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Journal of Economic Perspectives—Volume 20, Number 4—Fall 2006__ Pages 177-188

How Richard Nixon Pressured Arthur
Burns: Evidence from the Nixon Tapes

B u rto n

I

A . A b ra m s

n 1969, President Richard Nixon nominated Arthur F. Burns as the chairman

of the Federal Reserve, and Burns took office on February 1,1970. Burns was
a respected economist with years of experience and impressive credentials:
Professor of Economics at Columbia University, President of the National Bureau
of Economic Research from 1957 to 1967, and Chairman of the Council of
Economic Advisors under President Eisenhower from 1953 to 1957. He was an
authority on business cycles and published extensively with Wesley C. Mitchell.
Although Arthur Bums was an eminent economist, Nixon was probably more
impressed that he was a sympathetic Republican loyalist. In Nixon’s 1962 (p. 309310) book, Six Crises, he recounts that Arthur Bums called on him in March 1960
to warn him that the economy was likely to dip before the November election.
Nixon writes that Burns “urged strongly that everything possible be done to avert
this development. He urgendy recommended that two steps be taken immediately:
by loosening up on credit and, where justifiable, by increasing spending for
national security.” But when then—Vice President Nixon took this recommendation
to the Eisenhower Cabinet, “there was strong sentiment against using the spending
and credit powers of the Federal Government to affect the economy, unless and
until conditions clearly indicated a major recession in prospect.” Nixon sums up:
“Unfortunately Arthur Burns turned out to be a good prophet. Herbert Stein
(1995, p. 96), who was a member of the Council of Economic Advisers from the
start of Nixon’s term and became chairman at the start of 1972, confirms that
Nixon blamed a modest rise in the unemployment rate as one of the reasons he lost
the 1960 election.
During Richard Nixon’s first term as president, the economy faced another

■ Burton A. Abrams is Professor of Economics, University of Delaware, Newark, Delaware.
His e-mail address is (abramsb@lemer. udel edu).




178 Journal of Economic Perspectives

Table 1

Key Interest Rates and the Civilian Unemployment Rate
Federal

10-year

Discount

Date

fund y

Treasury6

rate

Unemployment
rate

1-1-70
7-1-70
1-1-71
7-1-71
1-1-72
7-1-72
11-1-72

8.71%
7.23%
4.82%
5.07%
4.05%
4.49%
5.06%

7.88%
7.64%
6.50%
6.69%
5.94%
6.15%
6.30%

6.0%
6.0%
5.5%
4.75%
4.5%
4.5%
4.5%

3.9%
5.0%
5.9%
6.0%
5.8%
5.6%
5.3%

aPrevious week average with date ending closest to indicated date.
bRate on date closest to indicated date.
Sources: Federal Reserve Bank of St. Louis website at http://research.sdouisfed.org/fred2/ and author’s
calculations.

unemployment problem. The economy was coming out of a recession that had
started in December 1969 and ended in November 1970. But unemployment,
which is usually a lagging indicator in the business cycle, continued to rise into
1971, as shown in the last column of Table 1. Evidence from the Nixon tapes,
recendy made available to researchers, clearly reveals that President Nixon pres­
sured Burns, both directly and indirectly through Office of Management and
Budget Director George Shultz, to engage in expansionary monetary policies prior
to the 1972 election. The relevant taped conversations used in this study usually
involved only two or three persons. While Nixon knew of the tapings, his remarks
are remarkably forthright, as though he had forgotten that the tapes were running.
The Nixon tapes used here begin in October 1971. Official transcripts do not exist
for the conversations reported below. I have done my best to transcribe the relevant
parts of conversations, but many of the recordings are of poor quality with garbled
words due to factors like background noises and simultaneous speaking. The
telephone conversations are very clear and offer some of the most interesting
conversations. The Nixon tapes are now accessible to all researchers at the National
Archives and Records Administration, College Park, Maryland.
Richard Nixon demanded and Arthur Burns supplied an expansionary mon­
etary policy and a growing economy in the run-up to the 1972 election. Table 2
provides information on the growth rates for M l, M2, and real GDP for 1970
through 1972. M l growth increased in each of the three years, starting at approx­
imately 4.5 percent growth in 1970 and ending at slighdy over 7.5 percent annu­
alized growth over the first half of 1972. M2 growth expanded even faster. Real
growth in the economy was accelerating, too. In 1972, real GDP grew 7.7 percent
and certainly helped Nixon in the election.
Table 1, showing some important interest rates, further supports the view that
the Fed became highly expansionary with its monetary policy in 1971 and 1972. The
discount rate started at 6.0 percent on January 1, 1970, and was lowered to




