESIDENT AND ECONOMIST  Mr. Paul A. Volcker Under Secretary of the Treasury Department of the Treasury 15 St & Pennsylvania Ave. Washington, D. C. 20220 Dear Paul: This is an effort to spell out the proposal I discussed with you over dinner last Wednesday. As I mentioned, I don't much like the exportimport type of financing as a means to induce U.S. banks to hold their Eurodollar bases. There is little if any more X -M will be able to do, the operation gives the appearance of being a subterfuge, and there is the danger that certain political elements might accuse the Treasury of "subsidizing the big banks". I think it would be preferable for the Treasury to borrow directly in the Eurodollar market in amounts necessary to staHlize the dollar and to head off the larger part of the flow of dollars into foreign central banks. Were the Treasury to decide to go this route, it would be most desirable that the proposed operation be discussed beforehand with the Congress, pointing out that the interest cost d;fferential between financing in Eurodollars and financing in the domestic market would be a reasonably inexpensive price to pay for restoring something like harmony to the international financial system Presumably such borrowing would be handled primarily by U.S. banks, but through their foreign branches and employing off-shore money rather than the way in which the X -M financing was arranged. The advantages of this idea, as  I  see them, are:  1.  The borrowing and the reasons for the borrowing would be out in the open.  2.  While the large U.S. banks connection between current specified maturity and the would eliminate any danger accused of subsidizing the Federal Reserve Bank of St. Louis  would be involved, the clear Eurodollar rates at the interest cost to the Treasury that the Treasury might be big banks.  2. A  March 8, 1971 Mr. Paul A. Volcker  3.  The potential size of such financing and the flexibility with which it could be conducted would make it possible to absorb most of the dollars that otherwise would have into foreign central banks. gone  4.  In the event that the Fed were to reimpose the type of restraint applied to the banks in 1969, leading the banks to bring in Eurodollars, the Treasury could permit its foreign debt to run down, thus preventing a squeeze of the sort that developed in on the Eurodollar market 1969.  5  Taken together, the latter two points would mean that by substantially insulating the Eurodollar market from the impact of Federal Reserve policy, the complaint of foreign central banks that we are over -powering their own monetary policies would be removed. Using Treasury borrowing and debt repayment to stabilize the international flow of dollars would make it possible for the Fed to eliminate the Eurodollar base concept and to eliminate reserve requirements on such funds, helping to reunite the U.S. and the international money markets. Alternative ideas that have been proposed would have the net effect of building more fences between these two money markets.  7  Finally, my proposal has the virtue of tradition, if that is a virtue. Prior to the first World War the U.S. regularly borrowed abroad (through Baring Bros. in London) as necessary to support the dollar and protect the cold stock.  hope you something, that would at minimum Federal Reserve Bank of St. Louis  will give this some consideration. Perhaps I am missing but it seems to me to be the logical course of action mitigate many of our international problems and do so cost to the Treasury.  Sincerei4,  ford C. Gaines  WAYNE HUMMER & CO.  PARTNERS WAYNE HUMMER GEORGE E BARNES HARRY A BAUM J WILLIAM LAWLOR GEORGE R BECKER WILLIAM B HUMMER PHILIP W HUMMER H rLAGG BAUM F GIRARD SCHOETTLER JOHN D CARROLL ROBERT H CHASE WILLIAM A ROGERS Federal Reserve Bank of St. Louis  105 WEST ADAMS STREET • CHICAGO, ILL. 60690 AREA CODE 312/263-1700  MEMBERS NEW YORK STOCK EXCHANGE MIDWEST STOCK EXCHANGE AMERICAN STOCK EXCHANGE  March 3, 1971'  Mr. Paul A. Volcker Under Secretary of the Treasury for Monetary Affairs Treasury Department Washington, D. C. 20220 Dear Paul: It was good to see you late last week. Knowing how very busy you are, I particularly appreciated having had this opportunity. Continuing my travels after I saw you, I came out with the impression that the $1055 number for 1971 GNP looks better and better. With best regards, Sincerely yours,  William B. Hummer wbh:dem
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