Chapter 5. Saturday, 6 October 1979, and 17 October: A Procedure Without a Term, with Its Watch Kept at Home

The historical claim of this section is that the Federal Reserve's change of October 1979, as its chairman presented it on the day and to Congress afterwards, named what would be watched and declined to name an end. The objects of the watch were domestic and measurable: money and bank credit, against ranges set in advance and reported to Congress. One instrument was given a condition of removal in general words; the new procedure was given no term and no condition of reversal, and the chairman refused to forecast how far the freed rate might swing. This bears on the debate between a procedural reading of 1979 and one centred on persistence, and on the debate over accountability.

5.1The press conference: why that day, and what changed

The transcript opens with an official, Mr Coyne, apologising to the reporters for calling them in on a fine weekend day; beside the Chairman sit Stephen H. Axilrod of the Board's staff and Peter D. Sternlight, who manages domestic operations for the System Open Market Account at the Federal Reserve Bank of New York.

Volcker opens lightly: the press conference, he says, is mainly to prove that he has neither resigned, as one rumour had it, nor died, as a later one did. The Board and the Federal Open Market Committee have spent the day putting together the measures in the release. Prices have been rising too fast, he says, and both inflation and the expectation of more of it have disturbed markets in the United States and abroad; the new measures build on earlier ones and should improve expectations.

He then gives the purpose behind the whole package: to bring the growth of money and of credit back inside the ranges the Federal Reserve had fixed the year before. Those ranges, he notes, had been looked at again at mid-year, confirmed, and sent to the congressional committees concerned in the usual way, and the targets have had wide backing. Lately, he says, money and bank credit have been growing faster than the Federal Reserve wants and faster than those ranges allow. He qualifies this: the totals are not yet far outside the targets, but their path has been too steep, and the measures should pull money and credit back and secure control. Earlier steps pointed the same way, all such steps take time to work, and the day's measures add to them.

This passage already answers part of the question posed here. The press conference names what will be watched: money and bank credit, measured against ranges set in advance, reviewed, and reported to Congress. That is an observable standard, and the Federal Reserve had already put it on the public record before the weekend. A reader who wanted to know whether the new measures were doing what they were meant to do was told where to look.

A reporter asks him to explain the third item of the release. For some years, Volcker answers, day-to-day operations have aimed chiefly at keeping the federal funds rate steady, nudging it in small steps to influence how fast money grows. Under the new approach the weight falls instead on the quantity of reserves, which in the end governs the quantity of money. He warns against expecting the method to work precisely from one week, or even one month, to the next; but by steering reserves, he says, the Federal Reserve expects to hold money growth more surely and over a shorter span. The price of this is that the overnight rate, which matters little to the economy in itself, will probably move about more than it has lately, and the Federal Reserve will pay less attention to its daily movements.

This is the change itself, as closely as paraphrase allows. It names the old method and the new. It names a benefit, a surer hold on money growth over a shorter span, and limits that benefit, since precision from week to week or month to month is disclaimed. And it names a cost: the overnight rate will move more. It does not say for how long the new method will be used, on what condition the old one might return, or what range of movement would be too much.

5.2The press conference: the instrument that would be removed, and the range that would not be forecast

A reporter asks whether the second item of the release, the marginal reserve requirement, might be changed often in order to achieve the third. A reserve requirement is a rule obliging banks to hold a share of certain liabilities as reserves; a marginal one applies only to increases in those liabilities. Volcker says he does not expect frequent changes. Then he says something about its life that he says about nothing else in the package. A requirement of this sort, he says, is not something one would want as a lasting fixture; it answers to present circumstances, and the Federal Reserve and the banks alike will be glad to drop it when circumstances allow, above all once the growth of credit falls into line with what policy intends. He explains what it covers: bank borrowing in short-term markets that lies outside the usual definition of money, which has grown fast in recent months and paid for much of the rise in bank lending. If money itself is to be held more firmly, he argues, it makes sense to restrain to some degree the bank funding that escapes the narrow definition.

Here is the one condition of removal in the press conference. It belongs to an instrument, not to the procedure; it is stated in general words, when circumstances allow; and it is given a content, credit growth brought into line with policy. That content is close to observable, because the policy is expressed in the ranges already reported to Congress. It is still a condition the Federal Reserve would judge for itself, and the press conference does not say how.

