A History of the Federal Reserve, Volume 2 (113 page)

Burns was a distinguished economist. His major work on business cycles with Wesley C. Mitchell was a statistical and atheoretical study of the interrelation of numerous economic time series to detect patterns of cyclical coherence. He told Edwin Nourse that he was neither a monetarist nor a Keynesian (Wells, 1994, 25). He suffered from the arrogance of the distinguished academic; he knew what was right. He had little patience with interpretations that disagreed with his, but he was willing to change his long-standing positions when it served his purpose. The prime example was his advocacy of price and wage guidelines, and his support of price and wage controls, despite his earlier writings and speeches opposing such policies and explaining why they would not work.

This was not his only error. He failed to control inflation. Of the ninetyeight months that he served as chairman, the measured twelve-month average rate of consumer price change fell below 3 percent in only three of them, all months in which measurement was distorted by price controls. A year later consumer prices rose more than 7 percent on their way to a maximum of 11.5 percent during his term. He left the System with the consumer price level rising at 6.3 percent, about where it was when he began. Part of the blame for increased rates of price change came from oil price increases and dollar devaluation that were not under his control.

Burns’s aides and senior officials describe him as a dominant chairman who left no doubt about who was in control (Guenther, 2001, 12). But he was open to discussion. He would, however, disagree with other members and correct them when he thought they were wrong. That was a marked change from the Martin era (Brimmer, 2002, 17).

One of his contributions at the Federal Reserve was improved data. As an atheoretical economist, he relied on his interpretation of a large number of data series. Burns’s failure as chairman came despite his understanding of economics and business cycles. He accepted the chairmanship of the Committee on Interest and Dividends, during the price control period, aware of the conflict of interest with his responsibility for controlling money growth and inflation. And he acquiesced in the view that the public would not accept a deep recession if required to end inflation. This was a political decision that led to the choices that sustained and increased inflation. Burns was unwilling to use the independence of the Federal Reserve
for its intended purpose, refusing to finance government deficit spending with additional money growth to avoid inflation.
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Martin worked with the administration to coordinate monetary and fiscal policy, and he did not become deeply involved in administration decisions outside this sphere. Burns returned to the Eccles tradition of advising President Nixon on all phases of economic policy, especially macroeconomic policy. “He saw the Fed’s role as one of innovator, supporter, and pleader for good macro policy” (Maisel, 1973, 121). He participated in the deliberations at Camp David in August 1971, when the administration floated the dollar, imposed a surtax on exports, revised the tax system, and imposed price and wage controls. Burns was a principal advocate of controls, and he became an adviser to the Cost of Living Council, which administered the control program.

Although Burns spent considerable time advising the president, he resented administration advice about monetary policy.
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He received such advice regularly during the Nixon years, but not during Gerald Ford’s presidency (1974–76). In Burns’s words: “Mr. Nixon tried to interfere with the Federal Reserve both in ways that were fair and in ways that by almost any standard, were unfair. Mr. Ford on the other hand was truly angelic. I met with President Ford frequently, alone in the privacy of his office. . . . He never even remotely intimated what the Federal Reserve should be doing. . . . Mr. Carter had a good record but not a perfect one” (Burns, 1988, 136–37).

Burns’s chairmanship brought major procedural changes. Burns was autocratic, not collegial as Martin had been. Often Martin achieved agreement and influence by speaking last and stating a consensus. Burns often spoke first to focus discussion on his proposal. He eliminated the recitation by the presidents of regional conditions (memo, Burns to FOMC, Board Records, March 2, 1970). Also, he reduced the number of meetings from seventeen to twelve or thirteen, and used the Federal Bureau of Investigation to investigate leaks to the press by the members or the staff. Maisel, who served during Burns’s term as chairman described him as “not believing that anyone who disagreed could be right” (Maisel, 2003). At times, he embarrassed members by challenging their statements.
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In
short, he had the right personality to make large errors. The staff worked for the chairman, so he was able to control some of the information available to the other members.

149. Burns was sworn in as chairman in the White House. President Nixon remarked that the Federal Reserve was an independent agency, but he hoped the chairman would independently decide to act as his president suggested.

150. When the president’s Domestic Policy Adviser, John Ehrlichman, came to Burns’s office to discuss monetary policy, Burns phoned the president to tell him that if he came again he “would physically throw him out” (Brunner, 2002, 24).

151. Jerry Jordan, senior vice president at St. Louis from 1972 to 1975, described Burns at FOMC meetings. “His style at the table was sometimes combative. He would question
people . . . interrupt their prepared remarks, and throw them off balance sometimes by asking questions they were unprepared for. . . . After a statement was made by one of the presidents or governors, he would pointedly take issue with them and say I don’t recall that or I don’t agree with that” (Jordan, 2002).

Burns recognized that short-term economic control could not be exact, but he could not accept the loose arrangement existing between New York and Washington. He wanted better control of policy actions. To improve operations, he favored more research on monetary policy and more precise instructions to the manager. Tone and feel ended forever as an instruction soon after Burns arrived. The manager lost much of his previous autonomy, and New York lost more of its special position.
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The Phillips curve relating the inflation rate negatively to the unemployment rate was part of mainstream economic thought at the time and later. Some thought of the tradeoff as a long-run effect. Others, following Friedman (1968b), believed any tradeoff was temporary. Burns and the Nixon Council accepted Friedman’s analysis, but they were not at pains to make that clear. When making the case for wage-price controls or guidelines, Burns claimed that reducing inflation would require a socially (or politically) unacceptable short-term increase in unemployment. In his confirmation hearings, however, he explicitly rejected the tradeoff (Senate Committee on Banking and Currency, 1969, 23–24).

