LETTER TO VINCENT DAVIS FROM STANSFIELD TURNER

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP05S00620R000200480003-5
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: June 2, 2009
• Sequence Number: 3
• Publication Date: July 14, 1977
• Content Type: LETTER

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The Director
CQ Intelligence Agency
14 JUL 1977
Just a note to thank you for your-several July
notes. Nothing new on the reorganization front but I
appreciate your 8 July advice. The Post this morning
would have our decks awash but I think our hull integrity
is still in pretty good shape for the time being.
Yours is the only reaction so far to the USNIP
article. We are hopeful it will stimulate some
reasonable exchange of views in the community., We've
decided to let the Keegan article lie - his arguments
are the same old ones and I see little profit in
generating greater interest in them through a debate.
On the public lecture, I think spring semester
looks best all around. Shall leave it to you to
suggest some alternative dates.
Thanks again for all your help.
Professor Vincent Davis
The University of Kentucky
Lexington, Kentucky 40506
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The University of Kentucky
Lexington, Kentucky 40506 U.S.A.
[phone]
8 July 1977
Vincent Davis, Director
Patterson Chair Professor
of International Studies
MEMORANDUM
TO: The DCI
FROM: Vince Davis
SUBJ: Next moves (re: recent OMB high-level comments)
Jim Taylor advises by phone that your recent meeting with the OMB
boss was discouraging, with the OMB man focusing only on the immed-
iate political problems for the President ("awkward") if two of the
key Cabinet people are squabbling. So, I gather, the OMB man has
joined the ranks of those seeking a bastardized compromise, refer-
ring you to Jaynes.
My advice: (1) DON'T PANIC...DON'T RETREAT. If it ultimately comes
to a compromise, make somebody else force it on you,
but then accept it with good grace.
(2) SEEK A PRIVATE SESSION WITH THE PRESIDENT, preferably
one-on-one without ZB or other aides on either side.
It had to come to this sooner or later, and now is
probably the time. Elaborations follow.
You obviously don't want to seek private access to the President
very often, but this is a MAJOR ISSUE--in my judgment, one of the
most critical issues of recent times. He gets paid to make the tough
decisions, and he's shown (with Andy Young, and on the B-1 bomber
issue) that he does not back away from the tough ones, and that he
does not seek middle ground just to placate critics in the Cabinet
or elsewhere. He may in fact be disappointed in you if you don't
fight for this one all the way.
If he thinks it's "awkward" to have a DCI and a SecDef in dispute,
explain to him what AWKWARD really means. It's awkward when (in '52)
a fragmented intelligence system gave faulty intelligence to the
President (in '50) on Korea, and drove the Democrats from the White
House. It's awkward when a fragmented intelligence system gave bad
advice on Vietnam in the '60's, and again drove the Democrats from
the White House in '68. It's awkward when a fragmented intelligence
system contributed to the abuses of the early '70's, and helped to
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The DCI
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chase two successive Republican presidents from the White House.
You can think of many similar horror stories resulting from a
badly managed and fragmented intelligence network over the past
30 years. The next big intelligence failure could mean not just
the demise of the Carter Administration but NATIONAL SURVIVAL.
This is what "awkward" should mean to a president, which makes
a DCI-SecDef disagreement appear quite minor in comparison.
Oh, yes. Don't take that advice to talk to Jaynes, unless he
wants to visit you, and even then I would turn him over to Taylor.
Don't compromise your dignity by getting into details with an 0MB
flunky.
The only thing that encourages me in all this is that I think you
have a superb team in John McMahon, Jim Taylor, Barry Kelly and
working on this problem for you--with whatever STAT
extra help you can get from Graham Allison. Stick with these good
people--they are giving you very good support and advice. And...
DON'T GIVE UP THE SHIP.
[See, you didn't really rid yourself of my gratuitous advice,
just because I left town.]
Info copy: Jim Taylor
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The University of Kentucky
Lexington, Kentucky 40506 U.S.A.
[phone]
8 July 1977
Vincent Davis, Director
Patterson Chair Professor
of International Studies
_-7-141
MEMORANDUM
TO: Stan Turner And con ratulations again
and tom on 0-6 selection!!!
FROM: Vince Davis
SUBJ: Congratulations!!! on your article in the July USNIP
It's a solidly reasoned and appropriately analytical piece that
the two of you have co-authored on countering the Soviet threat in
the Med. However, I am less sanguine than you are as to our capa-
bilities for meeting the first and the third of your "four key
points" summarized at the end of your article. On your third point
(assistance to ground commanders), I recall that the Navy constantly
assured the Army in the 1930's that the fleet could steam to the
rescue of the garrison troops in the Philippines within three weeks
following a possible surprise attack by the Japanese. But, as it
turned out, the Navy needed something more like three years to re-
deem MacArthur's "I shall return" promise. So, I hope that your
current optimism on the Med situation is well-founded. Meanwhile,
I am sure you can find time to whip out a quick rebuttal to George
Keegan's op-ed page article in the New York Times of 6 July... and
I look forward to reading your rebuttal.
Stan, at our recent lunch in your office, you asked me how I was
doing in my "fight with the Navy" to develop a greater appreciation
for the Naval Reserves. The Navy never won a war without the Re-
serves but, unfortunately, it always takes another war to impress
this point on the Regulars--most of whom never see a Reservist.
So, I can never "win" in this "fight." It's the same story in
another fruitless struggle that I have waged with the Regulars for
almost 20 years, brought to mind now by another article in the July
USNIP. See the attached copy of a letter to Captain Bouffard. As
Assistant Navy Secretary F. D. Roosevelt said once in the 1920's,
"Trying to reform the Navy is like fighting a feather bed--you
punch it and punch it, but it always looks the same." (Or words
to this effect.)
