Full text of Robert Hetzel Oral History Collection : James Pierce Interview, April 27, 1995 : Transcript

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Interview of James L. Pierce
Conducted by Robert L. Hetzel:
April 27, 1995

James L. Pierce: ...I came in 1966.
Robert L. Hetzel: You came from a university?
James L. Pierce: Yeah, from Yale. I was on the faculty there.
Robert L. Hetzel: And what sections did you come up through at the Board?
James L. Pierce: I started in the banking section.
Robert L. Hetzel: When did you become involved in FOMC—preparation of FOMC
materials?
James L. Pierce: Well, early on. I was—I went from the banking section and then
was head of this—it was called “special studies section.” And then was put ahead of all of
the, well, the model work and econometric work that was being done. And at that time I
started going to FOMC meetings. I think I started going to FOMC meetings in ’68 or
something like that...when Martin was still chairman. I started doing active participation a
year or two later, I think.
Robert L. Hetzel: So did you start in—do you remember when in 1968 you started?
Summer of ’68 or...?
James L. Pierce: Boy, I just can’t remember. Been too many years.
Robert L. Hetzel: Were—I don’t want to get too far off track, but I can’t help asking
you these things. There was a very important call in summer 1968 after the passage of the
income tax surcharge when the Greenbook had been predicting real growth in the range of 6%
or so. And with the passage of the surcharge, it predicted that that real growth would drop to
zero. And partly on that basis—though there were other reasons involved too—Chairman
Martin lowered the funds rate. Were you involved at all in that forecast?




James L. Pierce: I was aware of the forecast. I was—all I can remember is being
very critical of it. [Laughs] And...that’s all I can really remember. That was before...later on
I was responsible for a lot of their forecasts and made them and I’ll tell you if I screwed up.
But all I can remember then was that that forecast made very little sense to me. But that was
before—you have to remember, back in ’68, analytic economics was just barely beginning to
have an effect on the staff and on monetary policy. So I don’t find—it wasn’t at all surprising
that they would make a forecast like that; that people didn’t know how to make a difference
between transitory and permanent changes. And really weren’t very interested in hearing
such things.
Robert L. Hetzel: Did you have much contact with Dan Brill?
James L. Pierce: Yeah.
Robert L. Hetzel: He ultimately left over that forecast, I understand.
James L. Pierce: Right. Well, among other things, that’s right. You know, I was a
great fan of Dan Brill; I think he was very good...a very nice, you know, hard-headed man.
But, sort of, was not super-well trained in economics. And I think he—he didn’t have a staff
to do it. That was one of the reasons I was brought in. I was brought in, you know—the
hotshot from Yale—to try to change that.
Robert L. Hetzel: When did Jerry Enzler come in?
James L. Pierce: Jerry was there about the same time. I can’t really remember when
he was hired...sometime in the mid-‘60s to late ‘60s...I can’t remember anymore.
Robert L. Hetzel: And Peter Tinsley? He came in—
James L. Pierce: Same.
Robert L. Hetzel: When did the—
James L. Pierce: Peter, a little later I think. But, you know, there were a number of
people who were brought in.
Robert L. Hetzel: Greenbook forecasts began—
James L. Pierce: Were different, huh?
Robert L. Hetzel: Greenbook forecasts began in November 1965, but it was quite a
bit later when there were actually model forecasts.
James L. Pierce: That’s right.
Robert L. Hetzel: I mean, it wasn’t until early ’69 that a model forecast actually got
off the ground?




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James L. Pierce: Well, you’re going to know that better than I do. I’m pretty bad at
dates. That wouldn’t surprise me. Yeah, I mean, the Greenbook used to be completely
retrospective. And then it became somewhat forward-looking, but cautiously so. And the
models—you’ll always have an argument as to the role that the models had in the Greenbook
forecasts...I presume up to today. I know—I don’t see Greenbooks anymore, so I have no
idea, but at least when I was there, there was only one forecast. There was not a model
forecast versus judgmental. This was the staff’s forecast. Then in FOMC meetings or in
briefings, the question would come up about how—didn’t agree to which the forecasts would
differ. But there weren’t two different forecasts.
[00:05:06]
Robert L. Hetzel: But at some point in the 1970s—I came here in 1975. It seems to
me at that point we were getting two forecasts: we were getting a separate model forecast and
we were also getting the Greenbook.
James L. Pierce: Well, I think that was after I left. It wouldn’t surprise me. I mean,
because it got to the point where every time, the question was asked. And… let me go back a
step. When the model was first being used, the idea was a tool. It was a tool to help us
forecast. And there was an interaction among the—between the model forecasters and the
judgmental people. And in the process of these meetings, we would often each change our
forecast as we listened to the other. Because a model was always subject to constant-term
adjustments. There was no way to run that thing without some kind of adjustments.
And so the question—it was a great deal of judgement always in it. All right? And it
always seemed to me inappropriate—given the way that it was used—to talk about the model
versus the other. Because there really—you know...What the model was primarily being used
for back in those days was the forcing—you know, to force constraints and to force adding up
conditions and things like that. The judgmental forecasters were very bad at it. And to try to
get at some of the dynamics. But not the short-term forecasting. So the model was always
adjusted—you know, we watched each other. The judgmental people were much better at
short-term than a model was, because models do averages. It was very hard for them to make
all these near-term things, so we’d adjust it for that.
Later on there was a demand to see what the model by itself gave. And I was never
clear whether that was to make—to compare with the model or what. And it was by those
who didn’t want to use this or didn’t like the results of it. But there never could be a pure
model because you had to make adjustments every time it was used. And anybody who has
said that wasn’t true was just not telling you the correct story. Otherwise it would wander off
into nowhere.
Robert L. Hetzel: Would you be willing to tell me the history of the subcommittee
on the directive? I came in 1975, so this was almost over by the time I got there. There was
a—who was the governor interested in that and how did that get off the ground?




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James L. Pierce: All I can really remember was Frank Morris was on it, I
believe...God, I don’t remember anymore.
Robert L. Hetzel: Governor Holland and maybe—
James L. Pierce: Well, Bob was. He would be involved for sure.
Robert L. Hetzel: Bruce MacLaury?
James L. Pierce: MacLaury—that doesn’t surprise me. Wasn’t Morris on it? I can’t
even remember. I get—I remember endless meetings over this. That’s all I can remember at
this point. If you sort of pull my memory along—jog my memory—I’ll be able to do better.
Robert L. Hetzel: Well, I know some of the staff members who were involved.
Kalchbrenner invested in the [00:08:26 unintelligible]—
James L. Pierce: Right, Jack did it. Right.
Robert L. Hetzel: And Kinsley. I’ve not talked to him yet.
James L. Pierce: Right. Right. Right.
Robert L. Hetzel: And the purpose was to try to rationalize decision-making with—?
James L. Pierce: In what sense? I mean...?
Robert L. Hetzel: To start with—again, I’m going back to what I remember when I
just—I came here shortly before the thing was discussed at an FOMC meeting and at that
point we simply got some staff memos that were in final form. But my—the impression I got
was that this took place at a time when combining optimal control methods with the large
scale econometric model was the cutting edge of research and macroeconomics. And the idea
was to try to push the FOMC into specifying an objective function so that a model—along
with optimal control methods—could be used to generate a path for interest rates or...money
stock that then would, you know, serve as kind of a benchmark for assessing FOMC behavior.
James L. Pierce: Hm-mm. Okay. That’s making it much fancier than it was.
[Laughs] And certainly, the discussion among the principals—Governors and the Reserve
Bank presidents—there wasn’t a great deal of time spent talking about optimal control
methods.
[00:09:56]
James L. Pierce: It wasn’t nearly that technical. A lot of work was going on at that
time—it had for several years—on optimal control. And people like Tinsley and Roger
Craine and so on had done a lot of the work. You know? And we were talking to controls
theorists from MIT and the whole bit. You know—in engineering. The—trying very hard to
see the insights that dynamic optimization would give you. The idea was never to come up




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with a number. The idea was to come up with a story. And was it possible to use models—
again, with a lot of adjustment—I mean, there was a—people didn’t use the models or really,
you know, some sort of on the periphery—really thought they worked and that you could just
run them. [Laughs] And believe me, you never could. I mean, there was a tremendous
amount of fooling around. The thing wasn’t stable. There was a tremendous amount of
adjustment. And there was so much adjustment; anybody who used them knew that you had
to take it all with a grain of salt. It was a dynamic structure was what it was. And you’re
using it to do optimization games and seeing if it gave you insights. That was really what its
purpose was.
And that’s what the directive committee was all about. It was trying to see could the
directive be changed in a way to get the—in principle, this is all so trivial—but to get the
FOMC to be forward-looking. All during the late ‘60s and through all the ‘70s until I left, the
big war was to get the FOMC to look beyond the end of its nose. To realize that the decisions
it made today had implications a year from now. And to quit saying, “I won’t believe that this
policy is inflationary until I see it. Until the prices start rising.” You know? I spent years
hearing that from FOMC members: “I’ll believe it when I see it.” And you say, well, by the
time you see it, it’s too late.
And so we tried very hard to figure ways to tell this basic story. And, you know,
terms like “soft landing” and “stuff from the moon landing” and all those sorts of things—the
jargon that people like to hear—came into those kinds of discussions. And it sort of helped.
There was that thread.
The other thread was that there was a school of people who thought that you could
simply optimize monetary policy by controlling the quantity of money. And there was
another school of people—mostly the Board staff and some others—who thought the world
more complicated than that. And in fact, in some sense, you ought to look at everything and
that you ought to then—you look at it all for ideas how to optimally filter the information, and
that’s the feedback that you were talking about. How incoming information then should lead
you to change your forecast and your specification of policy.
Robert L. Hetzel: Yeah, I recollect now that Mike Keran was on the committee. So
he would have represented [00:13:16 tape skips]. I suppose John-- Jack Kareken from—
James L. Pierce: Well, Jack Kareken and Tinsley and people like that—and I —were
more at looking at everything in a disciplined sense. I mean, you can make it sound silly.
Robert L. Hetzel: Yeah, I understand.
James L. Pierce: looking at everything. But the point is that you don’t throw away
all the information except one variable. And a trivial but correct point which is if you’re
controlling money it can give you no information. So you have to look at the things you’re
not controlling to give you the information.