Burton A. Abram

179

Table 2

Growth Rates for M l, M2, and Real GDP

lirat GDP

Year

M l Growth

M2 Growth

growth rate

1970
1971
1972

4.51%
6.77%
7.56%a

7.36%
13.38%
11.65%a

33%

2.8%
7.7%

aGrowth rate for the first half of the year at an annualized rate.
Sources: Federal Reserve of St. Louis website at http://research.stlouisfed.org/fred2/ and author’s
calculations.

Table 3
Consumer Price Index Inflation Rate
Year

Inflation rate

1969
1970
1971
1972
1973
1974
1975

6.2%
5.3%
3.3% (wage and price controls initiated in August 1971)
3.6% (wage and price controls in effect for full year)
9.6% (wage and price controls removed in stages during 1973)
11.8%
6.7%

Sources: Federal Reserve of St. Louis website at http://research.stlouisfed.org/fred2/ and author’s
calculations.

4.5 percent over the next two years. The discount rate played a more important role
in monetary policy in 1971 than it did in recent times and usually was set below the
federal funds rate. Between January 1970 and July 1972, the federal funds rate
dropped by over 4 percentage points and the 10-year Treasury rate dropped by
2.6 percentage points. Additional evidence of an excessive monetary ease in 1971
and 1972 comes from inflation statistics for the years following the Burns-Nixon
pre-election monetary expansion, shown in Table 3. The Consumer Price Index
inflation rate was 9.6 percent in 1973, 11.8 percent in 1974, and 6.7 percent in
1975.
Thus, a monetary stimulus helped to boost the economy in time for the 1972
election, helping to deliver Nixon’s landslide victory. However, the excessive ag­
gregate demand stimulation prior to the election created serious problems for the
economy that took nearly a decade to resolve. The remaining question, which will
be discussed at the end of this paper, is whether Arthur Burns acceded to this
unwise policy because of the political pressure from Richard Nixon that is mani­
fested in the taped recordings or whether Burns independently reached the
conclusion that additional monetary stimulus was needed to get the economy back
on track.




180 Journal of Economic Perspectives

October 10, 1971 (Conversation No. 607-11)
Nixon, Burns, and an unknown person who does not speak are in the Oval
Office. Nixon, speaking to Burns, expresses his concern about the economy: “I
don’t want to go out of town fast,” he said, apparently referring to the possibility of
losing his upcoming reelection bid. Nixon tells Burns that “this will be the last
Conservative administration in Washington,” perhaps seeking to raise Burns’s
concerns that Nixon might lose the election. Nixon claims that the “liquidity
problem,” by which he seems to mean the problem of too much liquidity in the
system, is “just bullshit.” Burns states that monetary policy has produced “lots of
liquidity” in the banking sector, suggesting that there may be a problem of too
much liquidity. Burns discusses the various critics of the Fed's monetary policies,
whose views of those policies range from too tight to “gone wild.” Burns seems to
side with not needing much change in monetary policy: “I don't want to see interest
rates exploding on the next.. . [garbled]. I could lose control of my Board.” “Does
this mean we’re stuck then with a recession next year?” asks Nixon. “No, I predict
recovery,” replies Burns.
While Burns never explicitly defines “liquidity” in this conversation, he is
probably referring to the availability of loanable funds in the banking sector or
some monetary aggregate. Burns sees lots of liquidity in the banking sector and
fears a rapid rise in interest rates coming from a rise in inflationary expectations if
monetary policy is judged to have “gone wild.” Nixon, on the other hand, is
perturbed that liquidity isn’t growing fast enough. Over the previous year from
October 1, 1970, to October 1, 1971, the money supply had grown at a relatively
expansionary 6.7 percent, but the increase had been slower in the second half of
1971. The money supply had increased at a 4.25 annual rate over the previous two
months from August 1 to October 1, 1971.