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The University of Kentucky
Lexington, Kentucky 40506
[phone]
8 July 1977
Captain Edward N. Bouffard, USN
Professor of Naval Science and
Commanding Officer NROTC Program
University of Minnesota
Minneapolis, Minnesota 55455
Dear Captain Bouffard:-
Vincent Davis, Director
Patterson Chair Professor
of International Studies
I an writing sorely to express my very strong agreement with
(and therefore my emphatic applause for) your article on the N3TC
in the current July 1979 issue of the U.S. Naval Institute Proceed-
iaLs
I have been fighting this same battle in various forms since
1959 when I was a young faculty member at Princeton. But the
struggle is mach older within the Navy than any of us now involved.
It's important to remember that Mahan was widely scorned if not
ignored in the Navy because Mahan thought it was useful for officers
to be educated in subjects going well beyond scientific, technologi-
cal and engineering fields. Mahan was "put out to pasture" when he
was assigned to the Naval War Collage, as far as the U.S. Navy was
concerned. Indeed, Mahan was promoted to rear admiral only on the
basis of a "tombstone law" stemmming from the Spanish-American War.
And Mahan did not become a "hero" in the U.S. Navy until he had
gained wide acclaim in European naval circles. Even now, many
U.S. naval officers pay lip-service homage to Mahan without having
read a single word that Mahan wrote. Most naval officers have a
technological/engineering orientation, and those kinds of people
do not do very such reading in the literature of geopolitics,
strategy, world economics, etc., unless forced into it while stu-
di s at A war college.
I so not even convinced that the late Rear Admiral James L.
Holloway, Jr. ("the father of the modern NUM") truly believed
the fine sentiments which you quote on page 42 of your article.
Those nice words may have been political "window dressing." At
the and of World War II in 1945-46, the Navy predicted an annual
need for more young ensigns than the Naval Academy could produce.
Representatives and Senators from almost all of the major coastal
cities in the U.S. responded to this need by introducing more than
a dozen bills in Congress, each designed to establish additional
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now "Naval Academies" in places like Boston, Philadelphia, Charles.
ton, Save n sh, Jacksonville, New Orleans, Galveston, San Diego,
Los Angeles, San Francisco, Seattle, etc. Of course, these proposals
horrified the flag officers of that period, almost 100% of whom were
al* i of Naval Academy at Awmapolis. Those admirals did not
wish to see their Alma Mater fragmented into a dozen or so separate
naval academies. iiolloway introduced the I*ATC idea as a politically
attractive alternative, originally creating 32 units-?or at least one
in Almost every state of the Union. This scheme placated almost all
Representatives and Senators.
But, if we credit Jones L. Holloway, Jr. , with at least some
degree of sincerity and conviction in dreaming up the post-1945
version of the TIC idea, it's unfortunate to note that his son
"Jimmy Three-Sticks" lacks the vision and the political savvy of
his father.
If I could over be of assistance to you in your efforts in
this strcuggle, do not hesitate to call on as, however, I have be.
cam very frustrated and a bit cynical about it. My professional
work puts as IS close contact with many flag officers, and I try
to us. some of tbios? Contact occasions to wage this struggle. But
trying to tell an engineering type that he needs to know something
about politics and tics and history is ordinarily fruitless.
On a personal not., I an sure that you must know many of my
friends on the faculty at the University of Minnesota--for example,
my old pal Hal Choose in Political Science (and a major general in
the USNCA).
Feel free to share copies of this letter with anybody who
might be interested.
Cordially,
Vincent Davis
Director of the Patterson school
and Patterson Chair Professor
[also, Captain, USNR?R, for 10
years a Carrier aviator, and
for 15 years in naval intelligence]
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77- 7 _/V
The University of Kentucky
Lexington, Kentucky 40506 U.S.A.
[phone]
6 July 1977
Vincent Davis, Director
Patterson Chair Professor
of International Studies
MEMORANDUM
TO: Stan Turner
FROM: Vince Davis
SUBJ: A lecture by Stan Turner in Lexington, KY
You asked me how it would be if you gave a public lecture here
under our auspices on Thursday evening, 10 November, prior to your
appearances the next day at nearby DePauw and Wabash in Indiana.
I said that I would check our calendar here, and get back to you.
Very sorry!--but 10 November is the date for Paul Volcker's guest
lecture for us, a date that we finally nailed down with him last
April after about four years of trying. Thus, I would be hesitant
to go back to Volcker now with a rescheduling proposal for him. He
is one of the two or three most important men in the world in the
area of international finance, money, and banking--and he may be
President Carter's choice to succeed Arthur Burns as the next
Chairman of the Fed. (See attached xerox copies.)
OTHER POSSIBILITIES:
(1)
Lecture here on Wednesday evening, 9 November, perhaps also
talk for 20 minutes at lunch to the Rotary Club on Thursday
(Rotary is the most influential "elite" civic club in Central
Kentucky, with about 350-400 men on hand for lunch each Thurs-
day), stay over Thursday to help us welcome Volcker if you wish.
Disadvantages: (a) for you, it would take you away from your
office one extra day (Thursday and Friday, rather than Friday
only); (b) for us, we prefer not to have back-to-back VIP lec-
turers on successive evenings.
(2) Lecture here on Wednesday or Thursday evenings, 12-13 October,
doing the Rotary Club at noon Thursday too if you wish, and
remaining for our Patterson School Board of Advisors (BOA)
fall meetings with BOA members arriving on Thursday evening
for the Friday-Saturday meetings.
