A History of the Federal Reserve, Volume 2 (21 page)

A week later, Paul McCracken wrote to President Nixon warning about recent slow growth in money. His memo suggested that real growth should reach 7 to 8 percent in 1972 to reduce the unemployment rate. Lower unemployment required 8 to 10 percent nominal GNP growth and 7 to 8 percent money growth (memo, McCracken to the president, Nixon papers, WHCF, Box 43, October 27, 1971).
⁵²

Nixon
and
Burns

Following the FOMC meeting, Burns met with the president for more than two hours. Paul McCracken, George Shultz, John Connally, and others were present. When the discussion turned to monetary policy, Burns repeated the views he expressed at the FOMC meeting. If he pushed interest rates down now to increase money growth, they would have the “unsavory task of just watching them go up next year. . . . What I would like to do is prevent as much as I can an increase in interest rates next year” (White House tapes, tape 1327, October 28, 1971).

The president later responded by recalling his experience in 1960, when Burns warned in February about tight Federal Reserve policy. In the cabinet meeting, President Eisenhower sided with those who wanted a cautious policy because they feared inflation. President Nixon then explained his priority: “I don’t want the same mistake again . . . I don’t want to have a runaway inflation . . . [but many elections] have been lost on the issue of unemployment. None has been lost on the issue of inflation. . . . Unemployment is always a bigger issue than inflation” (ibid., tape 1328).

On November 9, the Board discussed a 0.25 percentage point reduction in the discount rate to 4.75 percent and a reduction in stock market margin requirements from 65 to 55 percentage points. The latter reflected con
cerns about falling stock prices. At the time of the meeting, the principal stock price indexes had fallen below their August 15 level.

52. Burns’s relations with the president continued to fluctuate over a wide range. The president told Burns at one point that he wanted his input on Federal Reserve appointments, so that Burns would have support for his proposals. William Sherrill resigned to accept the presidency of a bank in November and left in December, but Burns and others knew early in the fall that he would leave. Burns found a candidate and recommended him to the president as a person who would be “of inestimable assistance to me in the effective discharge of the Board’s functions and responsibilities” (Burns to the president, Burns papers, Box B_N1, October 8, 1971). By the time the position became open, the president was irritated and anxious about slow monetary growth. He did not take Burns’s candidate but instead appointed John E. Sheehan on December 23, 1971. Sheehan remained less than 3.5 years. He was a businessman influenced by John Connally.

Market rates had fallen relative to the federal funds rate and the discount rate. Board members expressed concern about differences in forecast for 1972. The staff and most economists were relatively optimistic; businessmen had become relatively pessimistic.

The Board approved the reduction in the discount rate but delayed the reduction in margin requirements. A main reason for delay was that several members argued against actions to influence stock prices or those perceived as such. By December 3, uncertainty about the international system had declined. Stock prices rose, and the Board reduced the margin requirement.
⁵³

Nixon and Burns met frequently both before and after the OctoberNovember meetings. In the months before the Camp David meeting, the president was strongly against controls that Burns thought necessary. The president wanted faster money growth, but Burns warned him several times that if interest rates were pushed down in 1971, they would likely rise in 1972.
⁵⁴

The relationship was not easy. On March 19, 1971, the two met alone. Burns complained about leaks to the press criticizing the Federal Reserve and him. The president again expressed his unhappiness about Burns’s calls for wage-price policy. But Burns cited his loyalty to Nixon and service to the country.

I am a dedicated man to serve the health and strength of our national economy. And I have done everything in my power, as I see it, to help you as President, your reputation and standing in American life and history. (White House tapes, conversation 470-18, tape 371, March 19, 1971)

Nixon mentioned the importance of lower inflation.

In April and May, the president was most concerned about the dollar outflow and the Germans’ decision to stop buying dollars. At a May 4 meeting with the president, McCracken, Volcker, Connally, and Burns asked the
president to publicly urge Germany not to float its currency. The president gave a political reason: “They’re going to blame us, and our political opponents at home are going to blame us” (ibid., conversation 490-24, tape 556, May 4, 1971). Connally wanted the float. He spoke of devaluation. “Even a twenty percent devaluation may not help us through 1972. You might have another crisis next year” (ibid.).

53. As usual, Governor Robertson objected that margin requirement legislation directed the use to control of stock market credit, not prices. There was no evidence of credit expansion for carrying shares. He voted for the change, however. No one else expressed concern about the regulatory change.

