A History of the Federal Reserve, Volume 2 (121 page)

As several economists noted at the time and afterward, there was little theoretical foundation and no empirical support for wage-price policies as a way of reducing the loss of employment (see especially Laidler and Parkin, 1975). The response to such criticisms was to insist that ideological bias was the principal, and perhaps the only, explanation of the unwillingness of the president and his economic advisers to embrace such policies. Burns, and most other proponents, did not address the issue of how guideposts and guidelines could be enforced.
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What would happen if unions, workers, and firms did not follow the guidelines? The Kennedy and Johnson administrations used sanctions and threats of reprisal to punish offenders, often with little effect. How could a wage-price board survive if it had no power to enforce its standards?
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Burns’s speeches added the voice of
a conservative economist and a close advis
er of the president to the rising demand to do something more
to reduce inflation while lowering the cost of doing so.
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As pressure mounted from Burns, Congress, some academicians, and many businessmen, the administration retreated. In December 1970, the president announced steps to roll back an oil price increase by importing more oil from Canada, and he proposed steps to centralize bargaining in the construction industry. In January, he pressured the steel companies to reduce a price increase from 12 to 6 percent. In February, he suspended the Davis-Bacon Act, which required union wages on government construction projects whether or not workers were unionized. The interpretation of the law at the time shows the confusion between high wages and rising wages. The government could reduce its construction costs by suspending DavisBacon. Any effect on inflation would be limited to the financing of a smaller budget deficit. Pressures to do more continued to build.
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209. Burns (1978, 112) mentions a 7 percent average rate of increase in compensation for 1970 and a 10 percent increase in wages in newly negotiated contracts with inflation in the 5 percent range. But construction unions received a 16 percent average rate of increase over the life of the contract and 22 percent in the first year. Burns blamed “speculative exuberance” for some of the changes (ibid., 104).

210. Some writers proposed changing taxes selectively to enforce guidelines.

211. None of these criticisms of guideposts or a review board surprised Burns. He heard them frequently from George Shultz, Herbert Stein, and Paul McCracken. Stein’s notes for a meeting with Burns accuse Burns of “contributing to the common idea that there is a simple way out of our economic difficulties which the Administration for some mysterious reason refuses to take” (Stein, Notes for Discussion with AFB, Nixon papers, WHCF, Box 34, Agencies Files, December 11, 1970, 3). He accused Burns also of frightening the public “without firm evidence about the inflationary consequences of an expansive policy” (ibid., 1). But he did not ask for monetary restraint. Instead he said: “We intend to get a strong recovery of the economy and believe that a strong recovery can be achieved while continuing to make progress on the inflation front,” (ibid.). We don’t have Burns’s response, but we know he dismissed such statements. Shultz had sponsored a conference in the 1960s, edited a volume, and concluded that guidelines could not work without enforcement (Shultz and Aliber, 1966). He had not changed his mind in government (Shultz, 2003, 3). He described a meeting of the Business Council, made up of CEOs of major corporations. He opposed guidelines in his speech. “The CEOs railed against me, took a vote and only two opposed controls” (ibid.).

At about this time, the president announced that John Connally, a conservative Democrat, would become Secretary of the Treasury. Connally was much more forceful than the incumbent, David Kennedy, and had greater concern for the political process. Most comments noted that Connally did not have preset positions or commitment to any particular beliefs about economic policy. He is often quoted as saying “I can sell it square or I can sell it round,” conveying that he would implement whatever policy the president wanted and would not be bound by the administration’s reluctance to use wage-price policies. Among the strengths he brought to the administration were a bipartisan appeal, a forceful personality, and an excellent ability to handle press conferences effectively. He became the administration’s spokesman on economic policy and a favorite among many of the president’s advisers other than Burns.