Chairman [Proxmire]: Let me ask you about your views on the Phillips curve . . .

Burns: I think even for the short-run the Phillips curve can be changed. I think we ought to be able in the years ahead to pursue when we need to a restrictive financial policy without significantly increasing unemployment.

152. Maisel’s diary (February 10, 1970, 16–18) describes Burns’s first week. He wanted to reduce Board meetings from daily to three times a week. He wanted to end the procedure of having each person make a statement at FOMC. Even more contentious was his decision to shift representation at the Bank for International Settlements (BIS) from New York to the Board. He chose Governor Dewey Daane as the System’s representative, the first time that the representative had not come from the New York bank in the forty years since the BIS started. And he indicated that he was “concerned with the New York travel budget as well as with other budgets of the System” (Maisel diary, February 12, 1970, 20). Burns recognized the contentious aspect of these issues by discussing them only in executive session of the Board.

After Burns presided over his second FOMC meeting, Maisel wrote: “As in the Board meetings, Chairman Burns had taken a more aggressive position in shaping the debate . . . He said that the Committee would have to vote his position up or down” (Maisel diary, March 10, 1970, 33).

Here Burns’s belief seems close to Okun’s position at the time—that the cost of reducing inflation would be small. Either he ignored heightened expectations of inflation or he believed these would reverse at low cost.
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And he did not mention that the 4 percent unemployment rate at which they aimed was below the rate needed to stabilize inflation.

Four reserve banks changed presidents in the next nineteen months. Karl Bopp, a career Federal Reserve official, retired as president of the Philadelphia bank at the end of February 1970.
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W. Braddock Hickman (Cleveland) died in late November 1970, and Hugh Galusha (Minneapolis) died in late January 1971. Charles J. Scanlon (Chicago) retired on April 15, 1970. Burns did not leave the choice of presidents entirely to bank committees, as had been customary. He intervened frequently. The successors at the four banks are shown in Table 4.7.

Eastburn and McLaury were economists. Winn was dean of the Wharton School at the University of Pennsylvania. Mayo served as director of the Bureau of the Budget at the start of the Nixon administration. He was a protégé of David Kennedy, Nixon’s first Treasury Secretary. According to Safire (1975), Nixon did not like working with him and wanted him out. He left when the Budget Bureau was reorganized as the Office of Management and Budget with George P. Shultz as director. Shultz was also
Secretary of Labor at the start of the administration, later Secretary of the Treasury, and in the Reagan administration Secretary of State.
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153. Hetzel (1998) develops Burns’s views in more detail.

154. Bopp’s statement at his last meeting included a strong critique of the System’s understanding. “Mr. Bopp believed that the System should allocate significant resources to developing knowledge and comprehension of the linkages among financial and real economic variables. As of today, however, its ignorance was colossal” (FOMC Minutes, February 10, 1970, 54). This is a remarkable indictment of an institution in its fifty-seventh year of operation.

Maisel briefed Burns on the inchoate state of policymaking. “There was no good definition of monetary policy now. . . . [A] majority really didn’t have a clear view . . . of the relationship [of monetary policy] to actions in the Committee room” (Maisel diary, January 15, 1970, 8). Maisel also told him about the work of the committee on the Directive and explained difficulties with the staff of the Board’s Legal Division. The division presented the Board with a narrow interpretation of the law instead of addressing the entire regulatory problem and presenting pros and cons of alternative decisions to the Board, (ibid., January 15, 1970, 7; January 20, 1970, 9–10).

Targets
for
Money
and
Bank
Credit

At his first meeting as chairman of FOMC, Burns instructed the members on the need for longer-range planning. This attempt to look over a longer horizon recognized that monetary policy actions operated with a lag. Controlling inflation required the FOMC to gear policy changes to the future conditions they foresaw, “to attend to today’s problems and to those of the future as best they could be discerned” (Burns statement, FOMC Minutes, February 10, 1970, 3). “[Burns’s] own thinking on monetary policy . . . tended to focus more on bank credit than on the money supply because the former was subject to closer control by the System” (ibid., 92). In his first year, he told the FOMC members several times that policy should not change frequently.

Maisel (1973, 169–78) reports some of the reasons that, at the time, led many FOMC members to oppose using quantitative targets or to make the instructions to the manager more precise. He discussed six principal objections but did not endorse them.

(1) Monetary policymaking is an art rather than a science; precise instructions crowd out the manager’s judgment of events.

(2) Closely related is the belief that knowledge of monetary transmission is too uncertain to provide reliable guidance.

(3) “Attempts to quantify monetary decision making will diminish the intuitive skills and judgment necessary for the best decisions” (ibid., 170–71).

(4) Data are imprecise and subject to revision. The FOMC and the manager may learn after the fact that money or credit growth was faster or slower than reported at the time.

(5) Quantification encourages neglect of useful non-quantitative information. “An experienced observer can often spot movements and dangers before they appear in the statistics” (ibid., 173).

(6) Public statements become commitments. If the Federal Reserve announced a target, it would be reluctant to change if it made an error.
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155. Shultz held four cabinet positions, equaled only by Eliot Richardson in U.S. history.

156 Maisel (1973, 173–75) presented the arguments used against announced objectives and policy changes. By the 1990s, influenced by the literature on credibility, many central
banks adopted explicit inflation targets. The Federal Reserve did not, but in 1994 it began announcing interest rate targets. None of the concerns about market reaction to announcements proved correct.