(3) Our preference: Some other time, not in connection with any
Programs of Professional Development, Research and Service in World Affairs for Kentucky, the Nation and the Global Community
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Turner
7/8/77
Page 2
other event on our calendar, so that we can give our undivided
attention to your visit. Wednesday or Thursday evenings are
ordinarily best from our perspective, for VIP guest lectures.
The last three weeks of September are clean on our calendar
thus far. The bad dates for us in October are 14-15 (BOA),
20-22, and 24-29. The bad dates for us in November are
8 (Election Day), 10-11, 15-16 and all dates later in November.
December is no good at all, with the end of semester and the
holidays. Spring semester starting in mid-January is a whole
new ballgame, with much clear time on our calendar as of now.
MISCELLANEOUS INFORMATION:
(1) It's about 225 miles, or 4 hours driving time, from Lexington
to DePauw (I have a colleague here who drives it often)--in
case you still want to try that connection in November as per
Other Possibility #1 on page 1 of this letter. It's about 45
minutes driving time from DePauw to Wabash.
(2) It's possible, if you felt necessary to squeeze it, to give a
public lecture here some Evening without missing a working day
from your office. You could fly over on Eastern #261 departing
Washington National about 1600, arriving here 1710, have a dinner
with us, lecture at 2015 until about 2200 (including Q&A), a
small reception from 2215 until about 2330, to bed by midnight,
and fly back the next morning on Eastern #504 departing Lex at
0800 and arriving Washington National at 0910. BUT we would
very much hope that you would not need to rush it this much,
so you could spend some of the next morning in small sessions
with students plus perhaps a Rotary lunch if on a Thursday.
(3) Piedmont offers Lexington-Washington service with a stop in
Roanoke, but Eastern offers our best non-stop service, as per:
Eastern #261 -- Lv Wash 1559 Eastern #655 -- Lv Wash 2040
Ar Lex 1710 Ar Lex 2151
Eastern #504 -- Lv Lex 0800 Eastern #256 -- Lv Lex 1706
Ar Wash 0910 Ar Wash 1811
(4) Regardless of anything said above, we will "move heaven and earth"
to accommodate your preferences, if at all possible. I think we
can assure you an audience of at least 750-1,000 for a DCI public
lecture here, but these are hard estimates to make. I guessed
1,500 for Gerald Ford's lecture for us in. April, and we had SRO
with 11,000 seated.
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FEDERAL RESERVE BANK OF NEW YORK
NEW YORK, N.Y. 10045
AREA CODE 212 731-6173
PAUL A. VOLCKER
PRESIDENT
April 27, 1977
Mr. Vincent Davis
Director
Patterson Chair Professor
of International Studies
The University of Kentucky
Lexington, Kentucky 40506
Dear Mr. Davis:
As promised, I have looked over my calendar for
some possible dates in the fall when I could travel to
Lexington. October 13, November 10 and December 8 seem
to be not only the most convenient times for me, but per-
haps the only Thursdays. I'll hold all three dates until
we hear from you.
Best regards.
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The University of Kentucky
Lexington, Kentucky 40506
[phone]
May 6, 1977
President Paul A. Volcker
Federal Reserve Bank of New York
New York, New York 10045
Dear President Volcker:-
Vincent Davis, Director
Patterson Chair Professor
of International Studies
We were delighted to get your good letter of April 27.
Among your indicated dates, November 10 is best for us,
indeed, ideal. So, it's a date and a deal. Thanks!
We will be back in touch with you in September or early
October to nail down a few particulars. Meanwhile, let me
stress again that we will want you here in time for an informal
little supper on that Thursday evening before your lecture at
around 8:15 or 8:30 p.m., and we will want you to remain through
lunch on Friday. Also, state your usual fee for this sort of
thing, and we will happily meet it.
Best regards,
Vincent Davis
Programs of Professional Development, Research and Service in World Affairs for Kentucky, the Nation and the Global Community
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4 sue) ;,00 ! --.` ~
Paul A. Volcker, the lanky, cigar-
smoivng President of the Federal Re-
serve Bank of New York, is one of
the most experienced players left on
the pitted and muddy playing fields
of international finance.
As Under Secretary of the Treasury
for Monetary Affairs from 1969 to
1974, he was in the thick of he fray
as the doa,r was de,;alued, the Breton
Woods monetary system was over-
thrown and the world stag;;ered from
fixed to floating currency exchange
rates.
In his present position, he heads what
traditionally has been regarded as the
most presitgious of the Federal Reserve
System's 12 regfcnal banks, with re-
sponsibility for the conduct of United
States fore;, exchange policy and the
manageme,1t of the dollar on interna-
tional markets. Mr. Volcker was named
president of the New York Fed in Au-
gust 1975, after the retirement of Al-
fred Hayes.
After last month's Presidential elec-
tion, the 6-foot 7-inch MSr. Volcker was
tipped as a possible '~ reasury Secretary
in the Carter Administration. His fail-
ure to get this post has heightened
speculation t1?:::_ `.lr. Carter may ap-
point him the next chairman of . the
Federal Reserve Board in Washington
when the present incumbent, Dr. Ar-
thur Burns, steps c.own In 1`)76 after
his term expires. Politically, Mr. Vol-
cker calls himself an independent.
At 49 Mr. Volcker also is that rarest
of creatures, a central banker willing
to speak his mind clearly on the issues
of the day and in public. In a recent
interview, just as the ministers of the
oil-producing countries were gathering
in Qatar to debate another price rise,
Mr. Volcker said outright what many
Western leaders are still saying only
in private.
This is that the strains created in
the world economic system by the oil
price increases that have already taken
place remain serious and that further
coordinated action may be necessary
to deal with them, even without any
further increases. Specifically, Mr.
