Arthur Burns, the chair of the Federal Reserve, was in a hurry. It was a Saturday morning in early December 1970, and he was at the Fed headquarters in Washington putting the finishing touches on a speech he planned to give at a Pepperdine College event in Los Angeles, California, on Monday. He had a plane to catch in the afternoon.
Down the street at the White House, President Richard Nixon was in a nasty mood. The midterm elections a month earlier had gone badly, and the country was encountering a novel economic problem, a recession in the midst of surging inflation. Nixon and his team wanted interest rates lower and were pursuing an aggressive policy to convince Burns, whom the President had appointed earlier in the year, to loosen monetary policy to boost the economy.
The President’s latest gambit was a speech he had given the day before, falsely claiming that Burns was falling in line with the President’s wishes. “He’ll get it right in the chops,” Nixon said privately beforehand. The President and the Fed chair were engaged in a high-stakes, public battle.
Now it was Burns’s moment to respond. He planned to use Monday’s speech at Pepperdine to outline what he had been saying privately for months. Monetary policy was already loose enough. The historically high inflation rocking the country was the most urgent problem, and it could not be brought down by the Fed hiking interest rates alone. The President and Congress needed to rise to the occasion and do their part.
By early Saturday afternoon, Burns finished writing the speech in longhand and passed it to his secretary for typing and copying. She finished by 3:30 p.m., and he planned to leave imminently for the plane. The phone rang. The President was on the line with a clear message: Arthur, don’t cross me by contradicting me publicly.
Burns was prepared. Bill Safire, a journalist working as a special assistant to the President, had called the day before to offer advice on Burns’ speech and express the President’s concern. Burns, always the diplomat (he later became ambassador to West Germany), walked the line carefully on the phone with the President. “I explained that I was fully sensitive to the need of avoiding any impression of a conflict between us,” Burns wrote in his private diary of the conversation. He then went on to read multiple pages of the speech to the President, the professor lecturing his pupil.
In the speech, he argued that the rate of growth in the money supply had been high by historical standards, contradicting the White House’s view. He went on to outline his own agenda: an 11-point plan to deploy new fiscal and regulatory tools, including price and wage controls, to check rising prices. The Fed could not and should not be expected to rein in inflation on its own, and Burns was going to make sure the world knew it.
Nixon, infamously afraid of conflict, “seemed pleased” when Burns finished reading him his speech on the phone. “At least he said he was,” Burns wrote in his diary. It’s difficult to imagine that was true, given the acrimony that was to come in the next few weeks. The call ended, and Burns rushed to the airport to make his flight. The morning after he delivered the Pepperdine speech, The New York Times ran the news as its lead story of the day, with the sub-headline “Budget and Money Policies Held Inadequate in Face of ‘Excessive’ Raises.” The Times quoted the speech extensively.
No one today thinks of Burns as a great leader of the Fed. In fact, most people think he was terrible. In his recent book 21st Century Monetary Policy, former Fed Chair Ben Bernanke rehearses the conventional wisdom that casts Burns as politically compromised, confused, and ineffective. The story goes that, led by mistaken views on inflation and easily influenced by his relationship with Nixon, Burns stumbled through the 1970s pursuing a “stop-go” interest rate policy that created confusion and did little to control inflation. According to Bernanke, Burns, unlike his successors Paul Volcker and Alan Greenspan, was simply not wise or strong enough to give Americans the necessary medicine of high interest rates they needed. America suffered through its highest peacetime inflationary period as a result.
Burns has unfairly and incorrectly become a kind of piñata for the idea of a politically engaged central banker. Later Fed chairs would claim to be “apolitical,” even as they pursued policies that shifted economic power, helping some and hurting others. Burns knew that decisions about monetary policy had both a technical and a political dimension. He pursued an all-of-government approach to price stability and growth, believing that interest rate policy should be one of several tools to bring down the rate of growth of price rises. His story is invoked today to suggest that if central bankers try to work collaboratively with other parts of government, they run the risk of becoming too political, compromising their ability to make unpopular decisions in the process and dooming them to failure.
