Oil Powers by Victor McFarland

Author:Victor McFarland
Language: eng
Format: epub
Publisher: Columbia University Press

THE VOLCKER SHOCK

As president of the New York Federal Reserve Bank, Paul Volcker oversaw the largest single block of Saudi investments in the United States. He visited the kingdom in January 1979 and met with Abdulaziz Quraishi. In a private memo, Volcker noted that Quraishi “went out of his way as I was leaving to urge the importance of a stable dollar in connection with oil pricing decisions.” Quraishi warned that Saudi Arabia could not hold the line against oil price increases if the dollar fell. Volcker observed “a good deal of skepticism and nervousness” about the dollar in both Saudi Arabia and Kuwait. “Perhaps some of that can be discounted,” Volcker wrote, “but I came away with the feeling that the depreciation of the dollar has provided a more potent economic and political argument for oil price increases than most US commentary has conceded.”71

In August 1979, Volcker became chairman of the Fed. Soon after he took office, the dollar came under renewed pressure. At a meeting of the International Monetary Fund in Belgrade on October 3, the Saudi finance minister Mohammed Aba al-Khayl said that the kingdom was unhappy about “the renewed instability in exchange markets” and warned that a further decline in the dollar’s value would bring more oil price increases.72 Just three days later, Volcker announced that the Fed would adopt a new and much more hawkish strategy against inflation by restraining the growth of the money supply. Volcker’s decision inaugurated a new era in which the Fed prioritized price stability at the expense of jobs.73 Over the next three years, the Fed would raise interest rates to all-time highs, reducing inflation and boosting the dollar while triggering a recession, reducing the competitiveness of American industry, and throwing millions of Americans out of work.

It is difficult to know how much Saudi concerns about the dollar may have influenced Volcker’s decision. At the October 6, 1979, meeting of the Federal Open Market Committee (FOMC) at which the Fed decided to limit the money supply, Volcker noted that he wanted to “just say a few words about the attitudes of foreign countries as I’ve experienced them first hand,” to impress on the other members of the committee “the depth of the feelings” that foreign officials had about U.S. inflation. Although FOMC meetings were recorded, Volcker warned that in this case he wanted his comments “off the record.” The tape recorder was deactivated until he finished discussing the subject. It was the only gap in the transcript of the meeting.74 The context suggests that Volcker was thinking of West Germany, whose leaders had long been pressuring the United States to get inflation under control.75 Even German worries about the dollar’s decline, however, were based partly on the fear that a further slide in the dollar’s value would upset Saudi Arabia and trigger more oil price increases. At the Bonn summit in 1978, Helmut Schmidt had warned that according to his conversations with Prince Fahd, Saudi Arabia might be forced to “raise the price of crude earlier and higher than they desire because of the dollar’s decline.

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