A History of the Federal Reserve, Volume 2 (22 page)

The minutes that later became available show that the first, more general, charge is false. Although some members dissented at times, a majority never opposed the policy. The second, more specific, charge is not only implausible, everyone at the meeting has denied it.
⁵⁸
Wooley (1984, 161) interviewed almost all FOMC members. They said “such a blatant tactic would have been strongly repudiated.” My interviews confirm this result, as did Abrams (2006) and Governor John Sheehan. No one to whom I spoke that was present at the meeting recalled the incident. All denied it occurred. Sheehan (2002, 14) pointed out that the Board was dominated by Democrats. “I never in monetary policy observed anyone voting because he was a liberal Democrat or a conservative Republican. . . . Every time that Burns went up to Capital Hill, Proxmire would beat up on him, that you’re not expanding the money supply enough.”

Wooley (1995, 8) returned to the issue after the Nixon, Burns, Haldeman, and Ehrlichman papers became available. His new conclusion was that “Rose was much closer to the truth than Fed officials wanted to admit or than many scholars believed.” This conclusion is also contentious. Others who have studied the period concluded that Burns, and many others, accepted that there was ample slack in the economy. The unemployment rate remained at 5.6 percent as late as October 1972. The standard presumption was that full employment would not be reached until the unemployment rate was about 4 percent (Matusow, 1998, 187–90; Wells, 1994, 99–101). Wells quotes Walter Heller and Herbert Stein as favoring expansive policy because of the distance from full employment. Wooley (1984, 168) lists several prominent economists who usually advised the Democrats. Until August 1972, none favored more restrictive policies. And he quotes leading Democratic members of Congress as favoring “fairly rapid money growth”
(ibid., 175). As late as July, the Joint Economic Committee warned the Federal Reserve not to tighten its policy (ibid., 176).

58. Issues about Burns’s role continue. Joseph Burns, a son, responded to criticism of his father in a letter to the
Wall
Street
Journal.
“In hindsight, there is little question that monetary policy in 1972 was expansionary, but the evidence strongly contradicts the assertion that Arthur Burns manipulated it to support Nixon’s re-election campaign” (Burns, 2004, A15). The first part of the quoted statement is true; regrettably the second part is at best ambiguous. The issue arose at the Board meeting in 1978 after a
New
York
Times
article claimed that Burns aided President Nixon’s reelection. The Times asked for early release of the 1972 transcript. Burns opposed but said that he would agree to release it to the president if asked by the president. He then denied that the record contained any matters of personal concern. “There’s nothing in that record that would concern me for one moment. . . . [T]he Chairman’s record in 1972 was an honorable record” (Burns papers, tape
6, August 16, 1977, 22).

Both positions have support. Ample evidence cited above supports the claim that President Nixon urged Burns to follow a very expansive policy and that Burns agreed to do it. Evidence also suggests strongly that many economists and politicians believed that the economy was far from full employment, and they wanted to reduce unemployment using highly expansive policies. Much of the previous literature neglects the fact that typically the FOMC voted unanimously. There were rarely more than three dissenting votes. At several meetings, including the critical meetings in January and February 1972, Hayes (New York) made a strong case for less expansive policy. He never drew more than two additional votes. Burns’s policy drew support from such independent-minded Board members as George Mitchell, Sherman Maisel, and Andrew Brimmer, all appointed by Presidents Kennedy and Johnson. And Governor J. L. Robertson (one of the most independent members, initially appointed by President Truman) did not dissent until September, long after the economy had strengthened.

Burns was able to get a majority vote of the FOMC because he could appeal to beliefs that considerable resources were idle, that inflation would be held back by price controls, and that their principal mandate was to contribute to full employment. This was compatible with service to the president’s reelection campaign. There is no doubt that he urged an easier policy in January 1972 after his discussions with President Nixon. He cited the unemployment rate and compared Treasury bill rates in previous periods of unemployment to conclude that bill rates were high (FOMC Minutes, January 11, 1972, 64). Most members agreed. Even Hayes favored 6 to 8 percent growth in M 1 for the next two months (ibid., 69).