Volcker suggested:
4New international arrangements to
insure that all countries can get the
money they need to pay their oil bills,
including the possible revival of the
"financial safety net" proposed by Sec-
retary of State Henry A. Kissinger last
year but never acted on by Congress.
cAn early tax cut to revive the flag-
ging American economy and create a
more expansionary international envi-
r,criert in V -11C3 the ."?s;ons Created
by the of pr. e increase would be easi-
er to resolve.
4A more cautious approach by
American. banks toward foreign lending
and closer monitoring of their opera-
tens by Federal Reserve and other
regulatory bodies.
Out
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on
V `~ "jar A 411-N l_`` ' ,`,4 U
aiI trices, "l ax Uuts
Reviewing the international outlook
from the vantage point of his paneled
dining room in the Fed's gloomy
Florentine palace on Liberty Street not
far from Wall Street, Mr. Volcker
points out that at present price levels
the oil exporting countries are taking
in some $40 billion a year more from
their customers than they can spend
on goods and services imported from
them-and that this figure will decline
only slowly.
This means that the oil-importing na-
tions are saddled with a payments defi-
cit of equivalent magnitude-$40 bil-
lion-which they can shift around
among themselves, but which they can-
not get rid of altogether.
"If the oil deficit was spread out
evenly and fairly", Mr. Volcker says,
"we could probably keep going for
some time." But it isn't. "The deficits
are becoming heavily concentrated on
some countries", he goes on, "and often
on those least able to bear them," a
reference to the developing world and
the weaker industrial nations like Brit-
ain, France and Italy.
For instance, the latest forecasts by
the Paris-based Organization for Eco-
nomic Cooperation and Development
suggest that the developing nations
will shoulder about half of the oil defi-
cit next year, just as they are ill',; % Car,
with the richer countries taking up the
rest of the burden.
Meanwhile, Britain is likely to pile
up another $2 billion in debts next year
on top of the $3 billion incurred in
1976, while France may add a $4 billion
deficit to the $5.5 billion deficit expect-
ed this year. Germany, however, could
see its surplus swell from $4.5 billion
to $6.5 billion, although it has no oil
of its own.
So far, as Mr. Volcker points out,
debtor nations have been able to raise
the funds they need by borrowing from
banks and in the private capital mar-
kets. But while "private intermediation
worked well to start with," he says,
"we can't persist in this pattern. Unsus-
twutable tensions are building up."
Simply put, Mr. Volcker's point is
this: at the present the oil exporters
are putting their surplus finds into pri-
vate banks and capital markets that
must then take the risk of lending them
on to countries in deep balance-
of-pay-ments deficit-in large part because of
the oil price increase.
At first these intermediaries were
prepared to do this. But the time is
approaching when it may no longer ae
a prudent risk. Mr. Volcker says be
had expected to see a slowdown in pn-
vate lending to deficit countries this
year, although it has not occured: He
now thinks that Sri?...te riders ll
grow `mitt more setecti e' the
year ahead.
But if oil importer cannot finance
their deficits, they will be forced
adopt such disruptive measures as im-
port controls, which will only pats
along their share of the oil deficit to
someone els "Changing the deck
chairs or, the Titan c" is the grapib,:c
phrase used to demioribe this ;process
by ,e staff of t e National Security
Courca in '.Vasnington.
So Mr. Vulck:r suggests that some
form of "rnternatiocaliv su; erv::sad
credit" might be necessary to t[de the
world over until the oil exporters have
learned to spend their funds and toe
importers have developed now alterna-
tive energy supplies of their own.
The most ambitious such sche.ne was
Mr. Kissinger's financial' safety net,
under which the industrialized co:!n-
tri'es of the world were to stand ready
to hail out any of their number deni:d
access to the private credit markets.
The proposal died a lingering death.
in Congress last year, but Mr. Volcker
-ays that "personally I would feel is
lot more comfortable" if it were re-
' ivied by the incoming Administratior
He adds that the same jch could he
done through a big expansion of the
lending facilities of the International
Monetary Fund, whicn are due to ;e
reviewed next year.
Any such new credit schemes, he
adds, should have appropriate strings
attached-"strict conditionality" is the
technical phrase-because the interna-
tional community cannot be expected
to finance Spendthrift
and the debtors must be encouraged
gradually to balance their books.
Reducing international financial im-
balances . is always easier when the
world economy is growing and trade
is on an upswing than in a etatic envi-
ronment. And Mr. Volcker suggests this
is one additional reason why the in-
coming Carter Administration should
consider a more stimulatory economic
policy at home.
"It's important for the health of the
world that a handful of the stronger
countries have a reasonable expan-
sion." he says, "though this does not
tell you how to do it without creating
more inflation."
But so far as the United States is
concerned, Mr. Volcker's views are
reasonably clear-cut. He says outright
that "the economy is not performing
as satisfactorily as one would like."
The concern about a too-rapid recovery
expressed at the Western economic
summit in Puerto Rico last summer
seems "to be diminishing, to say the
least."
His preference is for an income tax
reduction in view of the Americin
;ontv's "present ana tor,.; "
live!': slow grow.vth in per_cna
and weak capital investment.
?.s a member of the Federal Rcscrre'S
Oven Market Committee. v.hica
:uid; have an impact on toe financial
to stimulate economic activity. M.
Volcker insists that he is not a true
"monetarist." in the sense of believing
that control of the money supply is the
alpha and omega of economic policy.
:,it to concedes grudgingly that there
:ion,' be "incre than a grain of truth"
.n the rnonetari?ts' contention that
pumping new money into the economy
will only pump up inflation. In o:htr
respects. Mr. Volcker's relations with
ti:e strvr. -willed Dr. Burns provoke
innumberable, fascinating questions-
all of which he politely declines to an-
swer.
