The following is an introduction to a series of essays GoldMoney will be publishing, written by John Butler and Barry Downs, looking at the life and times of John Exter – leader in the fight against Richard Nixon, Alan Greenspan and the debasement of the US dollar. The source material for these essays includes John Exter's collected papers and works; the personal experiences, diary entries and recollections of the author; and interviews with former colleagues, friends and family of John Exter's.
It was a fine spring day in Washington, DC. John Exter was in town on private business, advising a wealthy client as to her substantial investments. When his friend and former New York Fed colleague Paul Volcker, Chairman of the Federal Reserve, learned that John was in the neighborhood he dropped everything in his diary that day and requested that John come by his office. John agreed and later that afternoon arrived at Volcker’s office for a three-hour chat.
At the time, the US was in a recession, by far the deepest since the Second World War. Yet inflation was stubbornly high. When he assumed the Fed chairmanship in 1979, Volcker had promised to bring inflation down at all costs. But by 1981, amid soaring unemployment, he was coming under unprecedented public criticism for a Fed chairman. Members of Congress from both parties were demanding that he be fired. It didn’t help that he was a lifelong Democrat, yet serving under a Republican president and a Republican-controlled Congress.
Yet what really hit home was criticism from the common man, out of work and suffering from Volcker’s bitter monetary medicine. John Exter was astounded that day to discover that against the walls of Volcker’s office were stacked piles of one-foot planks of lumber, sent by unemployed construction workers in protest at the many building projects cancelled as a result of record high interest rates. Some of the 2x4s were even personalised. On one was written, “Because of your high interest rates, Mr Volcker, I've lost my job, my wife has divorced me and I'm losing my teeth and hair, you no good SOB.” Volcker clearly needed some reassuring advice from those he respected most.
There was a long backstory to the economic mess the US was in at the time. In the 1960s, as the US government began to run chronic budget deficits – albeit incredibly mild by today’s debased standards – John and others had warned that this would lead, eventually, to a run on the US gold stock, a sharply weaker dollar and a surge in price inflation. He was right on all counts. Now, over a decade later, Volcker had been tasked with dealing with these nasty consequences.
Appointed by President Carter to deal with the national economic malaise and restore confidence, Volcker wasted little time in implementing an innovative policy of explicit monetary targeting. Grounded in the academic tradition of the Monetarist “Chicago School”, of which the esteemed Milton Friedman was Dean, monetary targeting was greeted with a combination of awe and horror by the public and politicians alike. What was it? Would it work in practice?
By 1980, alongside accelerating money growth, US interest rates had soared into the double digits, as had unemployment. Congress scheduled special hearings on monetary policy, a blatant attempt to pressure the Volcker Fed to relent in the fight against inflation. Volcker refused to even consider doing so. The Fed would continue to let the money supply dictate interest rates and, thereby, dictate the path of economic growth, inflation and unemployment.
In sharp contrast to his relentless, determined public persona, in private Volcker felt somewhat different. In 1981, with money supply growth still accelerating, interest rates at nearly 20% and no end to the stagflation yet in sight, Volcker was at his wits end. He had simply not expected that the fight against inflation could have escalated to this point. That spring afternoon he reached out to John for any advice he might be able to provide.
John was regarded by Volcker and his counterparts around the world as the central banker’s central banker. Part retired since the early 1970s, he had been active in banking in the US and abroad since the 1940s, and had served as vice-president of the New York Federal Reserve, senior vice-president of the First National City Bank (Citibank) and the first Governor of the Central Bank of Sri Lanka (Ceylon), founded in 1950 following the independence of Ceylon from India a few years earlier. He was also an active investor. In the 1960s, he not only warned against the policies that he believed would lead to a dramatic devaluation of the dollar and rise in the price of gold but, witnessing that his advice was going unheeded by those in greatest power and influence, positioned his investments so as to profit from them. And he did, handsomely.