Arthur Burns spoke frequently and testified in Congress, advocating a review board for prices and wages. The entire Board of Governors voted several times to support some type of incomes policy and a review board (Board Minutes, February 17, 1971, and March 30, 1971). At the time, and in retrospect, claims proved wrong that guideposts could work without
any enforcement other than the president’s “bully pulpit.” When the subject came up, President Nixon cited the difficulties he encountered as a young lawyer administering World War II price controls to explain why he did not want the country to repeat that experience. Pressures to do something more about inflation without increasing unemployment remained and grew. As the election approached, price and wage controls grew more appealing to him. The Democrats in Congress had challenged him to use controls, certain that he would not. He expected them to use his unwillingness as a campaign issue; they would claim that he could have lowered inflation with less unemployment if he had not rejected guideposts or controls for ideological reasons.

212. Some in the administration suggested that Burns’s conversion to guidelines was taken to gain support among congressional Democrats (Matusow, 1998, 71).

213. Press speculation at the time suggested that Burns had agreed to a more expansive monetary policy in exchange for President Nixon’s agreement to adopt guidelines
(New
York
Times,
December 9, 1970, 93). Burns explained to the Board that he had not made any commitments and the president had not asked for any (Maisel diary, December 9, 1970, 142). The president had taken several previous steps to reduce wage increases in the construction industry and had acted to lower meat prices in the winter of 1970 (Matusow, 1998, 65–67). Wells (1994, 40 n51) claims that the president’s earlier reluctance to challenge construction workers’ wage increases reflected their support of his policy in Vietnam.

The approaching election was important, but it was not the only factor. Administration economists were disappointed by the very limited progress toward lower inflation. Paul McCracken described a view that others shared: “If you look[ed] at the rates of increases in hourly earnings and compensation . . . , those weren’t showing the kind of deceleration that we would have pointed to as evidence that the strategy was working” (Hargrove and Morley, 1984, 344). Twelve-month hourly earnings rose 6.35 percent in January 1969, when the administration took office; two years later the rate of increase was 6.16 percent.

McCracken explained that President Nixon did not believe that guideposts would work. “In the early part of 1971, I can recall him saying, ‘we’re not going to go to an incomes policy. You and I know that won’t work anyway. If I have to go, I’ll go all the way.’”
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Those who favored the policy of gradual disinflation without wage-price policy lost ground in the spring of 1971. They could point to progress, but real growth remained slow, inflation relatively high, and unemployment at 6 percent. In July and August 1971, industrial production was about where it had been when the administration took office in January 1969. Consumer price inflation had fallen from its peak, above 6 percent, but remained above 4 percent. Private sector hourly earnings growth showed little change.

At a Quadriad meeting in June, McCracken told the president that the administration’s policies had reached a critical juncture. After describing
the slow and uncertain progress to date, McCracken wrote: “With no joy, I have concluded that we must even be prepared at a suitable time to invoke wage and price controls” (McCracken to the president, Nixon papers, June 14, 1971).

214. William Safire (1975, 587), a presidential speech writer, says the president made the statement at a cabinet meeting on March 26, 1971. McCracken presented some alternative policies, including a review board as proposed by Burns. “The President gave a clear indication that he would not move halfway. . . . ‘The idea of a wage-price review board is wrong,’ Nixon told his Cabinet flatly. ‘I will not go for something so temporary. Either we bite the bullet or else.’” President Nixon often used a football metaphor to express his views. He did not want “four yards and a cloud of dust.” He wanted to throw the long pass (McCracken in Hargrove and Mo
rley, 1984, 345).

Burns had, of course, reached the conclusion about the need for wageprice policy much earlier. He told the president that “it is doubtful we have made any progress in moderating the pace of inflation” (letter, Burns to the president, Burns papers, Box B-B90, June 22, 1971, 1). Burns explained why he believed administration policy could not succeed. Workers were less concerned about prolonged unemployment and businessmen about a sustained decline in sales. “Wage and price decisions are now being made on the assumption that governmental policy will move promptly to check a sluggish economy” (ibid., 2). He went on to cite other factors such as public sector unions, expansion of welfare programs, and firm expectations that inflation would persist.