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And so Kareken did a lot of work... probably the best work ever done on this was done
by Tinsley. In an almost totally unreadable paper, but it was really good. That was Peter’s
problem always—it was very hard for others to [laughing] figure out what he was up to, but it
was really good.
So anyway, that was sort of the—it was mainly to get people to be forward-looking
and to try to figure out how to [unintelligible] information coming from the outside in. Now,
I was sort of on both sides in that. I was more—I always came across as more of a monetarist
than I was simply because I was—being a monetarist back in those days forced the FOMC to
be more restrictive than they otherwise would be. And so I spent most of my time trying to
keep them from getting off this random walk on money. You know? Where they just tried to
always get a change and they were never worried about a level. And part of the thing on the
directive committee when I got involved was just that, which is more of a Bluebook thing
than a Greenbook.
Robert L. Hetzel: So, then you must have been involved in the process of where the
Bluebooks began to show paths that would get you back to—
[00:15:01]
James L. Pierce: Yeah, that was my doing, right? And I think those disappeared the
day I left. [Laughs] The level did. Burns hated those. Oh, he hated those. [Laughs] Yeah,
that’s right. That’s right.
Robert L. Hetzel: We’ll talk about Burns in a second, but—
James L. Pierce: Right. But anyway, that’s right. And so that’s why we got
involved again with the directive—how to get back to...and the question is how quickly you
get back to. And it clearly depends upon what’s going on in the economy and things like that.
But you needed the discipline of getting back to something that was a quantity.
Robert L. Hetzel: So what proposal then did the committee come up with to cause
the—that would have had the FOMC think in terms of a strategy whereby their individual
actions today had to be part of a longer-run strategy that would provide inflation control and a
particular—
James L. Pierce: You know, I think it really didn’t...that I can remember. I mean,
that’s why I can’t recall any...[laughs]. It was a directive committee—the members of it
thought it was a lot more important than it was. I think this committee—I think classical
Washington behavior—if you don’t want anything done, you start a committee. So I don’t
think this thing even was in fact to do anything. And I can’t even remember the proposal—
since it had such despaired members, I can’t recall even what they came up with. It didn’t
amount to anything.
Robert L. Hetzel: Well, they discussed it at the meeting after they stopped taking
minutes.




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James L. Pierce: Right. I remember that.
Robert L. Hetzel: So I never saw—that would have been, I don’t know, April...
James L. Pierce: I remember there was a discussion.
Robert L. Hetzel: Of course I had just come at that point and all I remember is our
director of research, Jim Parthemos [00:16:55 tape skips] saying that Burns took a couple
puffs on his pipe and said, “Well, I’ve been doing that all my life.”
James L. Pierce: Right. That’s right. Looking at—that’s right. That’s right. And
so—
Robert L. Hetzel: And then just dismissed it, so—
James L. Pierce: That’s right.
Robert L. Hetzel: And then I guess it just—
James L. Pierce: And it never was going to go anywhere. There was a lot—it was
mounting criticism of the way that policy was being conducted, which really had—well, part
of it was technical—but a great deal of it had—was veiled criticism of Burns. And it took the
form...how do I want to say this? Burns would get his way by always just forgetting the paths
and go forward. And so the fact that money was two standard deviations above where it was
supposed to be was neither here nor there; “Let’s talk about the future.”
And so where you—initial conditions never made any difference to him. And so—
you know, for political reasons he understood all this stuff, but the—and so there was a lot of
pressure to try and get the discipline of bringing things back to, you know, worrying about
initial conditions and where you were, and how fast they get back...things he didn’t want to
hear because it would from time to time get in the way of what he wanted to accomplish. And
so it’s not at all surprising—well, first of all, this committee got established as some way to
put off the pressure. And then secondly, that it didn’t in fact come to anything.
Robert L. Hetzel: So you don’t remember which Governors in particular were
involved? It makes sense that Frank Morris was involved. And I suppose...I don’t know,
Andrew Brimmer—
James L. Pierce: Was Andy was on it for a while, I think?
Robert L. Hetzel: He must—I know he left, I think, fairly early on...oh, I don’t
know, ’73 or so, I think. My recollection is that he would cross swords with Burns...
James L. Pierce: Yeah, he would. Well, in a very gentle way, but he would; yeah.
Robert L. Hetzel: Well, nobody really took him—I mean, nobody took him on—




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James L. Pierce: No. The closest was John E. Sheehan. [Laughs] Yeah. That’s right,
that’s right. It was all very gentle. Jeez, I can’t even remember who was on that thing...Bob
Holland...I don’t remember. It’s because it wasn’t a big deal. I mean, it was a lot of useful
research that went on...a lot of useless meetings and there never was any prospect it was going
to come to anything. It was always very hard for me to keep my enthusiasm up with that
thing.
Robert L. Hetzel: But the general objectives that you mentioned in particular seem—
individual policy actions—as part of a strategy which acts over time. And actions having,
kind of lagged effects over time and kind of constraining yourself on the basis of, kind of...of
a plan. I mean, that’s a very general idea. There’s no—that’s not going to...? That’s a
reasonable ideal right?
[00:20:21]
James L. Pierce: Right. Oh, sure.
Robert L. Hetzel: That that’s never going to happen because the chairman is always
in a position where he wants—he gets into the difficult positions at various times and he
wants flexibility to choose his policy action without being constrained and somebody pointing
and saying, “Hey, that’s not part of the strategy; that doesn’t make sense.”
James L. Pierce: Right. Sure. Sure. Right, and I think that’s, you know, why he
was less than excited about this. I mean, all the efforts, such as having a growth path for
money on the level, you could talk about bringing it back. Yeah, he hated that. He took it out
once and took a lot of lobbying and it got—I think there was at least one Bluebook where it
was gone. And then there was a lot of lobbying by me—and then it got back in.
He didn’t like it because it would tie his hands. Sometimes there’d be times that he
would want to do something and it would make it more difficult. And so this whole thrust
behind the directive committee was not to try to do in Burns, but rather having this kind of
discipline will—always reduces the scope for doing whatever you want to do. You know,
if—it just makes it—it takes away some of your flexibility; that’s right.
Robert L. Hetzel: Yeah. Of course, Martin was exactly the same way. As long as
the agenda is set in terms of deciding a particular policy action—given that information
always comes in in somewhat contradictory ways—he could always influence that particular
policy—
James L. Pierce: Well, no. Yeah. I remember one meeting, it was just—you know,
it’s telling stories, but [laughing]...you know, really, we’re all [unintelligible] discussion on
what was going on in the economy. And back then it was by the—you know, by what we
called judgmental economists and the non-analytic guys. But, you know, we had a very
credible story and when we’re all through, Martin said, “Well I don’t believe it because I just




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talked to the president of Macy’s and he told me...” And it was that sort of thing. And, you
know, it’d just drive you crazy. [Laughing] On the base of this sample of one, right?
Robert L. Hetzel: Well, that meant Martin wanted staff—
James L. Pierce: I think that’s correct. He wanted to do something different.
Robert L. Hetzel: Yeah, I mean, Martin thought that—Martin associated knowledge
of monetary policy with the knowledge of the bond markets.
James L. Pierce: That’s right.
Robert L. Hetzel: He thought he knew monetary policy. What he wanted around
was people who could supply information to him—
James L. Pierce: That’s right.
Robert L. Hetzel: Who could give him information and, of course, anecdotal
information was as good as any.
James L. Pierce: That’s all he had back then. But at least this was systematically,
you know—[00:22:57 unintelligible] lots of anecdotes as opposed to—you know, and a fair
amount of measurement, that’s right. And so I think any Chairman...wants maximum scope.
I mean, this is the way—because a Chairman is immensely more powerful apart from any of
the other members of the FOMC, it’s never in the Chairman’s interest to let anything tie his
hands—I think that’s right. Maybe in the nation’s interest, but it’s not in the Chairman’s
interest.
Robert L. Hetzel: Let me—so obviously—
James L. Pierce: See, what’s so—back in Martin’s time, it was so non-analytical—
and sort of old-fashioned economics—that it was really hard to make a contrast—I mean, to
make a comparison with him and Burns. Because by the time Burns was well into his tenure,
he was really hard-nosed and analytical. And he was finding it much more difficult to go up
against some of these things. He didn’t like it.
Robert L. Hetzel: Well, but, let me ask you about what you mean about Burns being
analytical. I mean, Burns—
James L. Pierce: I didn’t say he was—he was in his own way, but I said that the
presentations were much more analytical.
Robert L. Hetzel: I see.
James L. Pierce: We didn’t do—there was no more tone and feel of the market.
When I started first going to FOMC meetings, I thought that was a joke that people talked
about—tone and feel. They did talk about it. And then the manager was off—sent back to




