Free A History of the Federal Reserve, Volume 2 by Allan H. Meltzer

and the surtax would solve their problem.
    In the squabble over the discount rate with New York, the majority and minority set out their positions. The difference in the two positions was not in their analysis but in the goals each sought to achieve. New York recognized that a deflationary or disinflationary policy was the only way to keep the dollar price of gold fixed. A 6 percent discount rate would show “determination . . . to defend the dollar at all costs” (Maisel diary, March 18, 1968, 5). Maisel then wrote that the Board “should reject the concept that the defense of the dollar is worth ‘all costs’” (ibid.) He was willing to “hold the growth rate of the economy to 4 percent and perhaps even to 3.5 percent, but anything beneath this is not logical . . . [F]or equilibrium to come about at existing exchange rates there would have to be a much faster rise in European prices and it does not seem likely that this can be brought about” (ibid., 6). The choice, he said, was additional controls or eventual devaluation of the dollar.
    Martin did not share Maisel’s view. He told the American Society of Newspaper Editors that the United States was in a crisis—“the worst financial crisis that we have had since 1931.” But he added: “This is not a disaster story. The world would not come to an end if we did that [devalued]” (extemporaneous remarks, Martin speeches, April 19, 1968, 4, 5). 49 Press reaction to the speech called Martin an alarmist. Like many of his contemporaries, Martin believed that devaluation of the dollar or floating rates would end the postwar system and bring back trade restrictions.
    49. He noted that some economists preferred floating rates. That would be “the greatest setback, financially, that this country has faced, certainly in my lifetime, and I think it will take us a long time to recover from it” (Martin Speeches, April 19, 1968, 5). But his speech showed willingness to consider devaluation despite his reluctance.

    When the London market reopened on April 1, gold sold for $38 an ounce. The price remained between $38 and $43 for the next year, then fell to $35 following sales by South Africa (Solomon, 1982, 124). The price remained close to $35 until new disruptions culminated in the formal end of U.S. gold sales in 1971. The two-tier agreement remained in effect until November 1973, when the market price was almost $100 and the official price had increased to $42.22 (ibid., 127).
    Between November 1967, when Britain devalued, and March the federal funds rate increased nearly a percentage point, from 4.12 to 5.05. Growth of the monetary base remained at a 6 percent annual rate. In response to a question, Martin reported that the European central bankers held mixed views about the desirability of additional rate increases. They preferred a reduction in the budget deficit by fiscal contraction. Robert Solomon added that the Europeans would accept a rise in interest rates that shifted about $200 million in euro-dollars a month to the United States, reducing the capital outflow. A more aggressive policy would likely bring matching increases abroad.
    Despite a decision at the April 2 meeting to make only a modest change toward firmer policy, short-term rates rose following the meeting. By midmonth, the Board agreed to increase the discount rate to 5.5 percent and the regulation Q ceiling rate to 6.25 percent. Much of the argument for the changes referred to the balance of payments. Before making the changes, the Board notified the Secretary of the Treasury and the Council of Economic Advisers. The Council informed the president. No one objected, but the White House staff asked the Board to delay the announcement until the following Monday, “pending an opportunity for the President to discuss the matter with the Chairman” (Board Minutes, April 18, 1968, 13). The Board agreed to delay the announcement (ibid., 14). This was the first time that the White House interceded to