54. As early as February 19, 1971, Nixon explained his reasons for opposing price controls and urged lower interest rates (White House tapes, conversation 454-4, tape 271, February 19, 1971). Two weeks later, Burns urged the president not to give so much attention to the money supply. On June 7 and 8, the president again urged lower interest rates and stressed the importance of housing for reducing unemployment (ibid., conversations 59-4 and 60-1, June 7 and
8, 1971).

By mid-June, public opinion surveys showed the public concerned as much about inflation as about unemployment. In May and June, consumer prices rose 6 to 7 percent at annual rates. President Nixon asked: “What do we do to make people think that we care? We need to convince people that we’re trying.” Burns’s response was a wage-price freeze from early in 1972 to July or August of that year. Then the president added: “You know I care more about unemployment than inflation. You know that . . . . ” Then, probably reflecting briefing by his advisers, he added: “But I think that perhaps the best way of getting a hold on the unemployment problem is to subdue the inflationary expectations” (ibid., conversation 519-11, tape 750, June 14, 1971).

Two weeks later, the president was starting to consider some policy changes. Burns opposed any increase in spending and tax reduction. Then he brought up the wage-price freeze, saying he would not do it, but he would jawbone price and wage increases. “I have to do something with regard to foreign imports. I think Congress is going to pass a quota bill and if I was sitting there I’d vote for it . . .

“Connally: I would too” (ibid., conversation 531-16, tapes 808–9, June 28, 1971).

Nixon and Connally then criticized Burns for not supporting administration policy. Burns defended himself and predicted that events would drive the administration to adopt an incomes policy. He repeated that he supported the president. “No one has tried harder to help you” (ibid.).

On October 28, the president discussed the negotiations with the Europeans about the dollar. They mentioned floating rates, but the IMF opposed. Connally’s main concern was Japanese trade barriers. Discussion then turned to domestic policy.

Burns said that if the Federal Reserve pushed interest rates down, he would have the “unsavory task of just watching them go up next year. . . . [W]hat I would like to do is prevent as much as I can an increase in interest rates next year.” The conversation ended with the president reminding Burns about 1960 and the loss of the election to Kennedy over rising unemployment. “By February, we’re past the point of no return . . . let’s make sure we make our decisions” (ibid., conversation 606-2, tapes 1327–28, October 28, 1971).

The president then addressed Burns. “Maybe we’re talking about an entirely different subject than was the case when McChesney Martin was running the Board.” Burns replied: “I think we are” (ibid.).

Nixon
and
Burns
in
1972

The president wrote to Burns on November 4 about an article in the
New
York
Times
about slow money growth. Then he added:

I have been flooded with calls . . . from people in Wall Street for whose judgments I have the greatest respect with regard to the Fed’s policy of holding the money supply down for too long a period. . . .

I do want you to know that there is nothing I feel stronger on than this money supply problem and that the crescendo of complaints that I have been receiving, not only from the New York financial community but from other places . . . expressing the same concern convinces me that you owe it to yourself, as well as to our goal of getting the economy to move smartly up in the months ahead, to re-evaluate your decision with regard to holding the money supply down and to take some action to move it up” (Burns papers, Box B_N1, November 4, 1971).

At its November meeting, the FOMC voted unanimously for “somewhat greater growth in monetary and credit aggregates over the months ahead” (Annual Report, 1971, 194). The staff remained optimistic about growth and employment, but Mitchell, Maisel, and Burns were skeptical. The forecast ended with a 5.3 percent unemployment rate in fourth quarter 1972 “which he [Burns] felt was still too high and unsatisfactory” (Maisel diary, November 17, 1971, 7). (Like others, Burns believed that 4 percent was full employment.) He added that slow money growth convinced some that Federal Reserve policy was too tight. “He thought for this reason that we ought to start getting some expansion” (ibid.). Morris (Boston), Mitchell, Maisel, Kimbrel (Atlanta), and Robertson joined Burns in advocating more expansive policy. Hayes (New York), Mayo (Chicago), Clay (Kansas City), and Daane wanted either no change or less aggressive policy action. Following the meeting, the federal funds rate fell.

Burns had no problem finding support in the FOMC for more expansive policy. There was not unanimity, but he had sufficient support for increased money growth to get agreement.

The president was not satisfied. At a meeting with the president, Burns complained about public pressure (White House tapes, tape 1480, November 24, 1971). He was sure he knew the source. He gave the president the commitment he wanted.

Burns: There is a campaign on to write me letters to urge more expansion. I will make good on my promises.

Nixon: I have no doubt about it. I just want to be sure I’m not misreading you.

Burns: Burns does not forget.