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New York to feel it some more. I mean, I never knew what he was supposed to do. [Laughs]
It was really fuzzy.
Robert L. Hetzel: Of course that also gave Martin flexibility.
James L. Pierce: Of course, of course, of course.
Robert L. Hetzel: To choose interest rates that he—
James L. Pierce: No, I learned that. That’s right. But I didn’t know it at the time,
sure.
Robert L. Hetzel: But let me ask you about Burns though. Here’s somebody who’s
head of the NBER and so [00:24:56 tape skips]...He wasn’t a neoclassical economist in the
sense that you and I are. Was he in the—
[00:25:05]
James L. Pierce: No. No, no, no. That’s right.
Robert L. Hetzel: When we think of a model of the economy, we think of structural
relationships that ideally are derived from optimizing behavior...intertemporal utility
maximization, maximized profits, or whatever. But Burns went back to a time before that
was a standard way to think about the economy, and he had in his mind an incredible number
of cyclical relationships between variables. And what drove—over time, what drove the
relationship between these variables was waves of optimism and pessimism. And, kind of,
the key thing then was where you were in the cycle and what was the sense of confidence of
the businessman—
James L. Pierce: Right.
Robert L. Hetzel: --Or the consumer or whatever. So it was—I mean, we consider
that pop-psychology; we wouldn’t consider it... I mean, I think that—I’m saying this partly
because I want you to correct me if I’m wrong—but it’s a little misleading because we say,
“Hey, economist.” And for us, since everybody we know has been trained in this neoclassical
post-Keynesian macroeconomic framework that, you know, we just assume we know what
“economist” means. But he didn’t think in those—
James L. Pierce: Well, yeah, but I think, you know, even though he and I got into
dreadful wars, I think the man deserves his due. I’m one of the few people, I guess, who have
read Burns and Mitchell.
Robert L. Hetzel: Yeah, so have I. And that’s where I’m getting a lot of this from,
because it seems to be quite—




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James L. Pierce: And that’s really what it was, except he had—they didn’t
understand second-owner difference equations, so they had a terrible time getting the thing to
change direction on them.
But they had really a dynamic story. Part of the dynamic story had to be with either
bottlenecks developing or supply constraints. And often the banking sector would play its
role because it would run out of reserves and, you know, couldn’t land and all that sort of
stuff.
It was sort of a...a verbal—and much more complicated version—of Hicks’s trade
cycle stuff. You know, with ceilings and floors and all that. And he was really, I guess,
trying to model Burns and Mitchell. But they did—one thing they did understand with a
vengeance is that things have memories and once they get started, they tend to go in the same
direction. And that there’s a dynamic structure. Right?
Robert L. Hetzel: Right.
James L. Pierce: They certainly were not static in any sense of the word. And
though they may have looked at absolutely everything—I mean, my God...I mean, I took a
course when I was in graduate school where you actually had to read that book and look at all
these reference cycle relatives and all that sort of thing...It turns out—it turned out many years
later, that a lot of the stories they told hold up. That they’re [laughs] all these basic structures
of cycles and things like that...that they seemed to unearth with some very simple techniques.
But to them I think—and Burns particularly—things were very complicated. And he
surely was not a neoclassical economist—certainly was not well-known. He came to
Washington a firm believer—back to Washington—he came to the Board a firm believer in
incomes policy.
Robert L. Hetzel: Why do you say he “came” that way? Because in the mid-‘60s
he—
James L. Pierce: Well, the first time I ever met that man, he had just—I guess he had
just been appointed...I don’t know whether he had taken...I can’t remember. But I had lunch
with him. And he said, “Well, tell me, Mr. Pierce, what do you think about incomes
policies?” And I said, “I don’t know. What’s that?” [Laughs] So he had to tell me what it
was. And I said, “Well, not much.” And he said, “Why not?” And I said, “Well, I
just...fascism doesn’t appeal to me.” [Laughter]
Robert L. Hetzel: [Chuckling] Wow. Okay.
James L. Pierce: All right? This was when he first started. He was feeling
everybody out. He was a big pusher in the Nixon administration for wage price controls. I
mean, this is not Mr. Neoclassical...I mean, he’s so funny. I mean, he was an extreme
interventionist in every sense. He loved doing it.




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Robert L. Hetzel: Right. But the question is why? In the mid-‘60s, he came out
with very strong statements against the wage price guideposts of the Heller and Ackley
council—
James L. Pierce: That’s right. Right.
Robert L. Hetzel: And the question is why did he change his mind—
James L. Pierce: Well, I had a theory on that. I think it’s because of the stage of the
business cycle. It was—management had just taken its turn—if you could keep the pressure
off of wages, they’d do just fine.
[00:30:03]
Robert L. Hetzel: I mean, he had this idea that the reason the cycle turned around
was this change in real prices between the—
James L. Pierce: Right.
Robert L. Hetzel: Price level and the wage rate. And that’s what would get you out
of a recession.
James L. Pierce: That’s right.
Robert L. Hetzel: So that if you—
James L. Pierce: And this guy really was a different instrument. Then we could get
out of recession without inflation.
Robert L. Hetzel: That is, you go into a recession and then the natural working of the
economy is for profits to increase because wages fall relative to—
James L. Pierce: Right.
Robert L. Hetzel: Prices. And if that doesn’t happen, the businessmen don’t have
the confidence to go out and invest. And when he didn’t see that—
James L. Pierce: Or the profits. I mean, you know—right, it didn’t even have to be
just their confidence. Yeah, that’s right. Right.
Robert L. Hetzel: When he didn’t see that—I mean, you know, the United States
hadn’t been through a peacetime inflation before. He hadn’t seen the relationships that
subsequently people got used to. So when he didn’t see—he saw wages continuing to rise.
When economic activity and aggregate price level inflation began to fall, he thought
economics wasn’t working anymore.




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James L. Pierce: That’s right. I mean, you have to remember, in ’69 that was a truly
engineered recession. And I think Nixon was told—was sold the bill of goods by economists.
I mean, I’m no Nixon fan, but this one wasn’t his fault. He was told that with a short, sharp
recession, it would wring out the inflation and everything would be cool. We had our short,
sharp recession and prices went up.
And that’s when the stories started going on about how the world had changed. Old
economics didn’t work and we had to have new tools and we had to do all that...Nobody
listened to stories like, “Well, my God, there’s dynamics and if you build up another
inflationary pressure, this thing will keep going.” No, it had to be “The world had changed.”
And Burns became part of that. And so you needed other methods. You needed to break the
back of the wage spiral. So the only way to do this, is put the lid on wages. And that would
allow monetary policy to pump up the economy and everybody would be happy. He and I
had many wars over that, I’ll tell you. [Laughs]
Robert L. Hetzel: Did he like to—I mean, did he like to argue with people the way
economists do or did he just—
James L. Pierce: Yeah. Oh, yeah. He used to have me in to hear all this so he’d be
ready for Congress. I got to be [laughing]...You know, for the longest time, that’s what
I...boy, I got so turned off by Washington. Here I thought, “Gee, isn’t this exciting?” I was
pretty young talking to this really powerful man and—
Robert L. Hetzel: He’s listening to you. Yeah.
James L. Pierce: He’s listening to me and my God...he didn’t give a damn. He just
wanted to hear the arguments and he figured I was the best at the arguments. So I got to come
in and let him practice. He wasn’t going to change a thing.
Robert L. Hetzel: But, let me ask you the [00:32:55 tape skips]...McCracken
council—and later the Stein council—they were very much impressed by the experience with
money—1968 you have a tax increase, high money growth, the economy doesn’t slow
down...So these people who were—had been Keynesians become kind of semi—they become,
kind of, St. Louis equation people who believe they can exploit a Philips curve trade-off—
James L. Pierce: Right.
Robert L. Hetzel: Kind of control the economy with money a la St. Louis equation.
So you’ve got this group on one side and you’ve got Burns on the other side. In looking at
this period, I get the feeling that the administration had what Burns really wanted, which is
the fiscal policy and microeconomic policy tools to get in and change microeconomic things
within the economy—repeal Davis-Bacon Act, for example...wage-price controls is the big
example. And on the other hand, Burns had what the council wanted, which is monetary
control.
James L. Pierce: Right.




- 13 -

Robert L. Hetzel: So they got together and they traded. And in a way, ultimately
Burns lost out because he was willing to give up money growth because he didn’t think it was
that important. He thought what was important was how quickly people spent the money
because that depended upon confidence. And as long as he had a handle on confidence, he
had a sense he—he’d be at a sense of how rapidly people were going to expend. And it didn’t
make a lot of difference what money growth was. So he and the council kind of got together
and traded, and they each got some of what they wanted. But—
James L. Pierce: Now, what period—when are you—what—?
Robert L. Hetzel: Seventy-one...’72...
[00:35:00]
James L. Pierce: Eh, I don’t think that. I think you’re overdoing his confidence
thing. Sure, he believed in that. And animal spirits and all of those sorts of things...but I
think he was fully aware of the fact that he was being highly expansionary. He thought he
could do it—he had two instruments. Two targets, right? He had real output—money would
do that one—and he had the inflation—wage-price controls took care of that one. No, I don’t
think that’s right.
Robert L. Hetzel: But then, if you—
James L. Pierce: That was done on purpose. I mean, he—you know?
Robert L. Hetzel: If you believe that then—
James L. Pierce: It wasn’t that—he both—was he a monetarist in the sense that there
was just one number he looked at? No. But it turned out during that period you could look at
any number, it didn’t make a particle of difference which one you looked at. They’re all
telling you the same thing. Monetary policy was highly expansionary by any standards.
Robert L. Hetzel: Yeah, but if—in a way, my story is more favorable to him—
James L. Pierce: No, that’s correct. But mine’s more—this is a lot of meetings and
having a lot of arguments.
Robert L. Hetzel: Yeah. But you have to—I mean, if you go back and you look at
this period, you can’t get around the fact that shifts in monetary policy occurred at times when
the administration wanted shifts in monetary policy—
James L. Pierce: Well, how about that. That does not—that’s correct. And my
answer is, “How about that?” I went to—well, at least not to him, but people that certainly
wanted Nixon to get all the votes. That’s right.




