Interoffice Memorandum

INTEROFFICE MEMORANDUM

TO: DR. J. JONES

PROFESSOR OF ECONOMICS

FROM: H.R.

SUBJECT: THE RIEGN OF VOLCKER

DATE: 1/28/2007

More than a quarter of a century ago, President Jimmy Carter was saddled with disarray in his Administration in the midst of a rapidly declining U.S. economy. Attorney General Bell and Energy Secretary Schlesinger resigned, while Health, Education and Welfare Secretary Califano, Transportation Secretary Adams, and Treasury Secretary Blumenthal were forced out of their post. Former Federal Reserve Chair Miller replaced Blumenthal in the Treasury post leaving a very important vacancy, especially since the Carter administration saw their economic policies as a major re-election issue.

President Carter needed a Federal Reserve chairman who was strong, experienced, respected, tough on inflation, and willing to fight conventional wisdom on how to boost the U.S. economy. The position was offered to and accepted by Paul Volcker, President of the Fed’s most powerful member, the Federal Reserve Bank of New York. Volcker was very familiar with existing Fed policies, and knew he would have to make some significant changes to stabilize a dismal downward trending economy. He believed the Fed had to attack inflation more aggressively by putting the brakes on money supply growth. It was Volcker’s charge to persuade the Fed Open Market Committee (FOMC) who sets the Fed policy to trust him and follow his lead. He would also have to build and maintain a working relationship with the International Banking community, to assist with Global financial harmony.

Volcker’s operating procedures proved to be bold, unconventional, and risky in the eyes of most economists. Almost immediately following his appointment, the Fed increased the discount rate a full percentage point to 12% and introduced a marginal reserve requirement on some managed liabilities. The Fed then permitted the funds rate to vary within 11.5% to 15%. Also the discount rate would be managed flexibly to discourage excessive borrowing. All of these actions