Nixon: I’ll keep them off your back.
⁵⁵

At the November 14 FOMC meeting, reports and staff continued to express optimism, but the unemployment rate did not change. The staff expected slow money growth to end; their forecast called for 7 and 8 percent growth for M
₁
and M
₂
in first quarter 1972.

Maisel described the debate on current policy as “one of the most protracted that there had been” and “the greatest split there had ever been between the presidents and the Board” (diary, December 15, 1971, 10–11). Burns told the members that “the System was getting a good deal of criticism on the fear that the monetary policy appeared to be inconsistent with the New Economic Policy. If one used the aggregates as a measure of monetary policy, he said that people in the administration, perhaps the President too [sic], had raised questions with him as to whether the System had been trying to offset the New Economic Policy which obviously required that demand rise” (ibid., 10). He urged them to state that their goal for M 1 growth was 6 to 7 percent.

The division was about as before. Presidents Hayes, Kimbrel, and Clay wanted a more restrictive policy. Mayo and Morris were somewhat more expansive. Among Board members, Mitchell, Daane, and Burns “wanted a very aggressive move. . . . Robertson and I [Maisel] went along and Brimmer dragged his heels only slightly” (ibid., 11).

The instructions to the manager were very explicit. The Committee voted several times, once to set upper and lower bounds on the federal funds rate, 3.75 to 4.62. Then the committee voted on the desired money growth rate, 5 percent for December and January, and it instructed the manager to reduce the funds rate if money growth fell below the target. Each vote was split, but the final vote was unanimous.
⁵⁶
The funds rate
dropped to a 3.5 percent average for January; money growth remained low in December but rose to a 10 percent annual rate in January.

55. The president continued to express concern, and Burns tried to reassure him. In a letter, he described his policy by quoting his recent public statement. “The System will provide adequate reserves to finance a vigorous, but sustainable expansion” (letter, Burns to President, Burns papers, Box B_N1, November 24, 1971, 2).

56. Maisel (diary, December 10, 1971, 8) reports on a reduction in the discount rate to 4.5 percent effective December 13 at three reserve banks. By December 24, the 4.5 percent rate became uniform.

Burns met with the president and George Shultz on December 22. The president again brought up money growth. Burns explained that he had had trouble with the reserve bank presidents. “I had difficulty at the last meeting. I kept them there until four o’clock to get what I want” (White House tapes, conversation 640-3, tape 1588, December 22, 1971).

Nixon: “You’re independent (laughter), independent (laughter). Get it up! I don’t want any more angry letters from people. . . . The whole point is, get it up!” (ibid.).

After Burns left, the president remarked to George Shultz: “He made his commitment. You heard it again” (ibid.). Shultz pointed out that the FOMC had voted to increase the money growth rate and the reported growth rate rose the previous week, but it could have been random fluctuation.
⁵⁷

The president believed that Burns had committed to an expansive monetary policy that would achieve strong growth and lower the unemployment rate. Burns, on his side, worked to get higher money growth. Instead of concentrating only on interest rates, the account manager sent the FOMC members his recommendation that the FOMC suspend until the next meeting the lower bound on interest rates charged on repurchase agreements so that he could supply more reserves (Holland to FOMC presidents, Board Records, December 22, 1971). The FOMC voted nine to one to suspend the floor on the rate. Governor Robertson objected that the manager should use open market operations, not repurchase agreements. In 1972, the FOMC changed to require bidding for repurchase agreements, so the rate became market determined.

The FOMC meetings in 1972 became the subject of charges and claims about Burns’s efforts to expand money growth to help President Nixon’s campaign for reelection. Sanford Rose (1974, 186, 188) made two shocking charges: (1) “A majority of the FOMC recognized the need for a turn to a more restrictive monetary policy in 1972, but Burns held out for continued stimulus, arguing that the Fed should do nothing that could snag the ongoing recovery or cause interest rates to rise any more rapidly than they already were rising”; (2) Burns left an FOMC meeting for an hour.
When he returned, he told the committee, “I have just talked to the White House.” The implication was that the FOMC adopted an easier policy out of concern for possible retaliation by “the White House” against Federal Reserve independence.

57. The president was not the only one receiving angry letters about money. Milton Friedman wrote to Burns: “What in God’s name is happening” (letter, Friedman to Burns, Burns papers, Box B_K12, December 13, 1971). Friedman compared money growth to experience in 1959 and found “a far sharper slowdown . . . than in 1959” (ibid.). On his computation M
₁
growth averaged 0.4 percent for the past four months, down from 10.8 percent from January to August.