- 14 -

Robert L. Hetzel: And so my story makes it—kind of gets around—well, you know,
Burns was political, I don’t have to say that, but—
James L. Pierce: Yes, he was political. He was an extremely political man. He was
also very, very smart. And I think you don’t want to say, well, you know, he was this old
fuddy-duddy that just believed in expectations. That was one smart man. He knew what he
was doing. One of the smartest people I’ve met.
Robert L. Hetzel: So he basically just misjudged the extent to which controls
would—
James L. Pierce: I think so.
Robert L. Hetzel: Supress inflation?
James L. Pierce: I think that’s right.
Robert L. Hetzel: Absence of experience with—
James L. Pierce: Yeah. I mean, I think he didn’t really appreciate the role of how
much—you know, when you build up inflationary pressures like that, how hard it is to get rid
of them. Which is sort of funny. I mean, you would think, you know, “Germany experienced
all this.” I mean, [00:37:35 unintelligible]. He just—I don’t know.
Robert L. Hetzel: Yeah. Somebody who attached—I mean, you know—
James L. Pierce: Someone said somehow for all his bravado and his intelligence and
his presence, he was always trying to become acceptable to the White House. And I think
that’s probably right. It’s sort of sad.
Robert L. Hetzel: Well, he wanted to act on a grand stage. And he wanted to
influence—
James L. Pierce: He had those things plenty. I think he was looking for approval in
some sense. You know? That somehow—doing good by those people...I think. I mean, I
can’t prove that, but that just...And I’ve had several other people mention this to me as well
that knew him. I...it helps explain almost otherwise unexplainable things.
Robert L. Hetzel: But again, my explanation is more favorable [chuckling]—
James L. Pierce: Oh, I know.
Robert L. Hetzel: In the sense that—this happens—I think it happened with Martin
too, who wanted to influence fiscal policy and was willing to [00:38:36 unintelligible] off—
James L. Pierce: No, but look at the difference. Martin caused a credit crunch. Now
you go back, it didn’t look like anything now; it was then. He was willing to—no, I mean that




- 15 -

stuff is like night and day. Yes, he was fuzzy-wuzzy and he didn’t know all about
simultaneous equation systems and dynamic optimization, but boy did he know how to rattle
cages.
And he rattled a cage. Now, he got sold a bill of goods with his income surtax, but he
came right back in ’69. I mean, before he left he was going back up again. I mean, this was a
guy that actually knew about inflation. There’s no evidence that he was any kind of coconspirator in this. He was rattling cages. Burns on the other hand—
Robert L. Hetzel: Of course in ’69, then the Nixon administration—
James L. Pierce: Then it was Martin. And then—
Robert L. Hetzel: Was willing to—
James L. Pierce: And then Burns took over; that’s right.
Robert L. Hetzel: Was willing to have a tight monetary policy because they—
James L. Pierce: That was the original White House strategy. The idea was early in
the administration, to ring out the inflation.
Robert L. Hetzel: But Martin wasn’t rattling any cages in ‘69—
James L. Pierce: No.
Robert L. Hetzel: Because the administration—the only time he really rattled a cage
was that period in the summer of ’66 when actually he was in the hospital—
James L. Pierce: That’s right. But, I mean, he was involved in it.
Robert L. Hetzel: I’m sure he was.
James L. Pierce: And...you know, the bond market closed...it was a big deal.
[00:40:00]
James L. Pierce: It really...he was willing to change the rules of the game in order to
get the administration’s attention. So no, I don’t think it was the same. I think that you sort
of want to compare those two. I can’t tell you what Burns’ ultimate motives are...I mean, the
man was a very political animal. What he said wasn’t necessarily what he was thinking. All I
can ever—all I ever told people—during then and afterwards—was just look at what
happened. Not what he said, but what’d he do. It’s obvious what he did.
Robert L. Hetzel: Then, why did monetary policy become restrictive in [00:40:49
tape skips]? It became very restrictive. Was it because he simply wanted a restrictive policy?
He’d been burned by the criticism that—




- 16 -

James L. Pierce: Yeah. There was—the word went out to the desk that money
growth was not to exceed, I think, 6%. Period. And almost—he were in Washington every
day. I mean, I’d never seen such pressure. [Laughs] I mean, it was intense. He was going
back and forth. Yeah. And this was to make a point. And suddenly, Burns became the
monetarist. He didn’t care about [unintelligible], he just—you know, he needed a symbol. So
it was tough for a while.
Robert L. Hetzel: But our principals said that he was always saying that the problem
is not enough—the problem is not a lack of money, it’s a lack of oil. The implication being
that he thought the recession was a consequence of the oil price shock and had nothing to do
with monetary policy. Now, that’s what our principals thought that he was saying. But
you’re saying he knew policy was restrictive—
James L. Pierce: Sure.
Robert L. Hetzel: That’s what he wanted and...
James L. Pierce: That’s right. Sure. I mean, I don’t know if there’s any public
record of that, but I’ll tell you—I used to tease the man about it. The poor guy was in town
every day almost.
Robert L. Hetzel: I’m sorry, I didn’t quite hear you. He was in town...?
James L. Pierce: He was going back and forth—Burns had him in Washington every
day. And he’d get back on the plane and go back to New York. I mean, the pressure on him
to, you know, keep it tight was amazing.
Robert L. Hetzel: And who was that you mentioned? Peter Sternlight? Was he
the—who came—
James L. Pierce: No, that was—no, not then. Peter hadn’t taken over yet.
Robert L. Hetzel: So who...?
James L. Pierce: Alan Holmes, I think.
Robert L. Hetzel: Alan Holmes, okay. Hm.
James L. Pierce: That was Holmes, I’m almost sure. Yeah. And Peter took over
later. No. He knew how tight it was. He—that was a very facile thing he had to say. I mean,
he just walked rings around [laughing] the members. You know, he would say things like
[00:42:56 unintelligible] they say, “Oh, well, okay.” That was facile.
Of course, that degree of money growth was restrictive. But the reason was because
of the big price shock, right? I mean, there’s some truth to that.
Robert L. Hetzel: Sure. Sure.




- 17 -

James L. Pierce: That was another time on the directive. We tried and finally just
gave up. And maybe this is a time when your expectations are so important. To try to get
him to distinguish between a once-and-for-all level adjustment and an adjustment in the rate
of growth...of saying, “Look, there was this big oil shock...big price shock. It’s very hard on
the economy to try to adjust to that with the cost of quantity money.” And you simply tell
people, you’re doing this once-and-for-all increase to adjust with it, but no—but that you
won’t give into inflation and you go back to the same old gross rate. Then you’ll take a lot of
the pressure off the economy.
Which is, in essence, what the Japanese did. And he wouldn’t listen. Because he said,
you know, people won’t know the difference; they’ll think we’re under-writing inflation, blah
blah, blah. Maybe he was right. I don’t know.
But, he was—you know, he was willing to think in terms of money growth and its
implications when it fit his purpose. [00:44:25 unintelligible] was. I mean, no...you might
think, you know, in the confine of his office it was all doing Burns and Mitchell...no, he
talked money growth to me. It was pretty modern stuff.
Robert L. Hetzel: So he—but he—at least publically he was—or, I don’t know,
semi-privately—to our principles, he was always scathing whenever he talked about
Keynesian models or monetarist models—
James L. Pierce: Sure.
Robert L. Hetzel: But that’s just because he didn’t want to be tied down by any
particular—
[00:45:00]
James L. Pierce: That’s right. That’s one thing—when I started making FOMC
presentation, I was so naïve I couldn’t figure out—the other guys—Partee and Gramley and
these guys—always talked about the past. And I got to do the fun part which was do the
forecast—the model simulations. And I thought, “Oh, God, why do they let me have that neat
stuff?” Well, it didn’t take me long to find out why. [Laughs] I mean, Burns would just
pound on me ruthlessly, right?
Robert L. Hetzel: So these would be Monday morning Board—
James L. Pierce: Yeah. Or even chart shows done at FOMC things; that’s right.
And the—he would use a model really as a sign to criticize.
Robert L. Hetzel: But—
James L. Pierce: Which caused a lot of the problems. See, because he wanted it in
his pristine forms that could show how silly it was. He didn’t want it tying his hands. And it




- 18 -

was always my job to say, “No, no. You don’t use it that way; you try a little common
sense.” And just smile at him.
Robert L. Hetzel: So what you’re saying is that— [00:46:07 tape skips]...Because
I’m trying to understand the model that Burns carried around in his head about the economy.
It was partly Mitchell, but he did absorb—he had absorbed elements of the Keynesian model
and the monetarist—
James L. Pierce: Oh, sure. Oh, sure.
Robert L. Hetzel: Model. So he was much more up-to-date. And—
James L. Pierce: The only real lacking that we found when he first came is he didn’t
have the [laughing] foggiest idea about the mechanics of central banking. And so we, you
know—which is understandable. But I had some sort of funny meetings where he kept get the
sign wrong on purchases and sales and stuff like that.
Robert L. Hetzel: That’s interesting because—well, because people associate Arthur
Burns with central banking. So they just—
James L. Pierce: Yeah, but he wasn’t. He wasn’t—he didn’t come from that at all.
Robert L. Hetzel: And his research was never—
James L. Pierce: Right.
Robert L. Hetzel: On the financial side—
James L. Pierce: No. There was some really remarkable gaping holes.
Robert L. Hetzel: So he knew—
James L. Pierce: It was just sort of fun to watch. I mean, the man—he was a very
quick study and got so he understood it. He certainly didn’t come with that expertise at all.

[00:47:25]
[END OF TAPE 68, SIDE A]
[BEGINNING OF TAPE 68, SIDE B]
James L. Pierce: ...The unemployment rate month by month from 1066. But he
didn’t know anything about monetary policy.