To some observers, it is ironic that
a man who was once a power in his
own right in the Treasury should now
find himself a subordinate of Dr. Burns.
it is also true that the New York Fed-
traditionally has hewn an independent
line from the Federal Reserve Board
in Washington and that relations have
sometimes been strained in the past.
Today Mr. Volcker speaks tactfully
of putting the differences of the past
behind him and cooperating closely
with Dr. Burns and Washington. But
it is hard to believe that he would not
speak his mind, particularly on interna-
tional affairs, where his experience is
strongest and Dr. Burns may be at a
. _ .'e disad /antage.
The more buoyant domestic economy
that Mr. Volcker hopes to see next year
would help the banking industry, which
in part has been forced to step up its
lending to deficit-ridden foreign coun-
tries by the weakness of loan demand
at home. However, Mr. Volcker believes
that the regulatory authorities need to
keep a much closer eye on-the banks
in the future, even though they seem
to have weathered the worst of the
storm. "Banking regulation is a sleepy
business", he says, "it takes a shock
like the 1930's to wake people up."
The bankruptcies and sour loans of
the last few years have played the
same role as the Great Depression, in
his eyes, and Mr. Volcker wants to see
the New York Fed "out in front in
the bank supevisorv effort." He points
with pride to the leading role played
by his bank in developing a new "early
warning system" that the Federal Re-
serve svstem is building in an effort
to identify troubled banks in the future
before their troubles get serious.
Yet the president of the New York
Fed also wants to he loved-as well
as feared-by the private bankers. He
sir.,ac:. describes himself as more of
"a_ :list" than his predecessor, Mr.
h: with a heavier burden of public
speak:rg. Mr. Volcker also sees himself
as a link between New York's financial
and the Federal Govern-
of private financial
-,711 be eves that the
< t ;, Fed c d play something
Dill he _'_em.s to Side with the c im- 5_ m.. rci_ a., ..^.., old Lady of
mt2E: chairman, Dr. Bums. in beliCv- .ly rPaAr` :;y~ _ JCr%'3t .,~ act:?^',a, as a
;o-n_ to U a fas or rata of :nonetar;' ex- ?oet%veen. for the 1.0)5 eroment and the
.ni.1,i ha n unhnalthv way
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 Approved For Release 2009/08/28: CIA-RDP05SO062OR000200480003-5
Mr. Volcker's background is impec-
cable for any central banker. Born in
New Jersey in 1927, he graduated from
Princeton, took his master's degree
from Harvard and did ne tgraduate
work at the London School of Econom-
ics. After a stint with L.ie New York
Fed's research department, he moved
to the Chase Manhattan Bank in 1957,
became vice president in charge of
planning and then moved on in 1961
to the Treasury in Washington.
He is so tall that he is humorously
described as being twice as high as
the monetarist economist, Milton Fried-
man, though not quite as towering as
the crypto-socialist, John Kenneth Gal-
braith. His stature gives him a degree
of personal promin- nce that central
bankers are supposed to abhor.
He differs from the central banking
norm in another way, in that he is
one of the few who have ever had poli-
cy-making experience in a national
treasury. He thus has spanned the
,~-orldj of the r,n17ticiar, whose economc
decisions are tempered by expediency,
nd that of the central banker, who
is supposed to stand aloof from politics.
Ironically, Mr. Vclcker was one of
the key policy-makers in the Treasury
Department who helped strip the New
York Fed of some of its most imprtant
functions when the old Bretton Woods
system of fixed currency exchange
,rates was abandoned by international
agreement in 1971. Without the need
to maintain fixed parities among the
world's currencies, the New York Fed's
stature has diminished.
So while Mr. Volcker may dream of
restoring to the bank some of its for-
mer power and prestige, the banshees
-that wander its marble corridors in
lower Manhattan still call him the man
who took away its former glory in the
first place.
The New York Times
There is speculation that Mr. Volcker will replace Arthur F. Burns, chair-
man of Federal Reserve Board when the latter's term ends in two years.
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="romisrng
0
perience
Currency
.gating
WASHINGTON - The im-
-,ertdinq departure of Paul A.
Volcker as Under Secretary
of the Treasury for Monetary
,\\ffairs provides an occasion
ao reflect upon the most
turbulent period in interna-
':cnal monetary affairs since
the Great Depression and on
the legacy that this turmoil
.uis left.
'ir. Volcker lived this
age?-he did not create it.
While his influence was
great, and while he helped to
shape some important deci-
sions, he would be the first
o concede that massive
forces at work in the world
were more important than
government decisions in de-
termining what happened.
Only a few other men have
-' 'hrough the entire
period since early 1969 in po-
4itions of authority-Otmar
Emminger of West Germany.
Valery Giscard d'Estaing of
France, Guido Carli of Italy
and not many more besides
+[r. Volcker. What have these
Five years wrought? Essen-
tially two things:
!IBy the end of the period,
the worst peacetime global
inflation in modern history.
FA profound transforma-
tion of the world monetary
system from fixed to largely
leating currency-exchange
rates.
In the view of Mr. Emmin-
per and some others, the
ecord may be an essential
clenient in the cure for the
first. Or, put another way,
1crording to this school the
anal death throes of the
:::cstem of fixed exchange
metes produced a massive and
ritended extra inflationary
-ust to the world.
This happened as countries
uch as Germany and Japan
.lad to pump up their domes-
tic money supplies as a coun-
terpart, to buying billions of
United States dollars on the
foreign-exchange markets to
-per- e the established ex-
rates. This newly
d money was an impor-
ac:or in the inflationary
in that got under way in
:ate 197: all over the world.