Based on the FOMC’s usual measures of policy thrust, monetary policy tightened in 1972. The federal funds rate reached a monthly average low in February, 3.29 percent; by June it was 4.46, and by October and November it was just above 5 percent. Reported inflation (under controls) for the most recent twelve months rose only from 3.3 percent in January to 3.45 percent in November, so the real federal funds rate ranged from zero to one percent. The Society of Professional Forecasters put the year-ahead increase in the deflator between 3.4 and 3.7 percent, about the same as before price controls. Free reserves fell from $152 million in January to −$300 million in October–November. Twelve-month average growth of base money, however, rose from 7 percent in January to 8.4 percent in November. The November rate of increase was the highest annual rate since 1946. It was soon exceeded. Twelve-month growth of M 1 rose from 6.5 percent in January to 7.8 percent in November.

The FOMC divided again. It did not readily accept Burns’s choice of directive. Many wanted less expansive reserve growth than he did, and some objected to the shift from money market indicators to reserve growth. After a break, during which Burns and some staff redrafted the proposed directive, the committee reached agreement on projected reserve growth of 20 to 25 percent from December to January with a floor of 3 percent to the federal funds rate. Monetary base growth from December to January rose from 2 percent to 11.5 percent at annualized rates, then fell back to 7.4 percent in February. As is often the case, the aggregates and the money market measures have different implications about the direction of policy. This time, however, the FOMC gave more attention to the monetary aggregates. At its January 11 meeting, the FOMC voted nine to three to “promote the degree of ease in bank reserve and money market conditions
essential
to
greater
growth
in
monetary
aggregates
over
the
months
ahead”
(FOMC Minutes, January 11, 1972, 95; emphasis added). Hayes, Brimmer, and Kimbrel (Atlanta) dissented. Hayes’s and Brimmer’s dissents made clear that they opposed reference to a reserve target not to the money growth decision. Only Kimbrel objected to “pushing short-term rates down to unsustainably low levels” (ibid., 96).

Responding to administration pressures to “get it up,” Burns advanced the date for the January meeting by a week. Time was critical. Most studies suggested a lag of six to nine months from the start of monetary ease to the response of output, and President Nixon had said that February was the cutoff point. To stimulate the economy and reduce unemployment no later than the third quarter, monetary growth had to move up substantially from one percent M
₁
growth in fourth quarter 1971. M
₂
had increased nearly 8 percent, and interest rates had declined, but the president watched M 1 , and Burns wanted it to increase.

The staff had accurately forecast slow M
₁
growth at the end of 1971. They now forecast a reversal, 10 percent M
₁
growth in the first quarter with unchanged money market conditions and a 5.4 percent unemployment rate in the fourth quarter. Both forecasts proved accurate, although money market conditions eased in the winter.

In late January, the president met with the Quadriad. Burns described his efforts and spoke about opposition from Hayes especially but Brimmer also.
⁵⁹
The president sent him a letter, marked “eyes only,” commending Burns’s efforts to increase money growth and promising to appoint a new
member, to replace Maisel, who “will follow your leadership” (letter, Nixon to Burns, Burns papers, Box B_N1, January 28, 1972, 1). The president then expressed his “absolute confidence” in Burns’s pledge and Burns’s “absolute assurance that the money supply will move adequately to fuel an expanding economy in 1972” (ibid.).
⁶⁰

59. The president supported Burns’s criticisms of Hayes. In language reminiscent of Morgenthau’s in the 1930s, he concluded that the bankers were “timid,” reluctant to lend and wanted higher, not lower, interest rates, and that Hayes would represent their viewpoint in opposition to Burns (letter, Nixon to Burns, Burns papers, Box B_N1, January 28, 1972).

Then came the threat. “What could happen out of all of this is that a major attack on the independence of the Fed will eventually develop. I do not want this to happen—particularly I do not want it to happen when the Chairman of the Fed is a man in whom I have such enormous confidence and for whose economic advice I have such great respect” (ibid., 3).