- 19 -

Robert L. Hetzel: Was that ultimately part of the problem? Or the problem was
rather that—you said he simply misjudged the—
James L. Pierce: I think he misjudged. I think he got [unintelligible]. But he—you
know, he didn’t jump right in and try to bull—he was no bull in a china shop, so he went
pretty easy to begin with, until he understood and he learned that he could—on the technical
stuff—that he really could trust the staff; that no one was going to do him in. That, you
know...that there would be a straight discussion of, you know, no one would ever tell him to
move in the wrong direction and stuff like that. And so—no, I don’t think so. I think it
was—I think he misjudged...
Robert L. Hetzel: And he had this personality where he needed to dominate—
James L. Pierce: Yeah.
Robert L. Hetzel: And presumably that carried over to the feeling that, well, he was
just intelligent enough to, kind of, dominate on a wide-scale—both within the political system
and within the economy.
James L. Pierce: Right.
Robert L. Hetzel: And that personality must have been part of it.
James L. Pierce: No, I think that was part of it. I never really totally understood the
man, but I think there’s a lot of truth to that. And he ended up—for all his presence in
Washington—of not being a very successful central banker. My opinion. I mean, compare
him to Greenspan. Greenspan’s done a fine job.
Robert L. Hetzel: Sure. Yeah. Well, yeah, ultimately he was a—pretty much of a
disaster.
James L. Pierce: Right.
Robert L. Hetzel: Sure. [Chuckles]
James L. Pierce: But, you know—[chuckles] he was much more of a commanding
presence than Greenspan.
Robert L. Hetzel: Yeah. [Chuckles] What was he like as an individual? I come
from a regional bank and so, you know, I get the stories of how during FOMC meetings and
apart from FOMC meetings, he was just merciless with individuals who were willing to
oppose him. Poor Al Hayes, whom he just sat on continually. And, you know, Darryl Francis
from St. Louis. But was that just kind of engineered to just—
James L. Pierce: Well, part of it. I mean, if he hadn’t had Darryl Francis, he would
have invented him. I mean, he was—Darryl was his broken record. And because he was, you




- 20 -

knew exactly what he was going to say. He was just a wonderful foil for Burns, so Burns
used him. And so, you know, I don’t think he had a hate to it. I mean, I think he would have
missed him [laughs] because he was so handy.
I think Hayes was more complicated. I think that’s more of the New York mystique
and showing who’s boss. And that also explained—you know, requiring the manager of the
market account to be in Washington every day when you’re picking on him...that’s a big deal.
Reminding him who he works for because he technically—you know, when he’s doing that,
he’s an employee of the FOMC and not the New York Fed. And that’s a real nuance. But I
mean, he was trying to make that point. He didn’t like people to go against him.
And unlike Martin—I mean, Martin did it with just elegance. I mean, I can remember
meetings where he wouldn’t say a word and then he’d summarize the meeting and his
summary had nothing whatsoever to do with anything anybody had ever said. It was so
remarkable but everyone was sort of too polite to point it out. And so he’d just summarize
what he wanted to do and then they’d go do it.
Robert L. Hetzel: Yeah, and I’ve read the minutes and I can—there were some
meetings where there were just—like, before this reduction in interest rates in the summer of
1968—I mean, you read the minutes and you’ve got to say that, you know, these divergences
are very sharp. And then he would start a summary and he’d say, “Well, we’re really not very
far apart today...”
James L. Pierce: [Laughing] I know it. I know it.
Robert L. Hetzel: And, you know, “Let’s combine...” So, you know, “The
committee seems to want A and I had initially wanted B, so let’s combine these two...” and
then he would write a fuzzy directive and get what he wanted.
James L. Pierce: That’s right. That’s right.
Robert L. Hetzel: And nobody would—because the guy was such a great guy,
nobody would—
James L. Pierce: No, that’s right.
Robert L. Hetzel: Challenge him.
James L. Pierce: The—maybe—another—...that’s right. And so he got his influence
in just almost a diametrically opposed way from Burns. Burns would run roughshod over
people. Most of them he was smarter than.
[00:52:22]




- 21 -

James L. Pierce: He’s had much more knowledge of the—he knew more detail...I
mean, he would even shoot the staff down sometimes on these little nitty points, right? And
[laughs] sometimes the staff would say, “Well, good for you. You know this dumbass fact.”
Anyway—and he was pretty rough. The—yet he somehow—for all his roughness—
managed to get the FOMC to think it did more than it was doing. Let me try to explain. I
have a story I like to tell people about. One time—I used to be on these committees—the
Bluebook committee and the Greenbook and all that stuff—and one time, for some—there
were always three opposite alternatives. And the one they were supposed to vote on was B.
And B was the thing that Burns wanted them to do, so he’d get together with Axilrod and he’d
tell Axilrod what he wanted. And then we were supposed to come up with stuff that matched
that. Right? In terms of interest rates or whatever it is...usually interest rates.
One time, for some reason or another, he had politically some agenda and he wanted
to have four of them—four alternatives. And we started joking and giggling how will they
know what to vote for because they’re always supposed to vote for B. And so [laughing] I
thought we could have signs; this time vote for B prime—I think we ended up calling it Bprime or something like that. It was all sort of a sham. The decisions were made ahead of
time.
Robert L. Hetzel: Yeah. That’s what our principals said—that they had the feeling
that Burns came into the meetings already knowing what he—
James L. Pierce: Absolutely.
Robert L. Hetzel: What he wanted. Of course—
James L. Pierce: There’s no question he knew. And those—somehow they thought
these numbers came out of...I don’t know where they thought these numbers came from—the
Bluebook numbers and so on. Those were negotiated with Burns. And so the real policy was
the staff would [laughing] try to negotiate with Burns, saying, you know, “You can’t do that.
You can’t have those rates that low and that money growth.” And so we’d go back and forth.
And finally we’d get the best B we could. It was really crazy. And then the rest was just sort
of show.
Robert L. Hetzel: I mean, the idea of the Bluebook was to—I mean, after the fact—
after ’67, ‘68—the committee said, “Well, gee, we got more money growth than we wanted.
If we had known how much money growth we were going to get at those levels of interest
rates, we would have been more adventuresome in changing interest rates.” So the idea of the
Bluebook initially was to associate the interest rate—
James L. Pierce: That’s right.
Robert L. Hetzel: Target with projections for money so people wouldn’t be
surprised. Then the idea was that, well, if you knew what was coming, then you’d—you
know, you’d take care of it. But then you got into this, kind of, menu-thing where the




- 22 -

alternative interest rates were really associated with the, kind of, near-term projections of
money growth, a lot of which was seasonal. And then the committee would choose a
projection—the committee would choose an alternative depending upon what it wanted
interest rates to do. That is, if money growth was projected to be 7%—really wanted interest
rates to go up, but it wasn’t quite—it didn’t quite have the confidence to go with it, then it
would come up with a two month target range per money that would be 5% instead of the 7%.
And then, you know, with the assumption that, well, it’ll—
James L. Pierce: Right. But no change on the interest rates so that you know when
you’d get it.
Robert L. Hetzel: Right.
James L. Pierce: That’s right. And another thing with the models—unending
frustration. We had this monthly model just trying to get some structure into the money
interest rate relationship. And the first thing we would do when we would meet with Axilrod
is we’d simply double the multipliers—he’d double them every time. And he usually more
than doubled them so he could negotiate it back to doubling them. [Laughs]
Robert L. Hetzel: Okay, go over that again. I’m a little—
James L. Pierce: Well, if we—if the model said that in order to slow money growth
by half a percent, you had to raise interest rates by 1%, Axilrod would always conclude it only
took half a percent or a quarter. And we’d have these gigantic wars.
Robert L. Hetzel: Because he thought Burns would—
James L. Pierce: No, he not thought, he knew. I mean, he came in already with what
the interest rate was going to be.
[00:57:25]
Robert L. Hetzel: Burns was really a—
James L. Pierce: Burns was setting interest rates.
Robert L. Hetzel: Despite his bravado, he was really extremely cautious about
interest rates. I mean he was—
James L. Pierce: Absolutely. No, he didn’t—that’s right, it was interest rates.
Robert L. Hetzel: He was the old-line school that if you change an interest rate by a
big amount, that was a source of instability—
James L. Pierce: Well, now careful now—he was perfectly willing to change them a
lot in ’74. He didn’t want to change them a lot when they would get in the way of a very
expensive monetary policy. He wasn’t symmetric.




- 23 -

Robert L. Hetzel: Well, the committee was moving in the direction of reserve
control, wasn’t it, in the—?
James L. Pierce: Well, subject to an interest rate constraint, sure.
Robert L. Hetzel: Right. But it was Burns who—in early ’72 when the committee
thought it was actually going to be targeting a Reserve path—it was Burns that came up with
these very binding interest rate—funds rate—
James L. Pierce: That’s right. That’s right. Well, and some—you know, some
meaningless Reserve numbers that I can’t even remember what they were anymore...non—
Robert L. Hetzel: Reserves available to support Fed independence.
James L. Pierce: Yeah, that thing. Nobody even knew what they were; we had to go
find Holland and ask him what in the hell it was. [Laughs] Nobody knew. Yeah. But it
didn’t make any difference because there was a binding interest rate. So it didn’t make any
difference. He was just always wrong every time.
Robert L. Hetzel: Did you find him—when he argued—people argue for different
reasons, they argue—some people argue because they think it’s fun, they think that they like
to win. There are other people that argue that really have to win; they become angry if they
feel like they’re losing. Was Burns—
James L. Pierce: He was always very courteous with me.
Robert L. Hetzel: So he wasn’t the kind of person—he wasn’t privately somebody
who would lose his temper or—
James L. Pierce: No.
Robert L. Hetzel: Be a bully or...? He was always in control and—
James L. Pierce: Yeah. Right.
Robert L. Hetzel: In his personal relationships he was courteous with other people.
James L. Pierce: Sure. Oh, yeah. No, he was very—that’s right. I always had the—
I always just had the feeling whenever he was arguing, he was practicing; that it really wasn’t
someone with strongly held views but who would be willing to change them if you could
convince him. Rather, he wanted to hear—always—I mean, he never said this, but this was
just always the impression I got—he wanted to hear the toughest arguments he could. And
he’d have an answer ready. It was not a matter of striving...questing for truth and light. It
was sort of fun, but...[01:00:20 tape skips] He was a very smart man.
Robert L. Hetzel: So you ultimately left the Board primarily because it was just an
attractive—you had an attractive offer in Berkeley?