The questions that follow press on the range of the rate. Asked whether the Federal Reserve is now leaving the federal funds rate entirely alone or still has a ceiling in mind, Volcker replies that central bankers avoid absolute statements, but that banks will have to relearn how to manage their reserves without the Federal Reserve watching over the market each day; the market will have wide latitude. Later a reporter notes that the Committee had tolerated bigger daily swings since the spring and asks how far they might now go. Volcker declines to name any range; daily moves could be large without mattering much, and the market may settle sooner than expected as banks, whose business it is to even out such moves, adapt. He will make no forecast of the swings; the Federal Reserve will simply supervise the market less closely each day.

The refusal to forecast is deliberate and repeated. Lindsey, Orphanides and Rasche argue that the move was a way to permit larger swings in interest rates (Lindsey, Orphanides and Rasche 2005); the refusal is where that design shows most plainly in the chairman's own presentation, since a range named in advance would have worked as a new ceiling. The press conference thus withholds from review the one quantity a reader would most want to watch, and withholds it on principle.

The weekend itself is explained in the transcript. Asked what had made so unusual a session necessary, Volcker says the cause lay not in the past few days but in the past few weeks: disturbed markets, both for currencies and at home, and the economic and price trends he has described. Because markets were expecting something, he says, it seemed best to speak as soon as was sensible, and preferably while trading was shut. Set beside Kindleberger and Aliber's remark that the timing and wording of an announcement matter (Kindleberger and Aliber 2005), though their remark concerns rescues, the answer shows an announcement placed so that markets would hear the decision whole before they could trade on it.

Two other answers bear on review. Asked what had changed since the Board divided, only weeks earlier, on a smaller rise in the discount rate, the rate at which the Federal Reserve lends to banks, Volcker points to business figures stronger than forecast, price figures weaker, and market behaviour that made the risks of instability plainer; he himself, he admits, has altered his view. Asked whether sound borrowers might find credit unobtainable at any price, he says no: the aim is to keep lending in proportion to steady growth, not to stop it.

5.3Whom the press conference names as bearing the cost

The transcript names bearers in a way the address of 1971 does not. Banks must learn to manage their reserves without the Federal Reserve's daily supervision. Banks that fund themselves in the wholesale markets, through large negotiable certificates of deposit, federal funds bought outside the member system and Eurodollar borrowing, will bear the marginal reserve requirement, and money market funds may find that outlet less attractive. Business borrowers are named as the source of the largest recent growth in loans, with the assurance that the aim is to trim the excess, not to stop business lending. The press conference names no households or workers as bearing a cost, and denies that credit will be choked off.

5.4The statement to Congress

On 17 October Volcker appeared before the Joint Economic Committee. In paraphrase, the statement opens by observing that he comes before the Committee newly in office, that every course open to the country carries risk and hardship, and that a broad public readiness to tackle the problems offers a chance to adopt firm policies and hold to them, monetary policy among them.

The statement dates the problem further back than the press conference did. Young adults who came of age after the mid-1960s, Volcker says, have known nothing but rising prices, at a pace that seemed to quicken without end, so it is no wonder that many people doubt stable prices can return and have adjusted how they act. Because inflation partly sustains itself, ending expectations of it must be part of the task. The dating touches Meltzer's history, which is critical of the way policy responded to inflation as it grew in the 1960s (Meltzer 2009); Meltzer's book stops in 1969, and nothing is drawn from it here about October 1979.

The statement then sets out, with a disclaimer of self-satisfaction, what is going well, from employment to exports, and warns that all of it is at risk unless the inflation generated at home, and the speculation it has bred, is brought under control.

On the actions of 6 October, the statement presents them as one more step in an effort already under way to keep money and credit in check; the targets themselves stayed as they were, but the new measures, including the change in operating procedure, should make it likelier that they are met. Their chief purpose, it says, is to leave no doubt that the Federal Reserve will not pay for inflation to go on. It lists three measures: greater weight on controlling the supply of reserves, so as to keep money growth within the targets; a higher discount rate, so that banks could not undo the restraint by borrowing from the Reserve Banks; and a special marginal reserve requirement on growth in the wholesale funding of larger banks, the American offices of foreign banks among them.

The statement goes on to make several points. The first aim, it says, is to head off speculative excess and fears of a fresh burst of inflation, and the measures should bring nearer, rather than delay, the time when interest rates can fall. Meanwhile money and credit will continue to flow; the Federal Reserve knows that housing, small firms and others rely especially on steady credit. Doubts about the dollar abroad, it adds, turn on whether the country can master inflation, and any intervention in the currency markets will be coordinated with foreign authorities.

The third point matters most for the question asked here. The measures, the statement says, promise better control of the monetary aggregates but will not by themselves cure every problem; the new way of running open market operations is no cure-all. Money itself needs a better definition, and redefining the aggregates is now high among the Federal Reserve's aims. Markets and credit will be watched closely and the tools adjusted as needs change over time; but the Federal Reserve means to keep up the restraint on money growth that the Committee and others had long called for.