November 10, 1971 (Conversation No. 14-10)
About twelve months before the 1972 election, Bums and Nixon have a private
telephone conversation. Burns tells Nixon, “Look, I wanted you to know that we are
reducing the discount rate today.” The Board had reduced the discount rate 25
basis points to 4.75 percent. Burns goes on to say that this move should help Nixon
in his forthcoming meeting with Congressman Wright Patman (D-Texas) to argue
against using fiscal policy to boost the economy. Burns warns that an expansionary
fiscal policy would cause interest rates to move up and “lenders will become more
cautious.”
At the time of this conversation, the federal funds rate had dropped to
4.93 percent from the rate of 5.32 percent a month earlier. Burns seems to be
advocating a mildly more expansionary monetary policy, while also indicating his
opinion that additional demand from fiscal policy was unwarranted, which suggests
that he feared over-stimulating the economy.




How Richard Nixon Pressured Arthur Bums: Evidencefrom the Nixon Tapes

181

December 10, 1971 (Conversation No. 16-82)
With fewer than eleven months until the election and four days until the next
meeting of the Federal Open Market Committee, Burns and Nixon have a private
telephone conversation. Burns states that “I wanted you to know that we lowered
the discount rate. .. got it down to 4.5 percent.” “Good, good, good,” replies
Nixon. Burns indicates that the announcement of the discount rate reduction
would be accompanied by the usual statement that it was done in order to bring the
rate into line with market conditions, but with an added statement that it was done
to “also further economic expansion.” Burns exclaims that he also lowered the rate
to “put them [the Federal Open Market Committee] on notice that through this
action that I want more aggressive steps taken by that committee on next Tuesday.”
“Great. Great,” replies Nixon. ‘You can lead 'em. You can lead ‘em. You always
have, now. Just kick ‘em in the rump a little.” Burns urges the president to do
something about the Pay Board and the Cost of Living Council, who, in his opinion,
are “holding back recovery” by squeezing businesses by restraining price increases
relative to wage increases. Burns adds adamantly: “Time is getting short. We want
to get this economy going.”
Burns is no longer reiterating his prediction of economic recovery made two
months earlier, but instead is now emphasizing that in the lead-up to the election,
it’s time to get the economy going. What changed his mind? The unemployment
rate rose to 6.0 percent, up from 5.8 percent the previous month. The increase in
the unemployment rate likely was viewed with some urgency by Nixon, by bringing
back memories of his 1960 defeat. There is evidence that George Shultz, director
of the Office of Management and Budget and confidante to President Nixon, spoke
directly to Burns. During these conversations, Shultz was likely to have voiced the
president’s strong desire for the Federal Reserve to pursue a more expansionary
policy (see Conversation 670-5 below).
The reference to the Pay Board and the Cost of Living Council refer to the
wage and price controls that were adopted in August 1971 and which began with a
90-day freeze on wages and prices. Burns had been a strong advocate of these
controls since May 1970. With these wage and price controls in place, Burns may
have felt a sense of freedom to worry less about inflation and more about getting
the economy going. Whatever the reason, monetary policy becomes increasingly
expansionary. The federal funds rate has dropped in the month before this
conversation to 4.59 percent from 4.93 percent, and the 10-year Treasury rate was
down to 6.34 percent from 7.06 percent.
The Minutes of Action and Memorandum of Discussion from the Federal Open
Market Committee (FOMC) meeting of December 14, 1971, confirms that a more
expansionary monetary policy was adopted by a unanimous vote, but with some
controversy (Board of Governors of the Federal Reserve System, 1971). George H.
Clay, President of the Kansas City Fed, voted “reluctantly” for the proposal. Board
member J. L. Robertson voted favorably, but with “considerable reluctance” and
“serious doubts.” Mr. Alfred Hayes, Vice Chairman of the FOMC and President of