- 24 -

James L. Pierce: No. I couldn’t stand it anymore.
Robert L. Hetzel: Just the general environment? The...?
James L. Pierce: The environment, the beating of inflation...it’s funny to say that no
matter how high up I got and what I did, it wasn’t going to change. And I just thought
monetary policy was terrible. So I decided to leave even before I knew where I was going.
Robert L. Hetzel: So when was that?
James L. Pierce: I left in ’75. I decided to leave. I told them I’m leaving. “Where
are you going?” “I don’t know; I’m leaving.” [Laughs.] And it was non-negotiable. And
then I started looking around. And then I got this offer to go on the Hill for a year with Henry
Reuss. And—just for one year—and so I said I’d do it. And that was really a year—well, it
was sort of fun years anyway, but then came a time to decide what I was going to do. I knew
I wanted—I was going back to academics, the only question was where.
Robert L. Hetzel: So your objection was with the decision-making process or you
simply thought that you were wasting a lot of time trying to influence the policy that was not
likely to be very well-informed?
James L. Pierce: Both. I think that...For years, I thought that we’d get some modern
economics to bear on monetary policy. And that the arguments would be sufficiently
compelling that they went out. And that the problem was that the senior staff—most senior
staff—was not technically very good.
[01:02:25]
James L. Pierce: And felt threatened by more modern economics...and that
somehow, one could get high enough...one could overcome that. And it was finally this
realization that wasn’t true; that that really wasn’t where the problem lay. That it was
people—Burns in particular—doing—thinking he knew what was right and just doing it. And
that it was political.
And the rest—and the other part was just the constant rankling of having somehow to
listen to the-- the criticism—because I knew some economics—by the staff. I found that—it
just never ceased to send me up the wall...that I was a technician. [Laughs]
Robert L. Hetzel: That criticism came from...?
James L. Pierce: Everybody.
Robert L. Hetzel: From the staff?
James L. Pierce: Yes. Every one of them.
Robert L. Hetzel: So it was kind of the attitude of people like Axilrod...




- 25 -

James L. Pierce: Absolutely. Gramley...Brill...not Brill. Dan was okay.
Partee...yeah. I was this technician. And that gets to you.
Robert L. Hetzel: Yeah, the, kind of, condescension that, “Well, you don’t have
enough political reality of the situation...”
James L. Pierce: That’s right. Here I am, I may not know economics, but boy I sure
know how the world works because I’m such a sensible person.
Robert L. Hetzel: And I appreciate how significant housing is to the—
James L. Pierce: Right.
Robert L. Hetzel: Political sector. And that means there are just some things that
you can’t do even if [01:03:49 tape skips].
James L. Pierce: Right. And, you know, a willingness to say, “Look, we just use a
model to help us think.” [Laughs] That...there’s no blind use of the thing. And it just got—
you know, it was just a constant irritation to me.
And just a war. There was always a war to have the people that—with technical
backgrounds—you know, sort of modern economics—have them be listened to...that they
were never given the same credence as somebody who happened to know what happened in
the S&L industry a week before last. So I always had to just battle.
Robert L. Hetzel: Did—let me [01:04:34 tape skips] to this in a minute, let me finish
up.
James L. Pierce: People like Tinsley and so on. You know, Peter’s just brilliant.
Robert L. Hetzel: Yeah. Yeah. Well, it’s kind of...I don’t know quite what the word
is...sad...you have very confident people, they make a decision, you know, “I want to go to all
the FOMC meetings and do the Board briefings and kind of work my way up and become the
member of a team” or, “I want to retain my objectivity.” And the latter group—Dick Porter
comes to mind—
James L. Pierce: Right.
Robert L. Hetzel: There are others—they tend to get, kind of, put out to pasture and
they’re—
James L. Pierce: Yeah, it wasn’t sad. I mean, you know, by some standard I was
very successful, right? I was doing all this stuff.
Robert L. Hetzel: Well, but ultimately I think that most people—your case is
probably atypical [01:05:20 tape skips] yourself would not—




- 26 -

James L. Pierce: No, that’s right. That’s right.
Robert L. Hetzel: Remain at the center of the decision-making. You know, Peter
Tinsley and Dick Porter would go off to—
James L. Pierce: Oh, sure.
Robert L. Hetzel: Kind of one side and have a significant title and [01:05:35 tape
skips].
In ’76 when you were working for Henry Reuss, were you involved in the negotiations
with the Fed over—was it initially House Concurrent Resolution 133? I mean, Bob
Weintraub had the idea that—
James L. Pierce: You’ve got your dates off. That was before I left. I think
H.Con.Res was 1974 or ’75; so back then.
Robert L. Hetzel: So that was before you left?
James L. Pierce: Right. I—
Robert L. Hetzel: So then you were really involved in housing things, and you
weren’t so much involved in—
James L. Pierce: Well, I refused to. I mean, Burns was—he got pretty paranoid
about me, but [laughs] my agreement with Reuss was that I would not do monetary policy.
And I surely wasn’t going to tell any secrets. And that I just didn’t want anything to do with
that. I was working on financial reform...things like that. So no, I studiously avoided what
was going on. There was a lot of negotiation going on with Burns about testifying and giving
real income targets and so on.
Robert L. Hetzel: Well, and Humphrey–Hawkins became—
James L. Pierce: Right. And I just stayed out of it. He never believed that, but I did.
Robert L. Hetzel: How did Burns feel about things like Regulation Q?
James L. Pierce: He liked it. He was [laughs]...I’m telling you, the man—Milton
Freidman, he was not.
Robert L. Hetzel: Well, that’s one of the strangest stories of all time, is how Milton
Freidman could—
James L. Pierce: I know.
Robert L. Hetzel: Deceive himself into thinking that Burns looked at the world the
same way he did. It’s—




- 27 -

James L. Pierce: I know. I know. It’s just because apparently both are politically
conservative, but Burns isn’t conservative—was not conservative in any sense. He liked Reg
Q.
[01:07:21]
James L. Pierce: He wanted—I remember one of the great staff triumphs was to get
him to take reserve requirements off of big CDs. I mean, that was a war. And even then, he
insisted on having standby authority. No, he liked it because it gave him another lever. And
he liked to intervene.
Robert L. Hetzel: But he did take-- during the Penn Square—
James L. Pierce: That’s right. That’s when it came off.
Robert L. Hetzel: May of 1970. But what came off was—Reg Q, not—
James L. Pierce: That’s right, that’s right. It had to come off. It took a panic, but
yes.
Robert L. Hetzel: But you said reserve requirements. You meant the Reg Q?
James L. Pierce: I meant Reg Q; I’m sorry.
Robert L. Hetzel: So he—oh, so he—
James L. Pierce: What we got—now it’s coming back—to get the big CDs off, was
modern—he had standby authority to do modern reserve requirements.
Robert L. Hetzel: I see.
James L. Pierce: And that seemed like—now I remember—that sounded like not a
bad horse trade with him.
Robert L. Hetzel: I see. So he subsequently took credit for that, but in fact it was a
staff idea.
James L. Pierce: Well, yeah. I mean, we had to offer him something in return. And
we dreamed that one—I remember that now—we dreamed that one up. At least it got him on
a margin. See, sometimes analytics help. [Laughs] Told him -- explained to him that was a
leader on a margin, you know? That damn corner.
Robert L. Hetzel: Did you have the feeling at any time during this period that Burns
felt that Fed independence was threatened by Congress, so that he was pushed...? Or was he
always, kind of, basically doing what he did because that’s what he wanted to do?




- 28 -

James L. Pierce: He could haul that argument out when it fit his purpose. I never
had the impression in private discussion that he thought it was any important thread. I mean,
he had to huff and puff about it and fight Congress. You know, sort of a ritual they had. But
I...and he certainly would argue that when—as I said—when it fit his purpose. But I never
had the impression he thought it was anything that was very likely to occur.
He was—knew how important it was; he understood the politics of things very well.
For example, he got really—when I left—he got really mad at me for proposing that Reserve
Bank presidents be appointed rather than...and reduce the power of boards of directors of
Reserve Banks. And he knew why I did that. [Laughs]
Robert L. Hetzel: Sure.
James L. Pierce: I mean, it’s political—tremendous political...
Robert L. Hetzel: Well, the directors can walk right into the office of the
Congressmen—at least our directors have—are all—almost all pretty well-off individuals and
they know their Congressman on a first-name basis and—
James L. Pierce: Absolutely. And so it gives us constituency. See? I mean, I
understand why the Federal Reserve has it. It just seems—I don’t think it’s good public
policy to be set up that way.
Anyway, he fully understood why Reserve Bank directors were important. He
understood all that. He got that part of politics just right. You never had to explain any of
that stuff to him. He had that one down cold. And so he never wanted anything to erode that
influence. And I suppose—you know, as the Chairman of the Federal Reserve, that’s
appropriate. The—did he think that it was an imminent thing that he’d lose it? No. I don’t
think so. Congress, you know—all they do is huff and puff.
Robert L. Hetzel: What did Henry—somebody like Henry Reuss—think of Burns?
Was Reuss like Patman where he was happy to make a lot of noise, but ultimately wasn’t
really willing to clip the Fed’s wings or..?
James L. Pierce: No. I think Henry was willing; he didn’t know how to do it. And
he didn’t have the political...I think probably Patman was too. Neither one of them had the
political clout to be able to accomplish much. It’s very difficult to go up against the Fed.
And it just isn’t something you can rally members of Congress around. And both Patman and
Reuss were not remarkably adept politicians. Unlike, say, St. Germain, who was a good
politician. For all his other faults, he was a good politician. Reuss had sort of grandiose ideas
and he just thought somehow because he was smart and he knew the right answer, everybody
would just go along. And then was sort of surprised when it didn’t happen.
Robert L. Hetzel: Did you have any contact with Proxmire?
James L. Pierce: Mm...some. Not much, but some.




