Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Arthur Burns and Inflation

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Arthur Burns and Inflation

Article excerpt

Arthur Burns, Chairman of the Federal Open Market Committee (FOMC) of the Federal Reserve System (the Fed) from February 1970 until December 1977, was fiercely opposed to inflation. For the public, and especially for the business community, Burns embodied opposition to inflation. Nevertheless, during his tenure as head of the Fed, high rates of inflation became a pervasive fact of American life. How could that have happened?

The puzzle is especially striking as Burns became Chairman with an extraordinarily distinguished background as an economist. He had been president of the American Economics Association and had headed the prestigious National Bureau of Economic Research (NBER) since the late 1940s. As head of the NBER, Burns gained worldwide recognition as the leading scholar of the business cycle. Based on his work on the business cycle, he concluded that inflation itself sets in train forces that cause recession. As an economist, how did Burns think? How did he shape the data he studied into a coherent view of the world-a view that could lead him far away from the control of inflation?

1. EXPLAINING MONETARY POLICY

To explain monetary policy, one requires more than an understanding of the views of the Chairman of the FOMC. One must understand the general political and intellectual environment of the time as well. If Burns had been Chairman in another era, say, in the 1950s or 1990s, the environment, and therefore monetary policy, would have been quite different. So to attribute the inflation of the first part of the 1970s solely to Burns's leadership is wrong.

Monetary policy under Burns's FOMC was never as expansionary as vocal congressmen urged and, through 1972, was less expansionary than the Nixon Administration desired. In fact, throughout his tenure, monetary policy was consistently less expansionary than desired by Keynesian economists, who represented mainstream economics. Indeed, at the time, Fed economists joked that policy must be on track because it was more expansionary than monetarists desired but more restrictive than Keynesians desired. The inflation of the 1970s represented the failure of an experiment with activist economic policy that enjoyed widespread popular and professional support. Burns was part of a political, intellectual, and popular environment that expected government to control the economy.

In the early 1970s, the political system and the economics profession agreed that 4 percent was a normal rate of unemployment. Both the political system and a majority in the economics profession accepted that the government was responsible for keeping the unemployment rate to 4 percent or less through activist monetary and fiscal policy. Burns accepted this consensus view. And he added a sense of urgency to it. At the time, the United States was riven by the socially divisive issues of race and the Vietnam War. When the unemployment rate rose in 1970 to 6 percent, Burns believed that the country needed a combination of policies that would simultaneously restore price stability and full employment.

In November 1970, the minutes of the Board of Governors show Burns telling the Board (Board Minutes, 11/6/70, pp. 3115-17) that . . . prospects were dim for any easing of the cost-push inflation generated by union demands. However, the Federal Reserve could not do anything about those influences except to impose monetary restraint, and he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6 percent. Therefore, he believed that the Federal Reserve should not take on the responsibility for attempting to accomplish by itself, under its existing powers, a reduction in the rate of inflation to, say, 2 percent. ... he did not believe that the Federal Reserve should be expected to cope with inflation single-handedly. The only effective answer, in his opinion, lay in some form of incomes policy.

(The term "incomes policy" is a catchall expression for various forms of direct intervention by the government to control prices. …

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