182 Journal of Economic Perspectives

the New York Fed, reviewed economic conditions and concluded: “All of this
suggests the need for great caution in moving in the direction of any greater
monetary ease.” Mr. Hayes also voiced his “surprise” at the Board’s discount rate
reduction announced four days earlier. The minutes record: “Procedurally, he [Mr.
Hayes] had felt that there was a great deal to be said for taking advantage of today’s
meeting to exchange views on the discount rate before any action was taken” and
that Mr. Hayes “was inclined to recommend to his directors that the New York Bank
stay with its present discount rate until further clarification of the outlook.” While
the Board of Governors reviews and determines the discount rate, each of the
twelve Federal Reserve Banks “establishes” the rate. At the time of this FOMC
meeting, only four of the twelve regional Federal Reserve banks had implemented
the lower discount rates recommended by the Board, which suggests that there
were widespread doubts about the desirability of engaging in a more expansionary
monetary policy at this time.

December 24, 1971 (Conversation 17-5)
In a telephone conversation between Nixon and George Shultz, Nixon said to
Shultz, “Do you feel, as far as Arthur [Burns] and the money supply, we got that
about as far as we can turn it right now, have we? I mean as far as my influence on
him, that’s what Fm really asking.”
Shultz: ‘Yeah. Well, you know he said that he, that they voted to increase it [the
money supply].”
Nixon: “I know. And he said, ‘I . . What was his view, his words?”
Shultz: “‘And I’m on the line on that.’”
Nixon: “Well, you watch it and remind me. If I have to talk to him again, I’ll
do it. Next time I’ll just bring him in.”
Shultz: “I’m sure we’ll have to keep after him on it, but I think you hit it just
about right, the other day. He was heading for the Virgin Islands [Nixon laughs]
and wasn t going to do any good anyway to . .. because he wasn’t going back to his
Board at all.”
Nixon: “Right.”
Shultz: I think it was good to have that discussion about the procedures for
appointment [to the Board] so that he sees that he doesn’t have complete control.”
Nixon: “Well, he’sjust got to realize that it’s, uh, like it is with [Supreme Court
Chief Justice Warren] Burger . . . I’m not going to let him name his people.”
Later, at the end of the conversation Shultz concludes: “Well, it’s been quite a
year, Mr. President.”
In this conversation, Nixon and Shultz indicate that they have obtained a
commitment from Burns to increase the growth of the money supply. But they are
still planning to monitor him closely and “bring him in” if the money supply
doesn t grow as planned. Also, in a show of power, Nixon has made it clear to Burns
that any appointments to the Board are the president’s decision.




Burton A. Abram

1S3

February 14, 1972 (Conversation 670-5)
It is now less than nine months until the November 1972 election anti over two
months since Nixon and Burns have had a private (recorded) conversation. This
meeting in the Oval Office includes Nixon, John Ehrlichman (who was Assistant to
the President for Domestic Affairs), and George Shultz. Burns is not present.
George Shultz reports that the “money supply is beginning to move.” Shultz
adds, “The economy has to be good, strong expanding economy this year. So much
at stake on that.” Shultz implies having had other unrecorded communications with
Burns by stating: “He [Burns] recognizes that [the need for a strong, expanding
economy] and he needs to do everything that he can do.” Shultz exclaims: “Why
worry about interest rates going down? . . . We want low interest rates. What’s the
problem there? So, we don’t have a return flow of money from Europe? So what?
Keep the money supply going up!”
Shultz reports that Burns is quite optimistic about the economy. Nixon views
Burns’s optimism with suspicion: “Another defense he’s building up for not raising
the money supply. . . I’d rather he weren’t so optimistic . . Shultz and Nixon
conclude that Burns is not expansionary enough with monetary policy. Nixon
becomes very critical of Burns. “This is the last time I want to see him . . . [garbled]
or get the hell out of here. War is going to be declared if he doesn’t come around
some.” Nixon notes further that Burns is “talking to the Jewish press.”
Shultz recounts a story. At Burns’s swearing-in ceremony, Robert C. Holland,
Secretary of the Board of Governors, commented that Frederic V. Malek would
make a good addition to the Board. Shultz claims that Burns, upon hearing this
suggestion, “glowed because that is the guy he wants to see on the Board. He will
control him, just absolutely.” Shultz goes on to say that Burns also “would like to get
[Andrew] Brimmer off the Board.”
The emerging picture is that Nixon and Shultz fear that Burns is insufficiently
enthusiastic about expanding the money supply, despite Burns’s earlier explicit
statements. Indeed, Nixon seems paranoid concerning Burns’s loyalty. The eco­
nomic data supports the view that the Federal Reserve had already become decid­
edly more expansionary as Burns had promised, and that Shultz and Nixon’s
suspicions about Burns were unwarranted. The federal funds rate had dropped in
just over two months to 3.43 percent on a weekly average from its 4.59 percent
weekly average ending on December 10. The 10-year Treasury rate had fallen to
6.08 percent from its rate of 6.34 percent on December 10. The money supply was
now growing rapidly. Over the two months before this conversation, Ml grew an
annualized rate of 10 percent and M2 at an annualized rate of 12.8 percent.
Additional evidence of Nixon’s distrust of Burns comes from the fact that
Malek, apparently Burns’s top choice for the open Governor’s position on the
Board, was never nominated by Nixon. As Nixon had stated earlier (Conversation
17-5), he was not going to let Burns “name his people.” Brimmer left the Board in
1974 after serving eight and one-half years.