The drama around the Pepperdine speech illustrates how significantly people misread Burns’s legacy. The single-minded obsession with his interest rate decisions and relationship with Nixon obscures the more important story of his leadership. Burns, often in disagreement with the White House and Congress, led the Fed from a place of ideological conviction. Throughout his tenure, he believed the Fed shared responsibility with Congress and the White House to pursue a political economy that would control costs. He believed that overreliance on the Fed would require raising interest rates to historic highs, risking a dangerous financial crisis and inspiring Congress to pass legislation reining in the Fed’s autonomy.
When it came to monetary tightening, Burns had good reasons for erring on the side of ease early in his tenure. Two crises—the collapse of Penn Central in 1970 and Franklin National Bank in 1974—illustrated the growing fragility of the American financial system. In response to these events, Burns created a framework for handling systemic risk that future Fed chairs would build from, a major accomplishment his critics often overlook.
No doubt Burns made many mistakes during his tenure, including holding interest rates too low in certain periods. But given the challenges of our own day, policymakers could learn from Burns’s commitment to collaborating with Congress and the White House to bring all the possible tools to bear to support price and financial stability. It is a philosophy that was not sufficiently appreciated at the time and has been neglected in the decades since.
Contrary to his reputation, Arthur Burns was a conservative economist who hated inflation. Though he governed during an era dominated by Keynesian economics, Burns had been trained in the older tradition of American institutional economics, which led him to focus much of his academic work on how to ensure companies kept sufficient confidence in the macroeconomic environment to invest throughout the business cycle. His dislike for inflation was in particular grounded in a concern that price instability could bring about recession by sapping business confidence and lowering investment levels.
His students included Alan Greenspan and the monetarist Milton Friedman, economists who spent much of their lives dedicated to the cause of price stability. Friedman called him “almost a surrogate father,” according to Friedman’s biographer, and claimed that of all people outside of his parents he was most indebted to Burns, under whom he studied at Rutgers.
In 1969, a year before he became Fed chair, Burns published one of his major works, The Business Cycle in a Changing World, which made clear how serious a threat he believed inflation to be. “Serious depressions are no longer the threat they once were, while creeping inflation has become a chronic feature of recent history and a growing threat to the welfare of millions of people,” he wrote. “Not only is a creeping inflation unnecessary to the continuance of prosperity, but it can in time become a grave obstacle to it.” Friedman, in enthusiastic agreement about the risk of inflation, praised Burns’s nomination in 1970. “He understands the monetary system and its relation to the economy at a depth and subtlety that has not been equaled by any past chairman of the board.”
How did such an inflation hawk go on to lead the Federal Reserve through the period of the highest levels of peacetime inflation in American history?
The conventional answer is that his friendship with Richard Nixon led him astray. Burns’s critics imagine a kind of tacit conspiracy in which Burns kept interest rates low early in the decade in order to assure Nixon’s reelection in 1972. Burns kept a diary off and on from 1969 to 1974, which was published for the first time in 2010. In the years since, Burns’s critics have taken excerpts from the diary out of context, obscuring the bigger picture and suggesting a closer, more coordinated relationship than existed.
Burns and Nixon struck up a friendship in the 1950s when Burns worked in the Eisenhower White House as the chairman of the Council of Economic Advisers and Nixon was vice president. Confidants of the two viewed Burns as initially the “senior partner” in their friendship. “[H]e was older than Nixon and enjoyed more influence with Eisenhower and his lieutenants than did the vice-president,” contemporaries reported to Burns’s biographer. “Burns thought of Nixon as a protégé and treated him with what one friend described as ‘slight condescension.’”
Throughout Nixon’s presidency, the two were at odds with each other. Nixon won the presidency in 1968, and Burns became Fed chair in January 1970. From the very beginning, Burns chafed at Nixon’s attempt to encroach on the Fed’s decision-making power. At the press conference swearing him in as Fed chair, Nixon joked about the institution’s autonomy, saying, “I respect his independence; however, I hope that independently he will conclude that my views are the ones that should be followed.” Nixon grinned while the press corps cackled. Burns visibly grimaced.
