Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Thursday, November 23, 2006

Federal Reserve Independence

There are more Republicans angry at Alan Greenspan for not paying due respect to the political fortunes of George H.W. Bush and for not disrupting Clinton's deficit-reduction agenda than there are Democrats mad at Alan Greenspan for failing to publicly oppose George W. Bush's tax cuts. Nobody thinks that Paul Volcker trimmed Fed policy to serve anybody's political interest. And William McChesney Martin did quite a good job of resisting political pressures.

It's always seemed to me that this episode tells us much more about Nixon (and quite possibly Burns) than about the structure of relationships between the Fed and the White House:

Fedgate | Free exchange | Economist.com: "Just kick 'em in the rump a little." One cannot imagine Ben Bernanke, in his tan socks, resorting to such measures in today's Federal Reserve meetings. But a bit of rump-kicking is exactly what Richard Nixon told the supposedly independent Fed chairman, Arthur Burns, to do in December 1971, according to recently released recordings from the Nixon tapes.

Burton Abrams, an economist at the University of Delaware, writes about the tapes in the latest issue of the Journal of Economic Perspectives.... In December 1971, Nixon was less than a year from re-election. Unemployment had risen to 6% from less than 4% a couple of years earlier. Nixon blamed just such a soft patch (rather than the famous sweaty patch on his chin during the TV debates) for his defeat to JFK in 1960, and he wanted the Fed to do everything it could to avoid a repeat.... Sad to say, Burns, it appears from these recordings, did rather a lot to oblige.

At the December meeting, for example, the Fed opted for a more expansionary monetary policy, even after a cut in rates announced a few days before. Burns's footprints are evident in the minutes of their discussions. The President of the Kansas City Fed, for example, voted for the policy "reluctantly"; another board member supported it with "considerable reluctance"; the President of the New York Fed noted his surprise at the cut announced four days earlier, and urged "great caution" before allowing still "greater monetary ease". That caution turned out to be justified....

Nixon could be a persuasive man. He told Shultz in a taped Oval office meeting that "war is going to be declared if he [Burns] doesn't come around some." The skirmishes that did take place were covert and dirty. Mr Abrams cites the memoir of Nixon's speechwriter [William Safire], who claims the administration sought to undermine Burns by planting false stories about him in the press. Burns, they said, had asked for a big pay rise at a time when the rest of the country was labouring under income controls. In fact, Burns had offered to take a pay cut....

"I know there's the myth of the autonomous Fed," Nixon is quoted as saying in the book Witness to Power.

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