- 29 -

Robert L. Hetzel: How did he think—what was—he attacked the Fed when it served
his purpose?
[01:12:25]
James L. Pierce: Yeah. He was much more—Proxmire, out of all those guys, he was
much more of a political animal. And he got—his golden fleece did him no end of good. He
was a—you know, he was a real political animal. I could never really tell how he was any
different from the rest of them...in terms of, you know, getting political capital but knowing
full well nothing was going to happen.
Robert L. Hetzel: Yeah. [Chuckles] Let me ask you some, kind of, particular
questions—kind of, ostensibly the reason I called you—about how the Greenbook forecasts
got made—
James L. Pierce: Okay sure.
Robert L. Hetzel: When you were at the Board. Now in principle, if you—as an
economist, the way you think about making a forecast is, well, you’ve got to have an
objective function in which the monetary authority is—specifies its goals—
James L. Pierce: Yeah.
Robert L. Hetzel: For inflation and unemployment. And then you—you know, if
you’re in the Fed, well then you make some assumption about fiscal policy, some assumption
about the foreign sector, and then you solve the model on the basis of whatever you think
exogenous is going on in the economy.
James L. Pierce: Right.
Robert L. Hetzel: And out of that falls an interest rate path.
James L. Pierce: Right.
Robert L. Hetzel: Now, obviously it’s not done that—the Greenbook forecasts aren’t
done that way; they still aren’t done that way. But if you think about how they get made, I
mean, in some sense you’ve got—to make a forecast, you have to start with an objective for
monetary policy, don’t you? Even if—
James L. Pierce: Well, let me—I don’t know how they’re done now.
Robert L. Hetzel: Yeah, I can tell you that and that might be interesting because then
you might say, “Oh, yeah, it’s the same” or it’s a lot different.
James L. Pierce: All right. But let me tell you because—a little bit how they
originally were done, and then they got modified a little bit, but not very much. When I first
started going to Greenbook meetings, [laughs] I was this young person—I was really puzzled.




- 30 -

And I asked someone, I said, “Well, what are you assuming about monetary policy?” And I
just got this blank look. There was no monetary policy assumption. These so-called
judgmental forecasters simply—I think what they—all they do is really just do a first
difference. And the past isn’t going to be very much different from the—I mean, the future is
not going to be very much different than the past, right? So you just assume everything grows
by a quarter of a percent or whatever it is you’re going to assume, and you keeping trying to
keep the sectors sort of in balance.
And the real sector—all the real forecast was made independent of any monetary or
financial thing at all. And then later on, the financial detail would get added in to sort of be
consistent with it. Now, I know you probably don’t believe this, but it is true.
Robert L. Hetzel: So there was—you can make forecasts for a quarter or so, but how
far out would you make them?
James L. Pierce: They didn’t go out very far. They would only go out, like, six
months. Sometimes a year. We never could get them, I think, to go out farther than a year. I
remember another time Burns got furious at me—I tried to go out a year and a half. But, man,
he had a fit. [Laughs] Perish the thought you go out far enough that what you’re doing now
might have a difference, right?
Robert L. Hetzel: If you go out far enough, you have to make some assumptions
about policy.
James L. Pierce: You got it. [Laughs] You got it. That’s right. See, these are so
short-term...how far do they go out now? A year or more?
Robert L. Hetzel: Well, I think once a year the staff has to do it out, like, six
quarters. But now [01:16:00 tape skips]
James L. Pierce: That’s the max, right?
Robert L. Hetzel: Yup.
James L. Pierce: And then it gets shorter.
Robert L. Hetzel: Yeah, it’s about—
James L. Pierce: Year and a half, uh-huh.
Robert L. Hetzel: Yeah, usually it’s about a year.
James L. Pierce: Hm-mm, hm-mm. Well, there’s an awful lot of initial conditions,
right? You can certainly get halfway there without doing any economics at all. And I think
that’s basically what these guys did. They were really expert about what was going on in
their sector. They knew a lot. I mean, business—what they used to call “business




- 31 -

economists” or we called “judgmental economists”...you know, you just stare at the wall and
figure out what’s going to happen—that’s how the Bluebook forecasts were made. Then
totally separate from it—
Robert L. Hetzel: You mean the Greenbook forecasts?
James L. Pierce: The Greenbook, I’m sorry. Then totally separate from that, the
Bluebook was done. And it was nothing initially—no connection at all—which also sort of
puzzled me. Anyway [laughing] it built the interest rates depending upon what’s going on in
the economy. It got a little better. And one role the model did do—or models did do—was to
force a discipline where it just became increasingly difficult for people to make a forecast
because we’d always say, “Well, what do you assume about monetary policy?” And they had
to start thinking about it. And a better job was made of—done of getting the two a little bit
better integrated. But never very much.
[01:17:23]
Robert L. Hetzel: So the forecasting exercise would not start with an assumption
about the interest rate path?
James L. Pierce: No. Well, [sighs]...no. No. Until very late in the day, Lyle
Gramley who ran these, had two groups. He had his judgmental guys—[01:17:42
unintelligible] and these people; I remember them dearly—doing their forecasts. Then the
model guys. We’d come in and we’d compare. And I’d say, “Well, how are we going to
compare until I know what in the hell you’re assuming about monetary policy?” He’d always
give us the monetary policy assumption. [Laughs] Because, well, I told him, “We’ve got to
have one for Christ’s sake, we can’t just...” It’s meaningless —you know, it’s empty; we
can’t solve this thing. I’ve got too many questions. [Laughter]
And so we’d get one. And then our model would be different and I’d say, “Well,
you’re assuming a mon—you’re asking us to do a monetary policy that isn’t going to happen.
You’re going to say your money has been growing at 8% a year or whatever it was, and
suddenly you’re assuming it’s only going to grow at four. Our model says the
following...Your judgmental guys aren’t restricted like that; they know all along it’s going to
continue to grow. And so they took that into account. So you’re doing apples and oranges
here.” [Laughs] Well, he said, “Well, they don’t know how to do the other one.” And I said,
“Well, that’s meaningful.” [Laughs] And so we’d have these gigantic fights. I don’t know
how it’s done now. I bet it isn’t all that different.
Robert L. Hetzel: Well, yeah...it’s...it looks exactly the same. I mean, you look at
the page; it’s got the same format. The numbers are the same and the stories are all the same.
The Greenbook is just stories, there’s no—
James L. Pierce: No real analytics, right?




- 32 -

Robert L. Hetzel: Yeah. And there’s no—you look at these numbers and there’s no
sense whatsoever of how an internal consistency is imposed and how you arrive at aggregate
figures that make macroeconomic sense. That just...that’s never explained. And as far as I
know, the staff has never written it down or explained it.
I think what they do now is Mike Prell makes some assumption about what inflation
rate they want to have a year from now. And he’s implicitly got an objective for
unemployment, because that inflation objective is never very much different from the current
one. And then he will take the interest rate path that was done last period—just whatever it
was—and then he’ll consider incoming information since the last meeting. “Did the statistics
come in strong?” And he’ll also see what the yield curve did—“Does the market expect the
Fed to tighten? Did the slope of the yield curve move up because payroll unemployment
came in at 350,000...?” and so on. And he’ll adjust the last period interest rate path in this
ongoing way. Then he’ll give that interest rate path to the judgmental guys who are doing the
interest sensitive real sectors.
James L. Pierce: In, like, housing and stuff like that, right?
Robert L. Hetzel: Yeah. Housing, business fixed investment, and so on. And then
he’ll come up with four or five of these interest sector sensitive components. He’ll put those
together and get a rough figure for the rate of growth of real output. And then they’ve got a
productivity equation which translates into an unemployment rate. And then they’ve got a
formula that they use, which is that if the unemployment rate is above the NAIRU by two
percentage points for one year, that’ll cause a one percentage point change in the inflation
rate. And they use that formula to come up with the figure for inflation.
And if that is close to what Prell wants as an outcome, then, you know, they go on. If
not, then they’ll iterate back and forth. And they’ll talk to him and he’ll say, “Well, maybe
we ought to have a little more of an increase in interest rates here...” or whatever. And they’ll
go through the process again until they come up with this inflation number that looks kind of
like it’s what they want.
[01:22:23]
Robert L. Hetzel: And when they’ve done that, then they’ve got kind of a rough
figure for real GDP growth and for inflation. And then they’ve got some guy with this huge
table where he puts these figures in. People come in with their individual sectoral forecasts.
As they put these in, they jiggle them, tinker with them until they get certain ratios to look—
James L. Pierce: Oh, Christ.
Robert L. Hetzel: Reasonably like the savings—
James L. Pierce: This is so familiar.




- 33 -

Robert L. Hetzel: Ratio...and then everything looks consistent. And then they put
it—and that’s basically the Greenbook forecast out for several quarters. Then they will send
that over to the model people—along with the interest rate path—and they’ll say, “Tinker
with the intercept terms on the—on your equations until you replicate the initial couple
quarters. And then tell us what the next several quarters are going to look like.”
James L. Pierce: Oh, Christ. So nothing’s happened. Okay. That’s exactly the way
it was. What you described, that’s a much more orderly description of what used to happen.
It’s just the same.
Robert L. Hetzel: Okay. And I—
James L. Pierce: Except, we at least—I used to at least go to the Greenbook
meetings and would throw in my two bits’ worth all the time. Now, I don’t know whether
any model people do now or not.
Robert L. Hetzel: Well, I talked to Flint Brayton—I actually had a very congenial
discussion with him. He was somebody I could talk to. And I tried to talk to some of the
judgmental people. I’m going to talk to some more of them. It was much more harder to talk
to them. There was always this sense of exasperation in their voice. Like, “Why are you
asking this? This is so obvious—”
James L. Pierce: [Chuckles] Right.
Robert L. Hetzel: That, “What we’re doing, everybody should know this.” They
couldn’t...Anyways—but it was kind of funny because they don’t know what the model—they
really don’t know what the model people are doing, and the model people really don’t know
what the judgmental—
James L. Pierce: It’s worse then. See, I used to refuse to do them separately. And it
was, sort of, Partee—that sort of one of my jobs. I was supposed to straddle the model and
the other ones, you know? And also the Bluebook, Greenbook, and...So I refused to do that.
So it’s even worse than it used to be. There’s no VAR or anything like that?
Robert L. Hetzel: No. And the—you know, in my—I asked the question of the
judgmental—I talked to Larry Slifman—and I said, “Well, how do you pose—is there any
meaningful sense in which you impose economic theory on your forecasts?” And he says,
“Oh, sure. People in the individual sectors have their equations, so whoever’s doing...” I
don’t know, business fixed investments or car sales—
James L. Pierce: Right. So they’ll have somebody on just one thing, right?
Robert L. Hetzel: They’ll have an OLS regression equation that use and that they
tinker with—
James L. Pierce: Right.