Burns wrote privately in his diaries of his constant frustration with Nixon and the “sycophants” who surrounded him. He occasionally exhibited some interest in earning the President’s affection, but he was just as often annoyed by the pressure campaigns from the White House.
After the Pepperdine speech, Burns continued to advocate his plans for fiscal and regulatory actions to lead in the fight against inflation. Nixon, growing increasingly frustrated, asked him directly in the summer of 1971 to stop, and Burns flat-out declined. Two days later, Burns testified in front of Congress, again bucking the President’s request in a very public fashion. “[T]here are some men in this world who refuse to play politics when this means disregard for one’s oath of office or one’s self-respect,” Burns wrote in the diary. “Nixon thought that he could appeal to my friendship and get his way.”
Many writers point to a particularly egregious entry from the Burns diaries that seems to make clear his complicity with the President. In March 1971, inflation remained high, but the economy was struggling to move past the recession. The White House, anxious to build some economic momentum, had amped up its pressure campaign on Burns to lower interest rates from their historically high levels. Relating a private meeting with the President in the diary, Burns says that he told the President if a conflict arose between Nixon’s priorities and the Fed’s, he “would not lose a minute in informing RN and seeking a solution together.”
Even this seemingly clear statement of political fealty was actually a trade, as secretly recorded tapes of the conversation reveal. Burns butters up the President at the start of the meeting. “I’ve done everything in my power, as I see it, to help keep pressing your reputation, your standing in American life and in history,” Burns said. “I’ve never seen a conflict between the two. But I want you to know this, if a conflict did arise, the moment a conflict arises, I’m going to be right here.” After this preamble, the conversation dramatically turns, and Burns proceeds to explain to the President why he is refusing to lower interest rates, which the President has been asking for. He warns of an international monetary crisis, further inflation, a potential tailspin in the housing market, and dangerously higher rates in 1972. The message is clear: I know what’s best for you and the country, Mr. President, and it’s to keep interest rates high. From Burns’s perspective, the tete-a-tete worked. The White House laid off its pressure campaign for a few weeks, and he kept rates where he wanted them.
But Nixon’s anger at him only grew more intense. A few months later, in the summer of 1971, after a few drinks on a cruise around the Potomac on the presidential yacht, Nixon directed his staff to leak a rumor that Burns was seeking a doubling of his salary. Burns suspected the White House was the source of the rumor and was outraged. Nixon crowed gleefully in the Oval Office when he heard the news of Burns’s anger at the headlines. Excited that he had rattled Burns, Nixon phoned Treasury Secretary John Connally to share the good news that their ploy had worked. (Ironically, Alan Greenspan, Burns’s former student, played the role of emissary between the President and Burns in the spat.) In his diaries, Burns responded to the ploy with anger and resolve, not some desire to freshly endear himself to the President or his coterie.
Burns revisionists have incorrectly seen frequent contact and Oval Office meetings as evidence of a compromised Fed leader. Burns was indeed in frequent (and at times, friendly) dialogue with the President, but there is no evidence that Burns kept rates low in 1972 to endear himself to the President. Andrew Brimmer, one of the governors Burns clashed with at the Fed at the time, voted several times to raise rates in periods when Burns did not. But even he, both at the time and years later after Burns’s death, did not believe Burns was holding interest rates down to help Nixon politically.
So why did Arthur Burns, the inflation hawk, keep rates lower than most everyone thinks was wise early in the 1970s? Rather than being a shady political deal, his decision had more to do with his belief that only an all-of-government approach could rein in cost pressures.
To our modern sensibilities, the Fed has primary responsibility for lowering inflation through interest rate rises and monetary contraction. Arguments to use fiscal or industrial policy to lower the rate of cost increases are considered unconventional or utopian, but it was the inverse at the time.
Policymakers and economists across ideological positions in the 1970s agreed that inflation must be controlled, but they disagreed on how intensely to prioritize it and what tools should be used to fight it. Leading economists like John Kenneth Galbraith and James Tobin believed that the playbook for macroeconomic management should be broader than just interest rates. They believed fiscal decisions—tax hikes and cuts, along with adjustments in government spending—were the most powerful tools of demand management. Meanwhile, editorial pages were filled with debates about whether to decrease the bargaining power of organized labor to prevent spiraling wage hikes and relieve the strains on production costs. When inflation later became increasingly driven by rising energy prices, policymakers sought ways to boost energy production or limit corporations’ power to pass through high costs to consumers. Relying too intensely on interest rate rises would likely lead to mass unemployment or precipitate a financial crisis, while only modestly affecting the underlying causes of inflation, many believed.