But no one really foresaw
:1 This in 1969. Mr. Volcker
ould not at that time have
? nst floating exchange
. 7"'s and probably not even
arp depreciation of the
nearly all the other leading
currencies.
By now it is nearly unchal-
lenged conventional wisdom
that the dollar had become
gradually overvalued starting
some time in the nineteen-
sixties. And, in the United
States at least, it is also in-
creasingly the conventional
wisdom that a system of
floating exchange rates is
probably the best of all sys-
tems.
Before assessing the situ-
ation as it stands today, it is
worth recalling that Mr.
Volcker in no sense set out
to create a floating exchange-
rate system.
First under Treasury Secre-
tary John B. Connally at the
Smithsonian conference in
the huge increase in world
oil prices. This was reflected
in the recent decision of the
Committee of 20 nations
negotiating world monetary
reform to drop all further
discussion of a return to
fixed parities.
This can be said of the ex-
periment in floating:
cFirst, as Mr. Shultz fre-
quently points out, floating
has avoided monetary crises
in the old nse--massive
flows of dollars into one or
More County es. foreign cen-
tral banks being swamped,
domestic money suppiies ex-
ploding, exchange markets
closing and emergency meet-
ings of finance ministers.
Flows of funds now cause
char,^es in rates not changes
December. 19i 1. and iatpr in -t
n~r?nco.;l.- f C _ ', ..
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Paul A. Volcker sought
to, devalue the dollar-
not necessarily float it.
eral European capitals in Feb-
ruary, 1973, when George P.
Shultz was Secretary, Mr.
Volcker sought not to free
exchange rates but to re-
establish them on a more
realistic basis. He sought to
devalue the dollar, not to
float it.
In both cases, market
forces overwhelmed the new
pattern of exchange rates.
Mr. Shultz was ahead of Mr.
Volcker and many others in
coming out forthrightly for
floating as the least evil."
which was finally done at the
Paris conference of finance
ministers in March of last
year.
There is now universal rec-
ognition that floating will
continue indefinitely-though
rcretion to intervene in the
foreign-exchange markets).
t?Second, thanks ironicali}
to inflation, floating has no
so far tempted any counts
into a beggar-thy-neighboi
policy. This is a major lessor
just beginning to be per
ceived here.
If a government is worries
about inflation, as all are, i
is important to keep one'.
currency-exchange rate up
not down, as used to hi
feared. Britain has been do
ing so. France, despite ;
small effective devaluation it
January. has been doing so
Japan has let the yen rise It
the last eight weeks, ant
Germany has let the marl
rise.
If inflation should be re
placed by serious recessio:
and unemployment, this situ
ation could change. For th,
time being, however, inflatioi
has brought one blessing: ni
competitive depreciation o
currencies and no trade re
striction against imports. Thi
point was emphasized las
month in a speech here b,
Mr. Emminger. No one seem
to have contradicted him.
Two problems associate
with floating have bee
brought out by Arthur F
Burns. chairman of the Fed
eral Reserve Board, who ha
had reservations from th
outset.
cone, floating can mak
any nation's inflation prof:
Tern worse in a "viciou
circle" fashion. If its pric
level is rising faster than tlt
average, its exchange rat
tends to depreciate, which i
turn contributes to raisin
the price level even further
qTwo, contrary to a widel
held view, a nation may b
less able than under a fixed
rate system to conduct a
independent interest rate po
icy. If United States rates ar
lower than elsewhere, mone
will flow out and the dollar'
exchange rate will deprec'
ate, thus again making th
domestic inflation problem
worse.
And Dr. Burns told Congres
this month of an additionz
problem, which is. readil
conceded by Mr. Shultz: "Th
magnification of exchang
fluctuations through specula
tive trading is a troublesom
feature of a floating system.
Mr. Volcker shares sour
of these reservations. But Ii
departs in the knowleda
that there is no real alterns,
Live to currency floatinfc
the time being. Fe did' nit
particularly want it, bt,
neither he nor angone el_;
could preserve a fixed-rat
system against the massi'.
forces of the market.
And he did much t
achieve the main America
objective: a more realist:
exchange rate for the doll,.
and hence a far healtl,iE
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.:'. o?:- T".,i' rgLra~. & i 7 tl ak afi.~ e. o .e
ATLANTIC CITY, r.ir-A central
banker gently took u:o r?< i_,n's econem-
ics profession to task today for :that
he called its relative negl_ct of the roie
of the credit markets, and of financial
com.plexiues in general on economic ac-
tivity-Paul A. Volcker, president of the Feder-
al Reserve Bank of Now York, told a
luncheon gathering of the American Eco-
nomics Association and the American Fi-
nance Association in Atlantic City that
the "relatively little attention directed to-
ward serious and systematic analysis" of
credit markets and their disruptive poten-
tial had contributed to a roneral failure
to understand the implications of such
phenomena as the Lurodcliar market, tae
recent commercial bank loan leases and
the shifting proportion of debt and equi-
ty.
In some respects his complaint echoed
the sentiments of Alan Greenspan, chair-
man of the President's Council of Eco-
nomic Advisers, who said recently that
the trouble with most economic models
was that they did not take adequate ac-
count of the financial markets.
In part this failure, according to Mr.
