SYLVIE DOUGLIS, BYLINE: NPR.
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WAILIN WONG, HOST:
You know, when you think about historical figures, a lot of them get reduced to, like, a single piece of trivia.
ADRIAN MA, HOST:
Yeah. Name any famous historical figure, like Napoleon.
WONG: Short, French general in a funny hat.
MA: (Laughter) Or Amelia Earhart.
WONG: Lady pilot who disappeared?
MA: Woof. Now think about people like former chairs of the Federal Reserve Bank. They don't always achieve household name status while they're in office. And after they leave, the passage of time usually boils down their tenure to a sentence, if they even get that.
WONG: Take Arthur Burns, Chairman of the Fed in the 1970s. His name has been invoked recently by commentators in the financial press but as a cautionary tale.
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TED OAKLEY: I don't think Jay Powell wants to be the next Arthur Burns.
UNIDENTIFIED PERSON #1: He doesn't want to be Arthur Burns.
UNIDENTIFIED PERSON #2: ...Avoiding being another Arthur Burns.
UNIDENTIFIED PERSON #3: Arthur Burns.
UNIDENTIFIED PERSON #1: Arthur Burns.
MA: Woof again. This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma.
WONG: And I'm Wailin Wong. And as you heard, Arthur Burns does not have the best reputation. History remembers him as the Fed chair who didn't raise interest rates enough and let inflation run rampant. This is the outcome that current Fed Chair Jerome Powell wants to avoid.
MA: So today on the show, we're going to look back at the dilemmas facing the Fed of the 1970s and talk to a Fed watcher who thinks history has been a little too hard on Arthur Burns.
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MA: Arthur Burns was an Austrian-born, pipe-smoking economist. He was also a professor, taught at Rutgers. And one of his students happened to be one of the most notable economists of the 20th century - Milton Friedman.
WONG: Arthur Burns was also friends with President Richard Nixon. The two men worked together in the Eisenhower administration, and Burns was Nixon's economic adviser for his 1968 presidential campaign. Two years later, in 1970, Nixon gave Burns a warm welcome as Fed chairman at his swearing-in ceremony.
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RICHARD NIXON: You see, Dr. Burns, that's a standing vote of appreciation in advance for lower interest rates and more money.
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MA: Is that Nixon making a joke about how the Fed should keep interest rates low?
WONG: Yes. And that wasn't the only joke he made about what he thought his new Fed chair should do.
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NIXON: I respect his independence. However, I hope that, independently, he will conclude that my views are the ones that should be followed.
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CHRIS HUGHES: You can see Burns grimace. You see it in the video.
MA: Chris Hughes is a senior fellow at the Institute on Race, Power and Political Economy at The New School. He's also co-founder of Facebook and a former publisher of The New Republic. But all that aside, today we were talking to him because he studies the history of central banking.
WONG: Do you love reading Fed meeting minutes?
HUGHES: (Laughter) I do. I do, particularly the ones from the early '70s and prior.
WONG: Chris says he's long been fascinated by the 1970s as a pivotal period in American politics and the economy. For him, the Fed is a major part of that story, and so is Arthur Burns because he was Fed chair for most of that decade. And the narrative that's developed around Burns is that he kept interest rates too low and allowed inflation to get out of control.
HUGHES: To be honest, no one today thinks that Arthur Burns was a great leader of the Fed (laughter). And the conventional wisdom is that he was politically compromised, confused, ineffective.
MA: That is his reputation today. But when Arthur Burns first took the job, he came in, and everybody expected him to be an inflation fighter. And Burns hated inflation. He believed it eroded business confidence, leading to reduced investment and high unemployment.
WONG: And yet, the Fed under Burns eased up on rates in the early part of the 1970s, when U.S. inflation was already elevated, around 5%. And there are some different theories about why Burns did this. One theory is political pressure from Nixon. And that brings us back to Burns grimacing at the president's joke about Fed independence.
HUGHES: The press laughs. Everyone in the room laughs because Nixon's touting the official line of Fed independence, but he's going to apply political pressure. And Burns knows the guy, and he understands that's going to be a challenge. And it is.
MA: Nixon wanted low interest rates to stimulate the economy and boost his reelection prospects for 1972. And Burns actually writes in his diary about getting pressure from the president on this. But Chris doesn't buy the idea that Burns caved to Nixon. And a former Fed governor from that time, who actually disagreed with Burns on rates, he later said that it wasn't about political pressure. It was about avoiding a recession.
WONG: And this tradeoff between corralling inflation and risking a recession is also the debate that's taking place today. As we've talked about on the show, keeping rates elevated can help bring down inflation because it raises the cost of borrowing across the economy and cools off demand. But sustained high rates can also cause pain in the form of unemployment.
MA: Chris says not only did Arthur Burns worry about causing a recession, but he also wanted other parts of government to pitch in on the inflation problem. He believed that interest rates were a powerful tool but not the only tool. He wanted government to use things like tax policy and maybe even wage and price controls to also help fight inflation.
HUGHES: He was trying to moderate the interest rate hikes that were necessary by getting the rest of government to do their job. In other words, in the absence of other government action, he'd have to raise rates to such an high level, creating a recession, throwing millions out of work, and the guy didn't want to do it.
WONG: In 1971, Nixon did put wage and price controls into place. This was a controversial move because these types of controls usually only bring down inflation in a temporary way, and they create other problems like shortages and layers of bureaucracy.
MA: Over the next few years, the Fed raised rates to get a handle on inflation. Then it cut rates when it felt unemployment was getting too high. Inflation went up, and so did people's expectations of future inflation. By 1974, inflation was in double digits, and the economy was in a deep recession.
WONG: Chris says in hindsight, even as an Arthur Burns defender, he can point to certain periods and say rates should have been higher. But he also thinks Burns was dealing with a couple of big economic forces that shaped his approach to interest rates.
MA: One of those is that the American financial system was in a fragile state, and Burns didn't want to further destabilize it. During his tenure, two important companies, including a major bank, ended up collapsing.
HUGHES: There's a generalized fear that if the cost of money increases too fast or too high, it's going to cause the financial system to shake, if not even potentially come apart.
WONG: The other big force was what was actually causing inflation. In the 1970s, inflation was a global issue. There were big shocks coming from the supply side, like the Arab oil embargo of 1973. It wasn't clear that hiking rates, which would primarily affect demand, was the right approach for tackling this kind of inflation.
HUGHES: It was a mystifying and wildly frustrating period because it was not clear what to do. In other words, when the sources of inflation, particularly in '74, were largely driven by supply side shocks, raising rates would certainly throw the economy into the deep freeze. It may help with inflation to some extent. But if it's not actually going to bring it back to a level that is reasonable, then what do you do?
WONG: Today's economy has also seen supply side pressures drive inflation. And every time new data comes in on inflation and unemployment, the Fed has to think - do we stop raising rates now before we cause unnecessary economic pain, or do we keep going to make sure this inflation is really vanquished?
MA: So I guess to bring things around to where we started, you know, everybody has their one sentence that history sort of boils them down to, right? And if the old sentence about Arthur Burns is that he let inflation get out of control, what should his new sentence be?
WONG: Well, for a Burns defender like Chris, maybe it's something like - he made tough tradeoffs to stabilize the financial system and try to avoid recession.
MA: That works. Or what about - he tried his best during unprecedented economic times?
WONG: Like, he tried. He tried.
MA: (Laughter) Yes, he gave it his best shot.
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MA: This episode was produced by Brittany Cronin and engineered by Katherine Silva. It was fact-checked by Sierra Juarez. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR's a production of NPR.
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