184 Journal of Economic Perspectives

February 14, 1972 (Conversation 670-7)
Nixon and Burns have a conversation that almost immediately follows the
conversation above. Ehrlichman is reportedly present, but never speaks.
Nixon: “You say it's coming along, and we had this six-month period of an
awful dry spell, and I guess I’m not sure we may have hurt us irreparably.”
Bums: “No.”
Nixon: “You don't think so?”
Bums: “Ah, no. How could it Mr. President?”
Nixon: “Well, as my memory. .. [garbled]. You know the problem with it;
you’ve always spoken of that time lag.”
Burns: “No, but you see, uh . .
Nixon: “I don’t much, I really don’t care what you do in April, but between
now and April. . . [garbled] that can hurt us . . . [garbled] in November.”
Burns later goes on to say that “banks are just loaded down looking for
customers,” an apparent reference to the available liquidity in the banking sector
due to the Fed’s expansionary monetary policy stance. Burns also reports that
Milton Friedman in his most recent paper concludes that “M2 is more important
than M l.” Nixon responds with “Hmm.”
Much of this conversation is garbled, but several points seem clear. Nixon is
aware of the “long and variable lags” associated with monetary policy. The “awful
dry spell” is a reference to the second half of 1971. While M l growth for all of 1971
was a relatively expansionary 6.8 percent, the annualized growth rate for the last six
months was only 4.6 percent. Nixon worried that the lag from this less-expansionary
monetary policy would slow down economic activity prior to the election. Nixon is
also letting Burns know that he is free to follow his own desired monetary policy
after April 1972. Actions taken in April, given the lag presumed to be associated
with monetary policy, wouldn’t have an effect on the economy until after the
November election.
The report by Burns that M2 might be more relevant than M l as a monetary
policy indicator is important. Prior to this time, most economists, and probably
Nixon and Shultz as well, were focusing on M l. As noted above, M2 growth was now
exploding in 1971. Had Nixon and Shultz relied more on M2 as an indicator, then
the White House distrust of Bums and the corresponding pressure on him to
expand the money supply might have been reduced.

September 29, 1972 (Conversation No. 788-5)
In their last recorded private conversation between Nixon and Bums prior to
the November election, Bums reports on his recent IMF meeting where U.S.
economic successes were widely heralded. In Burns’ words, “We are doing much
better than they are [other IMF members] . . . We are the hope of the world . . . If
we succeed, it’s easier for them.” It is apparent that the two men are confident of




How Richard, Nixon Pressured Arthur Bums: Evidencefrom the Nixon Tapes

185

Nixon s reelection as Bums’ international travel schedule following the election is
discussed. Importantly, no mention of monetary policy occurs. The unemployment
rate, a lagging indicator, had dropped from its February 1,1972, level of 5.7 percent
to 5.3 percent at the time of this conversation. A rising unemployment rate had
hurt Nixon in 1960, but would not do so in 1972. The election was only five weeks
away. Nixon was set for a landslide victory.

