In April 1971, President Nixon was nervous. Inflation had fallen from an annual charge of 6.2% in February 1970 to 4.2%, however unemployment, 3.5% in December 1969, hadn’t been beneath 5.9% since October 1970. Nixon’s scores had been tumbling; because the New Yr, his approval score had fallen from 56% to 49% and in opposition to his doubtless opponent within the 1972 presidential election, he had had flipped from main 43-40 to trailing 47-39. He needed to act.
An avid sports activities fan, Nixon pulled an outdated favourite from his playbook. “Among the sharpest recalls of [Nixon’s] experience,” Theodore H. White wrote, was:
…the marketing campaign in opposition to John F. Kennedy in 1960, and the way the economic system affected that marketing campaign. As early as 1959, Nixon, then Vice-President, acknowledged the political hazard because the second Eisenhower recession started. He had pleaded, early, within the Cupboard for an easy-money, pump-priming coverage to get the economic system transferring earlier than the election of 1960. His solely ally had been economist Arthur Burns, however the Eisenhower administration had waited till late spring to loosen credit score. By then it had been too late, for pump-priming requires lengthy lead-time; and Nixon had been compelled to marketing campaign in opposition to Kennedy with unemployment rising all throughout the nation within the fall. He had misplaced. He didn’t wish to repeat that have in 1972. Now, time was working in opposition to him as soon as extra.
‘‘I’ve by no means seen anyone overwhelmed on inflation in the USA”, Nixon mentioned, “I’ve seen many individuals overwhelmed on unemployment.’’
In one in every of Nixon’s well-known secretly taped conversations, Arthur Burns, nominated by Nixon and now Federal Reserve chairman, instructed the president in February 1971:
For my part the financial authority…has laid the muse for restoration…What’s holding again the economic system not any scarcity of cash however a sure scarcity of confidence. If we flooded the banks much more than we’ve I believe you would have terrible issues in 1972 and past.
However with unemployment caught close to 6%, Nixon continued pressuring Burns to ease financial coverage. “We’ve really got to think of goosing it…late summer and fall of this year and next year. As you know there’s a hell of a lag,” Nixon instructed Burns in March, however Burns replied that “To drive interest rates lower would run the risk of accelerating an international monetary crisis.”
Altering tack, in July, Nixon mentioned a attainable emptiness on the Federal Reserve Board with Workplace of Administration and Funds director George Shultz:
I’ve instructed [Treasury Secretary John] Connally to search out the simplest cash man he can discover within the nation. And one that may do precisely what Connally needs and one that may converse as much as Burns…and Connally is looking out the god rattling hills of Texas, California, Ohio. We’ll get a populist Senator [sic] on that Board a method or one other…If of somebody that’s that loopy let me know too…I desire a man on that board that I can management. I actually do. Principally that Connally can management.
“To further pressure Burns,” Burton A. Abrams writes, “Nixon told his close advisors, John Ehrlichman and H. R. Haldeman, to leak a story through Charles Colson” – all key figures within the Watergate scandal – “about a recommendation to expand the Federal Reserve Board.” This “packing” would undermine Burns’ authority. Haldeman was additionally to leak that Nixon was contemplating laws to curb the Federal Reserve’s independence.
On November 10, Burns folded, telling Nixon “Look, I just wanted you to know that we are reducing the discount rate today.” In December, Schultz instructed Nixon “[Burns] agrees that the money supply should now go up.” Later, Nixon urged Burns, “The whole point is, get [the money supply] up. You know, fair enough? Kick it!”
He did. Unemployment drifted down to five.3% on election day. Nixon was reelected in a landslide, although this had as a lot to do with the Democrat’s missteps as the rest.
Wage and value controls introduced in August 1971 muted inflation quickly. However in September, Milton Friedman had warned Nixon that value controls “might be able to hold [inflation] down at least through the election…After this, you’ll have a great upsurge in inflation.” This quickly materialized. The year-on-year inflation charge rose from 1.4% on election day to 4.9% when Watergate compelled Nixon’s resignation in August 1974. One commodity after one other surged in opposition to the greenback; soybeans, wheat, and eventually oil, this latter, a consequence of inflation, being regularly mistaken as a trigger even at the moment. Unemployment was on its method up once more, to a peak of 9.0% in Could 1975. ‘Stagflation’ was right here.
The American economic system skilled the “awful problem” Burns and Friedman had warned about and the nice inflation of the Seventies wouldn’t subside till the insurance policies which precipitated it had been reversed by Paul Volcker. Its origins lay not within the Arabian oilfields, however in Richard Nixon’s White Home.
John Phelan is an Economist at Heart of the American Experiment.