By the time of the speech at Pepperdine, Burns’s belief in the primacy of an all-of-government approach had solidified, and this belief lasted through the rest of his chairmanship at the Fed. “Speculative excesses” and increasing labor power had caused the inflationary surge, and it was up to Congress and the White House to push through fiscal and regulatory solutions to contain inflation and boost confidence in order to avoid a dangerous recession. He suggested compulsory labor arbitration, job training programs, and a price and wage review board. Seven years later, close to the end of his tenure, Burns made a similar case, this time to President Carter, in a memo that contained 20 policies the President could pursue to bring down inflation. Nearly half had appeared in the Pepperdine speech two presidential administrations earlier.
The Nixon Administration adopted one of Burns’s proposals, price and wage controls. Initially skeptical, by the end of 1971 Burns believed so-called “incomes policy” offered a relatively painless way to restrain inflation. Controls used during World War II and the Korean War had met with general success. Former Fed Chair William McChesney Martin supported the use of price and wage controls, as did many members of Congress. Much of the business community, including the New York Chamber of Commerce and the New York financier David Rockefeller, believed that high interest rates would do unnecessary collateral damage and supported the use of controls. Almost everyone agreed that they would not be a permanent solution, but that they could be used in moments when inflation seemed to be disproportionately increasing to create a temporary restraint in price rises.
When Nixon huddled with his economic advisers at Camp David in August 1971, Burns organized the group to agree to controls as part of the Administration’s plan to suspend the convertibility of dollars to gold. The first phase of the controls was effective at holding prices down—inflation held steady at 3.3 percent in 1972—and met with general approval. Herbert Stein, Nixon’s chairman of the Council of Economic Advisers, later wrote, “The imposition of the controls was the most popular move in economic policy that anyone could remember.”
It was not, however, only controls that Burns sought. His agenda was to do everything possible to reduce cost pressures in the short term and spur business investment in the long term. He favored interventions to make labor markets more “efficient”—additional job training programs, lower minimum wages for young workers, the suspension of artificially high construction wages for government work. Burns believed strongly that excessive wage settlements, won by powerful labor unions, were a key institutional driver of inflation. The continued militancy of unions even as the recession began convinced him that wage controls, rather than just higher unemployment, were required to contain wage-push dynamics. He also worked for more aggressive enforcement of the nation’s antitrust laws to disrupt the pricing power of dominant corporations and, at many moments, favored tax breaks and depreciation allowances to spur business investment. (Many current critics of Fed policy want to pursue similar strategies today.)
In addition to his economic rationale, Burns was committed to a holistic approach to inflation management for social and political reasons as well. His own economic research had convinced him that a policy relying on interest rates alone to rein in inflation would require raising them to punishing levels—significantly higher than they had ever been in American history. Burns worried that such a shock could invite further scrutiny from Congress, and perhaps a major encroachment on the Fed’s autonomy. High rates would also likely lead to deep recession and social turmoil, a particularly frightening prospect for Burns coming on the heels of civil rights demonstrations and anti-Vietnam protests. And all of this would be happening in an environment of growing labor militancy—in 1970, days lost to strikes reached the highest point in more than a decade.
If recession, social unrest, and political encroachment from Congress weren’t enough, Burns had another major reason to be skeptical of precipitous rate hikes: the risk of igniting a financial crisis. Tectonic plates were shifting underneath the central bank and in the world of banking and finance. The suspension of convertibility of gold dissolved the fragile Bretton Woods arrangement, and the explosion of money market accounts made economies significantly more interdependent, global, and fragile. By making the cost of money significantly higher, a tight monetary policy could increase the chances of a global financial meltdown.
Burns had good reason to be concerned about triggering a financial crisis: Within six months of assuming the chairmanship, he was already facing a major threat to financial stability.