Volcker, is a result of the intellectual
triumph in the 1960's of monetarism, a
theory emphasizing the effect of changes
T'-a Ne.' Y~IK Rr' 'e,
Paul A. Volcker of the Federal Re-
serve Bank of New York, speaking
in Atlantic City, N.J., yesterday.
in the money supply on the level of eco- The problem with this approach, ac- i
nomic activity. In policy terms, the theory cording to Mr. Volcker, is not only that
in-,!' tit to l: 'o tt _,,- .n .-.taxi al ,..S4;m'i atc'! between the
at a steady, noninflationary pace, the cen- money supply and inflation is complex
tral bank simply has to set a moderate, and "rather loose", but that the Fed has
t fixed rate of expansion in bank reserves, a very hard time controlling money at
and not worry about short-run fluctua -' all, whether it manipulates bank reserves,
tirns in other targets sit.. `. as interest
rates. Continued on Fage D7
Continued from Page DI over the last year to accommodate a
vigorous and balanced economic recov-
aampers with interest rates or takes other ery
action. "If 1?ou want to bring the economy back i
Doctrine Confronts Reality to a reasonably healthy state next year,"
Eventually, simple doctrine comes up Mr. Bunting declared, "interest rates
against complex and harsh reality, he should be around 6 percent by the end
said. of this year." He added that with the
Nevertheless, Mr. Volcker said that the current makeup of the Federal Reserve
Fed's practice of announcing each quarter B=ard this will not happen and rates will
its money supply targets for the coming r main stable around their current levels.
year-a practice adopted more titan a ^he prime rate at most banks is now
year ago under Congressional pressure percent. This means. he added, more
and over the vigorous protests of the 'topo economic activity and a fore-
eserve's chairman. Arthur F. ^. ,coed recovery.
.Federal Reserve's'
h'e're in the 1930's and we don't know
..practical pa proved a useful experiment ?. ?? In Bunting added acerbically.
in
monetarism." i ~.:s year was the first in which ol't-
In particular, the specifying of longer- :Cl! ''.sues could be cpenly discusse i at
range targets has forced the Federal Open y E A , meeting and the break
Market Committee to iustity more c'eariy ! try" tiro was dramatized by a we''!-at
>tn its own mind its short-term decisions ed debate between Democrar.c a!-
:to influence monetary aggregates, there- -,rs Chores A. Sch ltze and Les er
by reducing the tendency to overreact ! 1)i'c-.v net tl e one hand, and Herbe?t
So a short-term and possibly temporary creln and Marina Whitman, forme: mem-
phenomenon. of President Nixon's Council of
A less sanguine view of the Fed's recent Ecc ,,,rmic ,advisors. on t~ e other.
performance .as tok' e ` : r _ djr he a t i.
marri: g Sri o . of 1a} ash' !^ .'an a a- nc . - t? D of the A:ifed Sfl _a, S :. tS .7;. .? ,Y.alor
a gather: of me 4?T60 ei o. , is a: c ;oaign %%
zs iii
an old seaside hotel in the Jersey re,o, rr ,e ind, :du,,u ro spend n.s u' it in-
John R. Bunting, the activist chairman and to manage his o%%-a eels: "imic
and chief executive officer of the First ~'fi8 rs," someth'ng that o'a!J he tev^ard-
Pennsylvania Bank and First Pen^ ; iva- .Ll by a string of Derr, c -atic adn,,i:;stra-
nia Corporation and avowed supporter and their propensity 'o i;:crease the
of Jimmy Carter, told reporters that in;inence of Government over economic
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 Approved For Release 2009/08/28: CIA-RDP05SO062OR000200480003-5
Sunday, September 24, 1972
Busy "PeddIct-T
it M-, o n P.." t ae-) r y
WASHINGTON - One of
the more sought-after people
at the annual five-day clam-
bake and jamboree of finance
ministers and central bank-
ers that opens here tomor-
row will be Paul A. Volcker.
As Under Secretary of the
Treasury for Monetary Af-
fairs, Mr. Volcker will be
outranked at the annual'
meetings of the International
Monetary Fund and the In-
ternational Bank for Recon-
s*.ruction and Development
by George P. Shultz, the new
Treasury Secretary.
However, Mr. Shultz is a
comparative neophyte when
it comes to official-asset
convertibility and other inter-
national monetary mysteries.
Or, as an .official of another
agency put it, "Paul is in
charge of strategy and
tactics."
That remark may have
been hyperbolic, but only a
little. Mr. Volcker is known
from London to Tokyo as
the chief architect of and
traveling salesman for United
States international monetary
policy.
Of late, there have been
complaints that Mr. Volcker
has been continent-hopping
without his sample case.
Since the realignment of ex-
change rates at the Smith-
sonian conference in Wash-
ington last December, the
United States has said little
about how to reform the in-
ternational monetary system.
"I don't think the Ameri-
cans, know where they're
going," an exasperated uni-
versity economist said.
"Paul's not exercising lead-
ership. In the . periods of
System-building, he hasn't
:o-a the man to do it.'
What ',"r. Volcker and i is
opposite numbers from o Wier
industrial countries hope to
devise is a new arrangement
for smoothing out imbalances
- surpluses and deficits in the lows of money among
countries for trade, invest-
ment.and.tourisrn-.
The old system, based on
dollars and gold, was interred
on Aug. 15, 1971, when Pres-
t Nixon slammed shut the
Treasury's gold window. That
paved the way for devalua-
tion of the dollar and ended
the post-World War II era
of fixed exchange rates that
were changed only rarely.
How to achieve greater ex-
change-rate flexibility while
retaining some sort of fixity
is one of the tasks of reform.
Europe, which holds billions
of dollars as a result of
chronic United States pay-
in nts deficits, wants to know
what sort of convertibility
Washington contemplates. If
not into gold, then what?
Washington, which has no
particular reason to foresee
an early return to equilibri-
um, would like to wrest from
Europe and Japan a commit-
ment to revalue their curren-
cies upward when in persis-
tent surplus.
Some in Washington spec-
ulate that Mr. Volcker knows
very well what he thinks
about reform, but that he is
playing his cards close to the
vest, as he learned to do from
former Secretary John B.
