Rising inflation and interest rates, although still low by historical standards, are starting to get the attention of economists. It is becoming harder and harder to find any who don't think that the Federal Reserve needs to tighten monetary policy soon. However, Fed officials continue to say that unemployment, low capacity utilization and strong productivity growth argue against tightening for now. They may be right. But one cannot help but suspect that politics is also playing a role.
The classic case of the Fed subordinating good policy to politics was in 1972. Richard Nixon was acutely aware that Fed tightening in late 1959 brought on a recession that began in April 1960. As the nominee of the incumbent party, Nixon took the blame for slow growth. In his book, "Six Crises," he complained bitterly that the Fed had, in effect, thrown the election to John F. Kennedy, whose most potent campaign pledge was that he would get the economy moving again.
When Nixon became president in 1968, he vowed that he would not let the Fed screw him again. At his earliest opportunity, he appointed a trusted aide, Arthur Burns, to the chairmanship of the Federal Reserve. His job was to make sure that money and credit stayed easy through the 1972 election.
However, Nixon did not want to take any chances. He ordered White House staffers to keep an eye on Burns and push him to err on the side of monetary ease. According to William Safire, a White House aide at the time, in his book, "Before the Fall," when Burns resisted pressure to guarantee full employment in time for the election, negative press stories about Burns were planted in newspapers. A plan to dilute the Federal Reserve Board's power was also floated. In his book, "Secrets of the Temple," William Greider says that the tactics were crude, but successful.
The problem was inflation. It has jumped to 6.2 percent in 1969 after having been in the 1 percent to 2 percent range for many years. In essence, the inflation rate had tripled in a very short period of time. The recession, which began in December 1969 and ended in November 1970, brought it down only very little to 5.6 percent in 1970.
Under normal circumstances, the Fed would have tightened monetary policy to bring down inflation. But Nixon wanted to keep monetary policy loose in order to make sure that the economy was robust going into the election. This led to the imposition of wage and price controls in August 1971. While everyone knew that they would not work for long, they would reduce inflation enough to keep monetary policy expansive through November 1972, which was all that mattered.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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