The near-crisis that occurred in the early summer of 1970 was precipitated by a threatened run on the commercial paper market. Commercial paper is an unsecured promissory note issued by firms to help meet short-term funding needs. American Express might have some extra cash on hand for taxes due in a month and loan it to GM on a short-term basis to help it finance a purchase, for instance. Commercial paper had been used since the nineteenth century, but the scale of the market’s growth in the 1960s was unprecedented. In the decade before, gross domestic product had doubled, and overall business lending grew around 2.5-fold. Meanwhile, commercial paper lending had grown eightfold. Within the commercial paper market, non-financial companies began to participate on a large scale as both lenders and borrowers.
One of the largest borrowers on the commercial paper market, the giant railroad company Penn Central, ran into serious financial difficulty in the spring of 1970. On Friday, June 19, the Fed learned that Penn Central was filing for bankruptcy.
The bankruptcy of a single, large company was not what worried the Fed. The commercial paper market was deeply intertwined and had become “a vast new unregulated banking system,” in the words of Burns at a Board of Governors meeting in June of 1970. If a major borrower in the market, in this case Penn Central, failed to repay, other companies would likely choose to reduce their lending. This could precipitate a run in the markets, causing liquidity to dry up and denying some of the nation’s largest companies the money they were relying on to meet short-term liabilities.
In several emergency meetings of the Board of Governors in the days after the bankruptcy, Burns led the Fed to take unprecedented action to shore up commercial paper markets. The Fed moved much of the private financing out of the shadows of the commercial paper market and onto the books of regulated banks. The Board of Governors suspended interest rate ceilings on large certificates of deposit, allowing banks to attract additional funds by offering higher interest rates on deposits and enabling those same banks to extend loans to financial actors locked out of the commercial paper market. The Fed also opened the discount window (through which it makes direct loans to member banks), inviting banks to use it liberally in order to stabilize the system. It took several weeks, but eventually markets calmed.
If Burns had not taken these actions early and quickly, the financial system could have faced significant challenges. Many of the largest companies were overleveraged. Investor concern centered on Chrysler, which had lost $29 million in the first quarter of 1970 and had $1.6 billion in commercial paper outstanding. The New York Fed, working with a consortium of big commercial banks, put together a package to keep Chrysler afloat. According to New York Senator Jacob Javits, who was party to the Wall Street rescue efforts, “the economy has just skirted the edges of economic disaster…for some days it was a matter of touch and go.”
Leading into the crisis, public equity markets had tumbled precipitously. In May, the Fed loosened monetary policy and Burns made clear to business leaders at a large private dinner that he would not allow an equity market panic on his watch. “We recognize that as a Central Bank we have the responsibility as the lender of last resort; we will discharge that,” he said.
Burns’s willingness to turn on the liquidity taps had as much to do with preventing a financial crisis as with mistaken economic theory or crude political manipulations. Without Burns’s reassurances in May 1970, the collapse of Penn Central in June could well have led to a far-reaching panic.
Just as importantly, the Fed’s agile leadership in the summer of 1970 signaled the beginning of a broader shift in how central banks imagined their role in the financial system. Historically, central banks believed it to be their mission to be the lender of last resort—to provide capital to illiquid but solvent financial institutions at a higher than market rate, on the “lender of last resort” model that Walter Bagehot had articulated a century earlier. But Penn Central was not solvent, as the New York Fed itself noted. In the classical central banking paradigm, the central bank should have let it fail without any kind of other immediate intervention.
The Burns Fed presciently understood, however, that the failure of a systemically important institution can have collateral effects on companies that have not taken on similar levels of risk. Penn Central did file for bankruptcy, but the Fed then stepped in to use its credit creation power to stabilize the unregulated commercial paper money market and through it a broad spectrum of non-financial companies. Penn Central was not bailed out by the Fed, but financial markets were stabilized at a moment of extreme fragility by Fed action. The Burns Fed had discovered systemic risk and developed a framework to ensure risky investors lost money while avoiding a tailspin across public markets.