Discussion
The fact that President Nixon pressured Arthur Burns to run an expansionary
monetary policy in the run-up to the 1972 election is well-known (for example,
Tufte, 1978, pp. 45-50). As another example John Ehrlichman (1982, pp. 248-49)
describes a meeting between Nixon and Burns on October 23, 1969, just after
Burns’s nomination to the Fed had been announced.
“My relations with the Fed,” Nixon said, “will be different than they were
with [previous Federal Reserve chairman] Bill Martin there. He was always six
months too late doing anything. I’m counting on you, Arthur, to keep us out
of a recession.”
‘Yes, Mr. President,” Burns said, lighting his pipe. “I don’t like to be late.”
Nixon continued. “The Fed and the money supply are more important
than anything the Bureau of the Budget does.”
Burns nodded.
“Arthur, I want you to come over and see me privately anytime ..
“Thank you, Mr. President,” Burns said.
“I know there’s the myth of the autonomous Fed. . Nixon barked a
quick laugh. . . and when you go up for confirmation some Senator may ask
you about your friendship with the President. Appearances are going to be
important, so you can call Ehrlichman to get messages to me, and he’ll call
you.”
In his memoir

A fter the Fall ,

William Safire (1975, pp. 491-95), who was a

speechwriter for Nixon during this time, recounts how the Nixon administration
kept up a steady stream of anonymous leaks to pressure Burns, including floating
one proposal to expand the size of the Federal Reserve (so that Nixon could
appoint a majority of the new members) and another proposal to give the White
House more control over the Fed, while planting a false story that Burns was
requesting a large pay raise, when in fact Burns had suggested taking a pay cut. The
taped conversations reported here illustrate further how political pressure is
exerted at high levels.
Numerous researchers have searched for evidence of a political monetary
cycle: that is, the deliberate manipulation of monetary policy to stimulate the
economy prior to an important election (Beck, 1987; Allen and McCrickard, 1991,




186 Journal of Economic Perspectives

Leertouwer and Maier, 2001; Price, 1997). Most empirical studies of the behavior
of the Federal Reserve prior to presidential elections have not uncovered evidence
of a political monetary cycle, which has supported the view that the Fed is inde­
pendent. However, Abrams and Iossifov (forthcoming) suggest that a political
monetary cycle does exist in the United States, but only when the president and the
chairman of the Federal Reserve share party allegiance— and Burns was very much
a Republican party loyalist.
Without invoking political pressure, the surge of expansionary monetary policy
leading up to the 1972 election seems hard to explain. After all, Arthur Burns knew
better than to run a heavily expansive monetary policy after the recession had
ended in November 1970 and in an already-inflationary environment. Burns wrote
in his 1957 book Prosperity without Inflation (p. 15), “There can be no danger of a
galloping or runaway inflation in the reckonable future unless our monetary and
fiscal policies become utterly reckless. I see no reason for expecting this to happen.
The money supply has been under tight control since 1951. It increased a mere
4 percent between the end of 1954 and the end of 1956.” Burns (pp. 21-22)
continued: “They [great numbers of citizens] know that even a gradual inflation
distorts the calculation of profits and therefore can impair the growth of business
on which they depend for their livelihood or advancement. They know that,
without giving notice, a gradual inflation may stop being gradual, gather momen­
tum, and eventually lead to depression and unemployment Most importantly of all,
they know that inflation is not an act of God, and they believe that a mature people
should be able to conduct their private and public affairs so as to avoid depression
and inflation.”
It is hard to understand how a man of Arthur Burns’s experience, intellect, and
political know-how could be pressured into abandoning his better judgment. An
alternative explanation of Burns’s actions holds that even though Nixon was
suspicious and hectoring and paranoid toward Bums, Burns was nonetheless
setting monetary policy according to his best judgment in a tumultuous macroeco­
nomic time.
The recession that began in December 1969 and ended in November 1970 had
done little to restrain inflation (as shown earlier in Table S). In August 1971, Burns
testified before Congress (as quoted in Romer and Romer, 2004, p. 140): “A year
or two ago it was generally expected that extensive slack in resource use, such as we
have been experiencing, would lead to significant moderation in the inflationary
spiral. This has not happened, either here or abroad. The rules of economics are
not working in quite the way they used to.” De Long (1997) writes: “Thus there is
a very real sense in which monetary policy did not contain inflation in the early
1970s because it was not tried. And it was not tried because the Chairman of the
Federal Reserve did not believe it would work.”
As an alternative approach to monetary restraint to combat inflation, Bums had
started to advocate in May 1970 an “incomes policy”— that is, a policy of wage and price
controls. Bums’s advocacy of this policy shows that he retained considerable political
independence, since such a policy was at first strongly opposed by Nixon’s team at the