Connally.
Everyone in Washington
credits Mr. Volcker with
having a keen mind and an
inordinately fine grasp of
financial and monetary is-
sues. "He's capable of keep-
in; a lot of complicated and
subtle considerations in his
mind all at ante," said
Marina Whitman, an eco-
nomic adviser to the
President.
Some also credit him with
an appreciation of political
realities. Mr. Volcker himself
US77 73 1 11
?o
.
Continued-from page I
Brays that monetary Issues are
"more Important to interna-
tional harmony than to the
domestic economy of the
United States."
The Under secretary dis-
played some of his widely
reputed skill at give-and-
take a few days ago at a
Congressional hearing. Sen-
ator Jacob K. Javits, Repub-
lican of New York, asked
when the United States
would make its proposals.
"Well, I don't know what
you mean exactly ' by pro-
posals, Senator," Mr. Volcker
began his reply. It was a
cheeky stall.
The Senator bored in, his
tone stern, asserting that
.Europeans had told him that
Washington was not exer-
cising leadership.
"Well, I've done a little
traveling in Europe recently
myself, Senator," Mr. Volcker
shot back, adding that some
Europeans had advised him
against making proposals
now.
Senator Javits backed off.
apologized for his tone, and
asked in a conciliatory way
whether proposals were be-
ing prepared.
"We have made some, we
will be making more, and
we have a good many ideas
in this area," Mr. Volcker
said. End of skirmish.
Mr. Volcker obviously likes
to spar intellectually. There
have been complaints that
he is disdainful of lesser ex-
perts, whom he skewers, as
one Volcker watcher ex-
pressed. it, "with a captious
thrust."
?
"He's a tall man and he
talks down, so to speak,"
said a policy adviser of more-
than-average height.
Mr. Volcker, who must be
very tired of being asked
how tall he .is, habitually has
said 6 feet 7 inches, but he
concedes he is taller. As for
"talking down," Mr. Volcker
acknowledges that when dis-
agreements arise, "A lot of
times you think it's because
the other fellow doesn't
understand-"
Mr. Volcker was asked
about such criticisms during
an 80-minute interview in
his third-floor office at the
south end of the Treasury,
and he appeared to weigh
them gravely. He recalled
the tense atmosphere last
autumn and the Administra-
tion's feeling that "we had to
convince people that things
had to be changed."
"After several years, I felt
fairly comfortable with a lot
of these people," he re-
flected. "Maybe you get
sloppy. You're more to the
point than you should be. It's
easy to get sarcastic in
making a point."
At 45 years or age, Mr.
Volcker has lost most of his
hair, which has whitened at
the temples. The smooth
head and a little jowliness
make the boy-wonder days
seem long ago. So do the
long cigar and the deep,
growly voice.
But the man still has a
light-hearted, youthful, sense
of humor. He fails to dis-
semble when a question
touches a tender spot.
There is one other funda-
mental criticism of Mr. Volc-
ker, and some of his best
friends make it: that he is
indecisive.
A member of the inter-
agency "Volcker group"
thought at first that the
chairman's habit of asking
questions was only truth-
seeking, but later began to
wonder whether he had a
view of his own.
"He looks for reasons for
not doing things," an
academic economist said. "He
c sects almost any simple or
dramatic solution. Perhaps
subconsciously he welcomes
delay."
"A not tremendously deci-
sive sort, subject to self-
doubt and uncertainty--like
the rest of us," one colleague
said.
What else is Paul Adolph,
Volcker?
He is a husband and the
father of two teen-age
children who is described as
a devoted family man.
"He doesn't shortchange
his family any more than all
of us do in this kind of
work," an associate said. He
meant that Mr. Volcker, like
a lot of important executive-
branch people, works late
most evenings and spends
many weeks abroad, 12 in
1969.
Mr. Volcker wishes he had
more time to garden, to pro-
duce something more tangi-
ble than a monetary system,
which is really an abstrac-
tion.
The grapes he grew one
summer in Montclair, N. J.,
produced wine that "came
out like shellac." Maybe he'll
become a serious grape grow-
er and vintner one day, he
muses.
He reads "whatever my
wife has around the house,"
most recently "The Happy
Hooker," the first pages of
"the book about Stilwell and
China" and a book about
wine.
He likes to fish but he
spends most of his time
working. A few weeks ago he
celebrated his birthday, while
at a conference in Austria,
singing in a pub with a
couple of friends until a late
hour-and that, evidently,
was a rare bit of frivolity.
Born on Sept. 5, 1927, ii
Cape May, N. J., he grew ui
in Teaneck, N. J., an upper
middle-class -suburb I not fa
from the George Wa'shingtoi
Bridge where his late father
for whom the son is name"
was City Manager for moo
than 20 years.
From public high school
Paul went to Princeton. Wha
had he done there?'
"Not much," he said will
calculated flippancy.
Had he not graduated sum
ma cunt laude and had no
that required -a lot o
studying?
The question amused hire
He recalled that his father
disturbed by Paul's casual ap
proach to scholarship in higi
school, had warned him tha
in college he would have t+
work.
"I never found college ver
hard either," he quipped.
was reasonably facile in wri`
ing and I could regurgitate
what I was supposed to."
He went on to Harvard
from which he graduatec
with an M.A. in economics it
1951. He was -supposed tc
write his doctoral thesis dur
ing a year on a Rotary fe':
lowship at the London Schoo
of Economics.
"It seemed like a waste of
time to write a thesis," he ex'
plained. "That's why I'm not
a doctor." His voice way
'laced with Irony.
After finishing college
Paul applied unsuccessfully
for a job at the Treasury an;:
the Federal Reserve Board
Later, through the inter.'c