After repeating his proposal for a wage-price review board, Burns added for the first time: “in the event of insufficient success . . . [it should be] followed—perhaps no later than next January—by a six month wage and price freeze” (ibid., 8). Burns added that with controls in place, confidence would improve, inflationary psychology would abate, “and perhaps leave elbow room for a more stimulative fiscal policy to hasten the decline of unemployment” (ibid., 9). This last suggestion spoke directly to President Nixon’s main electoral concern—not inflation but unemployment.
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Meeting with the president a week later, Burns drove home the point. He warned the president that it was too late to increase spending or change tax rates, and he urged the president to freeze prices and wages.

You’ve got to get at the inflation problem to get the economy going. . . . I am uncertain that any fiscal solution can do any good at this stage.” (White House tapes, conversation 531-16, June 28, 1971)

The president responded by rejecting proposals for a price-wage freeze. Less than two months before the wage-price freeze, he rejected controls. But he left an opening to change his mind.

I am not going to—and this is against all the recommendations that I take very much to heart—I am not going to go on the wage-price board, and I’m
not to go on the wage-price freeze. . . . I’m not going to say never . . . but I’ve got to indicate, Arthur, that right now this is what we’re going to do. (ibid.)

215. Burns added: “My omission of any reference to a more stimulative monetary policy is deliberate. Monetary policy, I feel, has done its job fully” (letter, Burns to the president, Burns papers, Box B-B90, June 22, 1971, 9). The letter referred to Burns’s presentation at the June 14 Quadriad meeting.

He urged Burns to support his position, but Burns declined. He told the president that when he testified the following week, he would have to remain consistent with what he had said many times.

The president repeated this message firmly to the cabinet a few days later, but accepted “jawboning,” as he told Burns he would. Then he warned them not to disagree. As he often said, “there must be certainty.” And he told them that Connally was the spokesman. “Everybody in this room will follow the line announced by the Secretary of the Treasury” (Haldeman, 1994,308).

Less than a month later, the president met with John Connally and Peter Peterson, his assistant for international economic policy. Connally proposed wage and price controls, closing the gold window, floating the currency, and shocking the system out of its current lethargy. He had talked to Shultz, who agreed. Peterson suggested an export rebate. The president urged that the proposals be kept secret, known only to Connally, Peterson, McCracken, Burns, and Shultz. He was most anxious to get Burns’s agreement because he did not want him to criticize the program publicly, and he knew that Burns opposed closing the gold window and floating the dollar (White House tapes, conversation 547-9, July 27, 1971).

By August 2, the new policy was set. A major change replaced the proposed export rebate with a 10 percent import tax and the addition of some fiscal measures, including a 7 percent investment tax credit (Haldeman, 1994, 340). They set no date, but the earlier discussion suggested a delay, perhaps until January, in case the program developed problems.

The president shifted position. He now opposed
permanent
wage and price controls (White House tapes, conversation 67-11, August 5, 1971). Soon after timing became firm, Connally called from his vacation in Texas to warn the president, according to Haldeman, that “we had a bad day in the gold market yesterday and another bad day today, and he anticipates a really bad one tomorrow. . . . There’s no panic, but it is getting worse and worse, and we’re losing the initiative” (Haldeman, 1994, 340). He returned to Washington, met with the president who decided to “go ahead on the whole move on Monday” (ibid.) after spending the weekend at Camp David with Burns and key Treasury and economic officials to work out the details.

The actual gold loss was small compared to 1968. By March 1971 the gold stock had fallen $1 billion from a local peak of $11.9 billion in September 1970. Following the German decision to float the mark in April,
the gold stock declined by $500 million through July. In August, the gold loss was $250 million. As Connally recognized, the greater the decline in the stock, the more likely others would convert dollars into gold.