Following his retirement from Citibank in 1971, he went into private consulting work and managed his by-then substantial fortune. He specialised in gold and gold mining investments and sat on the board of ASA Ltd. His clients included wealthy investors in the US and around the world.
No other US banker of the time had such extensive domestic and international private and public banking experience. None had had his degree of foresight to invest their savings as John had, accumulating a large holding of gold and gold mining shares. He had literally seen it all, and had predicted much of what he eventually saw, including what was unfolding in the US in the spring of 1981.
Retired or not, John never shied away from offering helpful if potentially harsh advice when asked. So when a desperate friend asked for John’s help, he was only too pleased to provide it. That said, John could have responded with an entirely justified degree of schadenfreude. After all, Volcker had been active in US policy circles since the 1960s and was among those who had not always heeded John’s advice. But schadenfreude was not in John’s character. Rather, he went straight to offering his friend his best, honest economic advice. He suggested to Volcker that, in his view, he had already restored the Fed’s credibility as an inflation fighter; that money supply growth would soon begin to trend lower; that the battle, as it were, had now been won and that it was time for the Fed to start easing interest rates to stabilise the economy.
Volcker found it hard to believe what he was hearing. He had expected John to recommend more of the same; to stay the course: Even higher interest rates perhaps, or tighter bank reserve requirements: some form of tough economic love, whatever was required to break the back of the rampant inflation. Yet John argued that this had already been accomplished, that Volcker could now begin to ease off the monetary brakes. How could he know that?
Perhaps it takes a true monetary hawk to know when Federal Reserve policy is convincing and credible and when it is not. John was a highly accomplished and experienced economist, and had an extensive analytical toolbox from which he could draw. In any case, Volcker appears to have followed John’s advice and began to ease interest rates within weeks of their meeting. Not long thereafter, money supply growth indeed began to slow, as did the rate of price inflation. By 1982 the inflation rate had fallen to under 3%, yet the economy was beginning to recover sharply. The stock market rallied. Growth rates picked up. Unemployment declined. And yet inflation remained low. The dollar grew stronger. Not only was the recession over; the battle against the dreaded “stagflation” had been won. John Exter had been proven right, yet again, in his predictions.
In 1984, basking in this pronounced economic success, President Reagan was re-elected in a landslide. In that same year he publicly gave Volcker tremendous credit for his achievements and re-appointed him to a second term at the helm of the Federal Reserve. Yet little did Reagan know how things could have turned out differently. Had the Fed continued pressing on the monetary brakes for too long the economy would have failed to recover meaningfully prior to 1984 and Reagan might well have lost his bid for a second term. Volcker might not have received a re-appointment. The economy might have spiraled downward into a deep financial crisis. The US dollar might have lost global investors’ confidence and continued to lose value, leading right back into the stagflation Volcker had long sought to end.
US economic and monetary policy might be made by institutions such as the Federal Reserve and the Treasury but all policies are the product of real decisions by real people, receiving real advice that they can either heed or ignore. John Exter’s advice was at times heeded, at times not during his long career and retirement. In 1981, it was heeded, Volcker succeeded, Reagan celebrated and the country experienced what was rightly described during Reagan’s re-election campaign as “Morning in America”. That the dawn came as it did, as soon as it did, was quite possibly due to the sage advice of John Exter.
There was another interesting topic of discussion late that spring afternoon: gold. Volcker knew that John was an expert in gold and gold investments and he asked him what he thought of the outlook. John explained why he believed that gold served as an insurance policy against financial calamity. But then he went further. He predicted how someday, perhaps when it was least expected, there would be a sudden debt crisis, investors would rush into gold and the entire banking system would be at risk of collapse. Volcker removed his glasses, rubbed his eyes and said, “John, I hope you are wrong but I respect you too much to rule out your predictions.”
John Exter died in 2006, aged 95. He may not have lived to see the global financial crisis of 2008 unfold, but as with most major economic developments of his time, he predicted it. He was more than just an ordinary banker. He was a banker for all seasons, and a monetary theorist of the first order. This series of essays tells his story.