Despite his annoyance, and possible anger, Burns replied a few days later. “I have read and reread your recent letter. I share your basic thought, and I am confident that monetary policy will promote rather than impede economic expansion this year” (Burns to the president, Burns papers, Box B_N1, February 3, 1972, 1). The rest of the letter criticized the president’s budget message because there was not enough stimulus.
⁶¹

President Nixon’s interest in policy actions continued for a few months. In mid-February, he described the economy as “in fairly good shape” but he wanted “to do
everything
to help the expansion” (Ehrlichman notes, February 14, 1972; emphasis in the original). Although money growth had increased, the president continued to be annoyed by Burns. He accused him of “putting himself on all sides,” telling Congress that the deficit was too high and telling the president to increase fiscal stimulus (ibid.).
⁶²
When Burns joined the meeting, he assured the president that there was no reason for complaint. The money “supply was growing and interest rates had fallen” (ibid.). The president asked about Burns’s problems with Alfred Hayes. Burns reassured him.
⁶³

With real growth reported in the minutes at 9.5, 5.5, and 8.5 percent in the first three quarters and revised real growth at 9.1, 8, and 4.2 percent,
the unemployment rate declined slowly from 6 percent in December 1971 to 5.5 percent in September 1972. President Nixon asked about money growth less often.

60. Burns wrote at the end: “Absolute assurance! What nonsense! No answer to be made to this letter. It’s outrageous” (letter, Nixon to Burns, Burns papers, Box B_N1, January 28, 1972, 5).

61. By mid-year M 1 and M
₂
had increased 8 and 11 percent respectively. In testimony to the Joint Economic Committee, Stein lauded monetary policy.

62. The president decided to have no more Quadriad meetings “for AB [Arthur Burns] to lecture others” (Ehrlichman notes, February 14, 1972). President Nixon’s relation with Burns went up and down throughout Burns’s tenure. Burns often lectured the president on policy and politics, sometimes at length.

63. Sheehan (2002, 23) reports that Hayes had little influence. “Burns despised him.” At a meeting later that day, the president told Ehrlichman that he wanted weekly reports from each cabinet member showing the spending they authorized to stimulate the economy.

In September, Burns told the president that M 1 growth averaged 8 percent so far that year and he “promised” that it would remain expansive until November. Interest rates had remained “level, below August 1971” values (Ehrlichman notes, September 7, 1972).

Once the election was over, the president had little interest in monetary policy. He had won decisively. The benefits of expansion helped; the costs were in the future. He shifted attention to the budget, impounding spending on many programs. Also in January 1973, the administration began phase 3 of the controls program despite the 5 percent increase in the GNP deflator for third and fourth quarters 1972.
⁶⁴
Large increases in prices, especially food prices, began in the winter of 1973 and made phase 3 unpopular. But monetary stimulus in 1972 and annual base money growth of 9 percent in the first half of 1973 added to the problem.
⁶⁵
By March-April, the president considered alternatives, including a new freeze of prices and wages. Shultz warned that there was no longer much excess capacity, so it would not work as well as phase 1. In April, he told the president that “Burns did the job before the election, and we’re paying some price now” (Ehrlichman notes, April 5, 1973). Burns, for his part, believed that firms and unions expected inflation to continue, so money growth had to remain high (Wells, 1994, 99). Incomes policy had to change these anticipations.

For the year 1973, the GNP deflator rose 8.3 percent, fourth quarter to fourth quarter. Consumer prices accelerated throughout the year; the twelve-month moving average rose from 3.4 percent in December 1972 to 8.4 percent in December 1973. Growth of annual average hourly earnings declined from 8.1 percent in December 1972 to 6.3 percent in December 1973; real wages fell and dissatisfaction rose.

The presidential tape recordings and letters and the Ehrlichman notes
leave little doubt that President Nixon urged Burns to accelerate money to aid his election and that Burns agreed. There are two alternative explanations, however, that cast Burns in a more favorable light.

64. Herbert Stein sent a memo to the president on January 8, 1973, to tell him that wholesale prices of farm products increased in December by the largest percentage in 25 years. For the year 1973, producer prices of farm products rose 41 percent. Stein suggested some specific measures—sell agricultural stocks—to slow the rate of increase (memo, Stein to the president, Nixon papers, January 8, 1973).

65. At a breakfast in the White House, Chairman Wilbur Mills of the House Ways and Means Committee chided Burns because the “Fed did everything to help in the election” (Ehrlichman notes, January 9, 1973). Democrats did not criticize the expansive policy before the election. Wells (1994, 101) quotes Walter Heller and Senator William Proxmire as arguing that the economy was far from full employment in 1972, so there was no risk of inflation.