Politically oriented monetary policies and business cycles are the inevitable by-products of a central bank, the ultimate favored banking institution which is viewed as a savior by some politicians facing elections. After the elections comes the bill: Inflation runs amuck. The nation goes into a painful recession, or the stock market crashes. Whatever the extent of the damage, monetary policy is always the primary cause of these economic woes.
One such episode of monetary mischief occurred three decades ago during the Nixon presidency. In the disastrous aftermath of the monetary policies of the early 1970s, America would stumble through a decade of stagflation—high inflation rates coupled with high unemployment rates, which was something that Keynesian economists had said could never happen simultaneously. Yet by the early 1970s, that is precisely what happened.
This round of the monetary policy through politics began when President Nixon—unhappy with the policies of then-Fed Chairman William McChesney Martin, who had followed a tight monetary policy—decided that he would not reappoint Martin. Nixon opted to name his political ally, Arthur Burns, who had been serving as counselor to the president, to succeed Martin. Nixon blamed Martin for the recession of 1969 and 1970. Nixon was worried about his reelection in two years.
One of Nixon’s economic advisers was critical of Martin, saying that the Fed governors “have a money supply expansion of 5 percent, but they keep missing—under-shooting it.” Nixon was taking no chances. “We’ll take inflation if necessary, but we can’t take unemployment.”
Burns became chairman at the Fed in early 1970. Almost immediately, Nixon started his pressure. Commenting about the new Fed chairman, he told an audience, “I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed.”
In private, Nixon’s message was more blatantly political.
“I must register with you, as strongly as I can, my concern that what really determines the result of an election is not interest rates, but unemployment statistics around election time. . . . [T] here is no doubt in my mind whatever that if the Fed continues to keep the lid on with regard to increases in money supply and if the economy does not expand . . . the blame will be put squarely on the Fed,” he wrote Burns.
Nixon threatened to wage a public campaign against Burns if he didn’t ease monetary policy. Stories were floated in the press that Nixon was going to double the members of the Federal Reserve Board, which would have diluted Burns’s power. The administration believed its policy of threats would be successful and the printing presses would hum.
H.R. Halderman would privately brag in 1971 that, “We have Arthur Burns by the balls on the money supply.” The administration was going to obtain the money supply it wanted.
Burns, several board members said later, would press for looser monetary policies in 1971 and 1972. The figures, which are available at the Federal Reserve Board’s Web site, confirm that the pace of money creation greatly expanded in 1972. Monthly money growth, which had averaged 3.2 percent in the first quarter of 1971, jumped to 11 percent in the same period of 1972. Money creation was 25 percent faster in 1972 compared to 1971.
Burns and his allies at the Fed were flooding the market with new money. The Fed was going to do everything possible to ensure that 1972 would be a great year for the economy. And it appeared to be a good year, as the inflation rate—along with unemployment numbers—declined.
Nixon adviser John Ehrlichman later wrote that Burns understood what was wanted by the Republican administration: “Some economists are oblivious to political reality, but Arthur Burns was every bit as much a politician as he was an economist.”
Only a month after the election—in which Richard Nixon was reelected, carrying forty-nine states, and most Democrats in Congress were reelected—damaging double-digit rates of inflation were becoming apparent. At a speech in Toronto in December 1972, Burns said that “the current inflationary problem has no close parallel in economic history.”
Besides a disastrous expansion of the money supply—which, by the mid-1970s, would give the country double-digit inflation rates—Burns was part of an administration economic team that constantly eschewed market forces. He persuaded the administration to go ahead with an incomes policy as well as wage and price controls, all policies that were as bad as his easy monetary policies.
Burns later complained that huge deficits were to blame for inflation, conveniently forgetting the role he had played in the great monetary expansion of 1971 and 1972 and not mentioning the failure of wage and price controls. All these policies, which had one common theme of greater government meddling in the economy, were failures.
Nixon continued to fund an expensive war in Vietnam. He didn’t dismantle Lyndon Johnson’s huge Great Society programs. And, in a measure that would be as disastrous on the fiscal side as his monetary policies, Nixon, with bipartisan support, greatly expanded Social Security programs in the midst of the aforementioned 1972 election.
Have Americans learned the lesson of politicized monetary and fiscal policies? There have been proposals to limit the dangers of a central bank. More important, though, we need to listen to Vera Smith: A central bank is an artificial creation, an imposition of politicians often working in concert with pseudo business people who believe their success will come from favors provided by pols with itchy palms. When Nixon wanted more money, he wasn’t only speaking of campaign contributions.
Before any reforms should be entertained, Americans must study the record of these dangerous institutions called central banks. We must understand that, just as a military industrial complex is inimical to our liberties, so, too, a central bank is as much a threat to our economic liberty as a despot is to our political liberties.
Damage to the economy will likely happen again as long so Americans accept the flawed notion that the nation’s top banker, the Federal Reserve System chairman, is also an all-knowing economist who can always anticipate economic trends and that he is either uninterested in political pressures or that he is invulnerable to them.