- 34 -

Robert L. Hetzel: Period by period. And they’d each got those...I didn’t...you know,
I didn’t under—I didn’t even want to say that, well, you know, a lot of OLS regression
equations does not a model make; nothing’s identified. That seemed to be a comment that
would have been totally out of order.
James L. Pierce: Right.
Robert L. Hetzel: So they feel like they have—so they have certain guidelines that
they use. In particular what I just described to you—what they call the “two-to-one sacrifice
ratio.” That seems to be enshrined. But other kind of guidelines—if you ask them about—
like, if you ask them what change in the real rate of interest would you need to eliminate or
change the rate of growth in real output by one percentage point...or how much on average
does the real rate of interest rise over a cycle...there’s none of that—you know, they have
certain rules of thumb, but other rules of thumb which touch on interest rates, they aren’t
willing to specify.
Well, anyways, so this gets—it’s a little bit—it gets back to the original form of the
forecast because then when the forecasts are made, the interest rate path is totally expunged.
It appears nowhere. And you can infer the objective for inflation if—when you get these six
quarter forecasts—
James L. Pierce: Yeah. So you’re saying they worked backwards. In some sense,
this is what’s going to be presented to Congress.
Robert L. Hetzel: Well, the Greenbook isn’t made—
James L. Pierce: Well, they’ve got to be consistent, right?
Robert L. Hetzel: Except that the Treasury gets a copy —
James L. Pierce: To be—it must still be true. I can’t imagine that when they
coincide, that the Greenbook’s six quarter out is going to be different from what’s presented
to Congress, right?
[01:27:21]
Robert L. Hetzel: Well, yeah. The—Humphrey-Hawkins forecasts—
James L. Pierce: Right.
Robert L. Hetzel: Which are odd in themselves in that the individual members first
have to forecast what other individual—
James L. Pierce: Right.
Robert L. Hetzel: Members are going to do as far as monetary policy goes. Then
they can make their own forecasts.




- 35 -

James L. Pierce: Right.
Robert L. Hetzel: Rather than get together.
James L. Pierce: Sure.
Robert L. Hetzel: Try to come to some kind of consensus about—
James L. Pierce: Right.
Robert L. Hetzel: What they’re going to do. And then make their forecasts on the
basis of that common consensus. But we’ve been in the situation before where they’ve
rejected one of our forecasts because they didn’t think it was appropriate. So, they are
sensitive to getting something that on average looks like what they—
James L. Pierce: What they’re saying.
Robert L. Hetzel: What they’re saying. But they’d call it a forecast—
James L. Pierce: No, no, no. I understand, I understand. This is coming back to me.
[Laughs] See, I’ve been away from this for so long, I forget all this.
Robert L. Hetzel: But there’s no—
James L. Pierce: Yeah, yeah. Okay. So—
Robert L. Hetzel: But when you finish—
James L. Pierce: Well, that’s really remarkable.
Robert L. Hetzel: When you finish with these forecasts, there’s no interest rate path,
so there’s no assumption—
James L. Pierce: Is that right?
Robert L. Hetzel: And there’s no objective visible so that you expunge all evidence
on the preferences of policy makers in these forecasts. Even though it’s an internal forecast—
James L. Pierce: Right.
Robert L. Hetzel: So, you know, the question is how do you use that as a basis for
discussion since you can’t argue about the results that you’re getting on the basis of, you
know, kind of one’s view of theory? You can’t say, well, you know, the permanent income
hypothesis—
James L. Pierce: Right, right.




- 36 -

Robert L. Hetzel: — would suggest that consumption really ought to be higher or
whatever. Because there is no—you know, theory doesn’t impose consistency on it. So it
doesn’t serve as a basis for discussion among economists.
James L. Pierce: Hm-mm.
Robert L. Hetzel: All right. Well...
James L. Pierce: Well...I mean, that’s...okay. That’s...things haven’t changed. And
I guess if you were designing something that would give the Board and the Chairman in
particular the most...well, that’s what you’d design.
Robert L. Hetzel: Yeah. So that the only discussion at FOMC meetings concerns
policy actions—
James L. Pierce: Right.
Robert L. Hetzel: Rather than a strategy. And the chairman—if he doesn’t get the
policy action he wants this meeting, well he can—he’ll get it next meeting or—you know, it’s
always easy to postpone—
James L. Pierce: Sure. And so that’s the way I think it’s always been.
Robert L. Hetzel: Yeah.
James L. Pierce: And it’s just remarkable. I would have thought that at least they
were doing VARs and things like that, right? That are sort of neutral and you can’t...there’s
no politics in them or anything. [Laughs] At least you’re picking up regularities in a day
there, right?
Robert L. Hetzel: Yeah.
James L. Pierce: Really fancy modern-day Burns and Mitchell, if you will.
Robert L. Hetzel: Yeah, but—no, absolutely—
James L. Pierce: They’re not.
Robert L. Hetzel: There’s no...And there’s no longer any model—well, there is a
sense there’s a model forecast. Twice a year in the—they go through this exercise in the
Bluebook, and as far as I can tell, this is really the only way the model is used in a significant
way.
In the February and July meeting Bluebooks they’ll go through this process, and then
they’ll calibrate the model to replicate the initial judgmental forecast. And they’ll make
their—they’ll then use the model to make a forecast for several years. And then what they’ll
do is they’ll assume that the funds rate is initially a quarter of a percentage point higher or a




- 37 -

quarter of a percentage point lower...they’ll have some different path for the funds rate. And
then they’ll make a forecast that then will yield a different path for inflation. And then they’ll
put those in the Bluebook and they’ll say, “Okay, these are long-range scenarios.” And in
principle you can choose which inflation rate you want. And then that gives you a different—
James L. Pierce: Based on different funds rate.
Robert L. Hetzel: Yeah. Then that’ll have different implications for the funds rate.
But that’s—
James L. Pierce: But it’s almost none for today’s funds rate, because you can—
Robert L. Hetzel: Sure.
James L. Pierce: Right.
Robert L. Hetzel: Sure. And those—
James L. Pierce: That’s the same game we used to play with money growth. You go
far enough, doesn’t make a particle of difference what you’re doing right now. Sure. Okay.
Robert L. Hetzel: But then—and even that’s not discussed at FOMC meetings. It’s
there, kind of, pro forma, but—and I’m not sure quite why it is there...maybe—
James L. Pierce: It may actually—isn’t that remarkable? It may actually be less
analytical than it used to be. That’s truly remarkable.
Robert L. Hetzel: Well, I get the feeling that the model people really don’t have
much to do. That in the sense that—
James L. Pierce: Well, I don’t know if I’d use the word “model.” I would just say
“analytical people,” right?
Robert L. Hetzel: Well, that’s the—yeah. That’s the—
James L. Pierce: I mean, no one believes in models the way they used to.
Robert L. Hetzel: Well, it’s the same thing.
[01:32:22]
Robert L. Hetzel: I mean, if you’re analytical you choose your own—
James L. Pierce: Right. I mean, you don’t—we all learn the hard way that these
models don’t work very well. And, you know, they’re subject to Lucas critique and all these
sorts of things that—




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Robert L. Hetzel: Sure. But ultimately, they’re a way of thinking with—
James L. Pierce: Absolutely. They help you. You need some structure. Lucas
never argued that you then go out and stare at the ceiling. [Laughs]
Robert L. Hetzel: That’s right. Well, that’s the one thing James Tobin and Bob
Lucas and Milton Freidman—that they all agree on.
James L. Pierce: Right.
Robert L. Hetzel: I mean, you do work off a model one way or the other—
James L. Pierce: You got it right.
Robert L. Hetzel: And you’re kidding yourself—
James L. Pierce: You’ve got to be analytical. You need some structure, right. And
that’s—that’s really depressing, but it’s...you know what’s sort of interesting? Monetary
policy’s been pretty good.
Robert L. Hetzel: ...Yeah. I think it’s been pretty good because the Fed really got
burned in the ‘70s on inflation—
James L. Pierce: It did.
Robert L. Hetzel: And people were saying, “Why do you need an independent
central bank if you’re going to be getting [unintelligible] percent—”
James L. Pierce: [Laughs] All you want to do is get a lot of votes for Nixon, right?
That’s right. So, yeah. No, I think that’s right.
Robert L. Hetzel: —Inflation. So Volcker—
James L. Pierce: And they’ve been lucky too. I mean, there have been no shocks.
Whatever shocks have occurred have been in the right direction.
Robert L. Hetzel: Yeah. So—but Volcker and Greenspan were both individuals who
came up through this period and they kind of feel it—
James L. Pierce: Right.
Robert L. Hetzel: Deep down inside that they know what kind of—
James L. Pierce: Avoid, right?
Robert L. Hetzel: Social turmoil—how the divisive it was to set off that inflation.
And they were—both of them were determined it wasn’t going to happen again. Now what




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happens 10 years from now or 20 years from now when you get a whole new generation of
people? I don’t know whether these are lessons that are, you know, just kind of learned—
James L. Pierce: You’ll see pretty soon, I think. You’re already starting to hear—
and it sounds so familiar to me—you know, the economy is still expanding...people are
saying, “Well, there’s no inflation... See, the world’s different now.” “We don’t get inflation
anymore because there’s international competition...blah, blah, blah, blah, blah...”
Robert L. Hetzel: [Laughing] Right. Yes.
James L. Pierce: And I remember back—well, I’ve sure heard those arguments
before. It takes a long time to get that baby going. But it sure takes a long time to get it
stopped. We’ll see pretty soon though I think.
[END OF RECORDING]




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