Here the statement names what will be reviewed, in three forms. The aggregates themselves are to be redefined, so the measure by which the procedure would be judged is announced as provisional. Markets and credit flows are to be watched, which names an object of attention and no threshold. And the tools will be adjusted over time, which reserves the power to change the procedure without naming any condition on which it would change. What the statement does commit to is not the procedure but the restraint. The procedure is a means, open to revision; the restraint is the end, and the statement does not give it a term either.

The last point is that monetary policy cannot do the work alone; fiscal, energy, regulatory and tax policies and international cooperation are needed. Recalling the recent meetings of the International Monetary Fund and World Bank in Belgrade, where he found the mood guarded and doubtful, Volcker says that strong policies can work but need the backing of citizens willing to accept difficult choices and some sacrifice, and that the dangers will grow if the country does not act firmly against inflation now and keep at it.

The close speaks the language of persistence: keep at it, hold the restraint, resist gloom. That language matches the theme of Silber's argument that Volcker's persistence in the face of political and economic pressure was central to the outcome (Silber 2012), in that the chairman, days into the new regime, asked an elected body to expect persistence; the match is drawn here, not by the biography. It does not show that persistence followed, or that it decided the outcome; the statement is an account by the decision maker, given after the act, of what the act was meant to do, and is treated only as that.

5.5Before whom

The statement is an act of accountability of the kind Tucker's principles call for, transparency and accountability to elected bodies (Tucker 2018): a delegated agency explaining its use of power to a committee of the legislature, against targets already reported to Congress. The contrast with the address of 1971 is plain in form. Nixon spoke to the nation and to partners abroad and reported to no body that could undo the act; Volcker spoke first to the press and then to a committee of Congress, and told it what he would watch. Neither text names a condition on which its central act would be reversed. The difference lies in whom each announcer told what to watch.

5.6The modern record

Skeptron's record of 6 October 1979 compresses the change into three sentences of its Scenario:

The second and third sentences are a fair summary of the answer Volcker gave to the question about the third item. The record keeps the change of method and the warning about wider swings. Its second question asks:

The word non-scheduled is the record's only trace of the weekend and the extraordinary session, apart from the Saturday of its title.

Its third question looks forward from the day, and its answer refuses the look:

The question names a later rate that is not in either primary text read here, and the answer keeps the announcement apart from whatever followed. For background only, and as evidence for nothing in this article, the monthly effective federal funds rate (FRED series FEDFUNDS) stands at 11.43 per cent for September 1979 and 13.77 per cent for October. Those figures describe the field in which the act was taken, not what the announcement did.

The fifth question of the record sets the condition of a later comparison, and its answer reads oddly against the texts:

The question that precedes it proposes to compare the conditions of price and control with a present matter. The answer reads as if written for a price control, in which posted and actual prices can diverge, rather than for a change in the way reserves are supplied; its wording would fit the wage and price freeze of 1971 better than the procedure of 1979. Skeptron's fifth questions follow a recurring form, and this one is not treated as a finding about either case. It is noted because it is the record's only forward-looking condition, and it concerns the record's own comparison, not the end of the act.

What the record loses is, again, what this article asks about. It does not mention the ranges set in advance and reported to Congress, so it does not tell its reader what the Federal Reserve said it would watch. It does not mention the marginal reserve requirement, so the one condition of removal in the press conference is absent. It does not mention the statement to Congress at all. It names no bank, borrower or sector as bearing a cost. Read for the study's own questions, the record shows an act, a change of regime; it does not say the act was temporary, names no condition of ending, says nothing of what became of it, gives no two dated moments and no figure for the act, and names no bearer. All of that is a correct reading of the record. Much of it would not be a correct reading of the transcripts.

5.7What the case adds

To the debate between the procedural and the biographical readings of 1979, the case adds the texts' own division of labour. The procedure is presented as a means to unchanged targets, open to adjustment over time, with its key quantity, the range of the overnight rate, deliberately left unforecast, the shape Lindsey, Orphanides and Rasche's account would lead one to expect. The commitment is presented as restraint to be kept up, and the statement to Congress closes by asking for persistence, the theme Silber's biography makes central. The texts carry both readings because they distinguish what the procedure would do from what the institution would hold to. They cannot say which mattered more afterwards. To the debate over accountability, the case adds that the Federal Reserve told an elected body what it would watch, and named no condition on which its new procedure would end.