The learnings from the Penn Central crisis would directly contribute to the Fed’s response to the next systemic threat: the collapse of a major bank, Franklin National, in 1974. By 1973, inflation was surging, clocking in at 9.6 percent for the year. A year later, it leapt to 11.8 percent. Despite his hesitancy, Burns’s Fed raised rates throughout 1973 and 1974, and the country fell into the worst recession in four decades. Burns’s contemporaries criticized him for being too aggressive in his efforts to rein in inflation. Some of the most respected economists of the era, like Paul Samuelson and James Tobin, believed that the Fed held rates too high for too long. Writing in The New York Times in this period, Tobin claimed that Burns “appears to be determined to go down in history as the man who broke inflation in the United States, and if it takes years of unemployment and economic stagnation, he is willing to have us pay the price.”
As Burns anticipated, the high rates caused another newly popular, poorly regulated money market, the Eurodollar market, to tighten, leading to another encounter with systemic risk. One of the top 20 largest banks in the United States at the time, Franklin National, based on Long Island, had followed many of its peers in investing in foreign exchange trading and the Eurodollar market. Franklin’s management had developed a heavy reliance on the Eurodollar market to finance long-term loans.
The bank’s foreign exchange investments began to go bad in mid-1974, and Franklin teetered on the brink of collapse. Burns’s Fed feared contagion in the foreign exchange markets, just as it had in 1970 in commercial paper markets. Franklin National, like Penn Central, was not solvent, but collapse could have created a much broader banking crisis. On the heels of an extended slide in the value of the dollar in international markets, the Fed could not afford to risk such a collapse. Franklin National would become the largest bank failure in American history up to that point. According to Fortune,the Franklin panic was the financial system’s “gravest crisis” since 1933, with doubt spreading “about the solvency of even the most profitable banks,” not just in America but around the world. No financial institution since the Great Depression had threatened the international monetary order so profoundly.
In response, Burns’s Fed took several steps, developing and deepening the playbook from Penn Central a few years earlier. The Fed used the discount window to loan $1.7 billion to the failing bank. This bought time and ensured that an otherwise imminent collapse would not spark a general panic. It also arranged for other banks to lend to Franklin and other money market actors. In an unprecedented step, the New York Fed took $725 million of Franklin’s foreign exchange commitments directly onto its books. Finally, the Fed teamed up with the FDIC to arrange the takeover of Franklin’s remaining assets by another firm. Decades later, Bernanke’s Fed would use a similar playbook to engineer the fire sale of Bear Stearns in the financial collapse of 2008.
The Fed had never stepped in before to orchestrate a fire sale of a major financial institution, and the moves were unpopular at the time. (The Fed’s moves were not entirely unprecedented. The Bank of England convened major financial actors to acquire Barings in the late nineteenth century out of fear of the repercussions to the global financial system.) The central bank was no longer sitting on the sidelines and acting only as a lender of last resort to solvent institutions; it was using existing tools and developing new ones to prevent systemic collapse.
Burns’s moves were pioneering. Franklin National’s shareholders experienced significant losses, but the Fed did not allow it to go bankrupt overnight, creating unnecessary chaos in markets as Lehman Brothers’s failure would do in the fall of 2008. Instead, it teamed up with other institutions of government to initiate an orderly liquidation and fire sale. These moves were not without their critics—Friedman and other economists were concerned about moral hazard—but they managed to ensure equity holders in risky markets lost money, without creating a financial crisis that would spill over into the broader economy, including labor markets.
With no comprehensive financial regulation in response to Penn Central and Franklin National, systemic crises accelerated in the following decades. Volcker’s Fed raised interest rates aggressively in the early 1980s, helping to precipitate the savings and loan crisis and the collapse of Continental Illinois, then the eighth largest bank in the United States, in 1984. In 1987, public equities lost 23 percent of their value in a single day. By the early 1990s, sovereign bankruptcies in Latin America and Asia threatened to profoundly disrupt the international financial system, as did the implosion of a systemically important hedge fund, Long-Term Capital Management.