Burton A. Abram

1S7

Council of Economic Advisers, headed by Herb Stein, and also originally opposed by
Nixon (De Long, 1997). In effect, Bums turned over management of inflation to wage
and price controls, at least for a time after they were first enacted in August 1971, which
left him free to focus monetary policy on reducing unemployment. Further, many
reputable economists argued that the unemployment rate, which was hovering around
6 percent, indicated that there was considerable slack in the economy (DeLong, 1997).
A more sympathetic interpretation of Bums’ push for monetary ease in 1971-72 is that,
with wage and price controls restraining both prices and inflationary expectations, he
believed that monetary stimulus could return the economy to full employment with
litde inflationary cost.
Whether Burns responded to political pressure or out of personal economic
convictions to return the economy quickly to full employment may never be
definitively determined. Yet, one wonders, had there been no political connection
between Burns and Nixon, would Burns have been so eager to run an expansionary
monetary policy in late 1971 and into 1972? Without the political connection,
might Burns instead have sided with his Vice Chairman Alfred Hayes in arguing
against greater monetary ease?
Regardless of the ultimate source of Arthur Burns’s motivation, his actions as
Federal Reserve chair helped to trigger an extremely costly inflationary boom-bust
cycle. By Election Day in 1972, the Fed had already started its monetary tightening.
The federal funds rate had risen from 4.49 percent in July 1972 to 5.06 percent by
Election Day. As Nixon had told Burns in February 1972, “I really don’t care what
you do in [or after] April.” One year after the election, in November 1973, the
Federal Reserve had hit the monetary policy brakes in earnest. In the year since the
November 1972 election, the discount rate had been increased from 4.5 percent in
July 1972 to 7.5 percent. The federal funds rate, which had been 4.49 percent in
July 1972, jumped to 9.71 percent. But the civilian unemployment rate, as usual a
lagging indicator, continued to plummet, falling to 4.8 percent in November 1973.
The Nixon-Bums boom-bust cycle was underway.
The eventual elimination of wage and price controls in 1973 and the exces­
sively aggressive monetary policy of 1971-72 produced an inflationary boom. The
inflation rate measured by the change in the Consumer Price Index for 1973 was
9.6 percent (as shown in Table 3). In response to the post-election Federal Reserve
tightening, the economy swung into a recession in November 1973, one year after
the election. The recession lasted until March 1975, but even this recession was
insufficient to stop inflationary pressures. The inflation rate for 1975 was
6.7 percent— higher than the rate that precipitated the earlier wage and price
controls. It was not until Paul Volcker became chairman of the Federal Reserve in
1979 and the 1980-82 recessions occurred that inflation was finally brought under
control. During those recessions, the federal funds rate hit a record 15.61 percent
(weekly average) and the unemployment rate rose to over 10 percent for ten
months. Inflation was finally defeated, but at huge economic cost.
This episode of Richard Nixon and Arthur Burns in the run*up to the 1972
election illustrates the danger of permitting too much discretion in the implemen­




188 Journal of Economic Perspectives

tation of monetary policy. It is time to consider an explicit rule for monetary policy,
whether that rule targets only inflation or some mixture of inflation and output or
unemployment. Monetary policy is too important to be left to the discretion of
central bankers, who may be subject to errors in economic judgment or to manip­
ulation by politicians.
■

The author extends thanks f o r helpful comments to J oa n n e Abram s , D a v e Black , James

Butkiewicz , Farley Grubb , Saul H o ffm a n , the editors o f this jou rn a l, a n d to m an a gin g editor
Tim othy Taylor .

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