Amity R. Shlaes presents “On the Legacy of American economist and former Chair of the US Federal Reserve, Arthur Burns, during the Keynesian Revolution” at the American Institute for Economic Research Annual Meeting of Voting Members 2019.
Current Chair of the Federal Reserve, Jerome Powell, famously claimed Marriner S. Eccles “had created a central bank able to make decisions in the long-term best interest of the economy without regard to political pressure.”
The role of the Federal Reserve has always been to be responsible and independent of political influence. Yet, there is no better example of the wrongness of this belief of independence than of former Chair of the Federal Reserve, Arthur Burns, during his term from 1970-1978. Originally a “loud and public enemy of inflation” and a staunch advocate of preserving the gold standard, Burns had been influential in talks with the presidential candidate, Richard Nixon, in 1968.
Burns would convincingly warn Nixon against Universal Guaranteed Income advocated by Daniel Patrick Moynihan and the devastating consequence it would have in forcing millions of more people onto welfare. However, once elected, Burns was no longer getting access to President Nixon. Despite this blow of disloyalty from the President and Burns’ desire to have President Nixon’s favor, Burns would not reduce interest rates. Pressure grew between the Administration and Burns as President Nixon and Treasury Secretary, John Connally, wanted to deliver a package of wage and price controls, tariffs and a commitment to closing the gold window. Burns was torn between his principles of sound policy and his desire to win the President’s affection.
In August 1971, President Nixon invited Burns to Camp David where the President treated Burns to the flattery he craved. In turn, Burns traded his policy for his career and the affections of the President. As a consequence, the rough storm of the 1970s US economy saw mortgage interest rates over 15%, the Federal funds rate at 22.4% and joblessness over 5%. Arthur Burns proved through his compromise of policy for Presidential favor that there is no independence and responsibility in the Federal Reserve when pressured by the Commander-in-Chief and that the “political system” will always win out.
Burns himself once said, “inflation might be denied for a moment but in the end, the problems of inflation will return to harm us.” Burns’ need for goodwill with President Nixon was his Achilles’ Heel and no one would understand firsthand the problems inflationary pressures would cause more than Burns in his role as Chair of the Federal Reserve.