The number of potential crises grew quickly, and, until 2008, the Fed developed and refined the Burns playbook to address the problems. The Fed stepped in to create rescue packages for companies, countries, and markets, using the power of its balance sheet to stabilize markets but ensure that risky investors were not bailed out. Rarely, however, did it move to work with Congress to address the underlying causes or the failure of regulatory policy to prevent the crises from occurring in the first place.
Because of Burns’s moves to mitigate systemic risk, the actions of later Fed leaders were considered less radical. By the end of Greenspan’s tenure, market actors relied on the Fed to ensure financial stability, calling it the “Greenspan put.” This commitment to stability would be tested in a more fundamental way in response to the Great Recession and the COVID crisis. The seeds of the actions taken by later Fed leaders had been sown by Arthur Burns in the decades prior, even if they failed to credit him.
Burns did little to burnish his own legacy after he left the Fed. A year after his tenure ended, he gave a speech titled “The Anguish of Central Banking” in which he suggested that the Fed had been hemmed in by a political environment in which new expectations for government benefits and high incomes had made it impossible for central banks to raise interest rates high enough. The Fed’s boss, Congress, was standing by to rein in its power at any moment.
In the months and years immediately following Burns’s speech, Volcker’s Fed raised rates aggressively, stamping out inflation but creating the most significant recession since the Great Depression, with job losses in the millions. (Even the Volcker disinflation benefited from a sectoral “supply side” effect, namely the collapse of energy prices in the 1980s.) Congress and the American public were supportive, at least initially. Most economic historians believe these actions were necessary and desirable to anchor inflation expectations, despite the immediate human cost.
Volcker’s success created a “take your medicine” attitude around interest rate hikes: They may be unfortunate, but the short-term pain will be good for everyone in the long run. Pre-Volcker history is rewritten in this light, so that Burns is defined by his “unwillingness to pull a Volcker.” The effect of Volcker’s actions, which still colors our political debates today, has been to foster and entrench a general view that interest rates should be the primary tool to control inflationary surges. It contributed to the emergence of the widespread belief that government cannot execute complex economic policy, leaving mathematical formulas and econometric models at an independent Fed as the only hope for managing the price level.
Unquestionably there are moments when rates need to be raised, and today’s is surely one. The Fed should have moved earlier to end its bond-buying program and begin to raise rates. But the causes of inflation in our moment are manifold: supply chain bottlenecks, war-induced supply shocks, rapidly shifting consumer preferences, and robust demand are all contributing. Interest rate hikes are a blunt instrument that should be part of a broader toolkit to lower inflationary pressure, not the go-to, one-size-fits-all tool they have become.
It is hard not to feel that this evolution to “apolitical” interest-rate-focused inflation policy represents a step back rather than an advance. Interest rates will always be able to slow the growth of prices because of their power to suppress demand. But the gains come at real cost. They are won by throwing the economy into a deep freeze, creating job loss and financial strain that generally falls disproportionately on the most vulnerable.
A robust anti-inflationary policy would follow in the spirit of Burns’ approach from 50 years ago and not just rely on the Fed to rein in inflation. Many of the specifics of his recommendations are outdated: price and wage controls, for instance, are unlikely to be successful or effective. But Congress and the White House could work together to restructure markets to bring down the costs of essential goods. Energy policy could help incentivize additional oil and gas production in the short term as we transition our way to renewables. Raising taxes on the wealthy would help cool demand in an economically just fashion. Revised zoning laws, tax incentives, and access to lower-cost capital could spur the creation of more housing to lower rental costs. Enhanced antitrust enforcement could make markets more competitive, preventing the largest companies from using their market power to mark up prices disproportionately. These kinds of inflation-fighting tools would shift who feels the pain of efforts to rein in inflation, shifting it out of labor markets and toward capital holders. These policies still involve “taking one’s medicine”—it’s just a different set of people who get hurt.
These changes would take time to have their desired effects, but their implementation would take heat off the Fed to raise rates faster in the short term, decreasing the chance of recession or at least making the coming one less deep.
As Burns became a caricature of what wise, responsible central bankers should avoid, we lost an appreciation for the variety of ways that inflation can be prevented, managed, and controlled, and for the origins of our tools for countering systemic risk. Policymakers and historians today would do well to take a second look.