In April 1971, President Nixon was worried. Inflation decreased from 6.2% in 1970 to 4.2%, however not working3.5% in December 1969, not less than 5.9% since October 1970. Nixon’s ratings were falling; by New Year’s, his approval rating had dropped from 56% to 49% and against his potential opponent in the 1972 presidential election, he had once led 43-40 and trailed 47-39. He had to take action.
An avid sports fan, Nixon pulled an old favorite from his playbook. “Among the sharpest memories [Nixon’s] experience,” Theodore H. White wrote, it was:
…the campaign against John F. Kennedy in 1960, and how the economy affected that campaign. From 1959, Nixon, who was Vice-President, realized the political danger as the second collapse of Eisenhower began. He had urged, early on, in the Cabinet for an easy money policy, to pump money to get the economy going before the 1960 election. His only ally was the economist Arthur Burns, but the Eisenhower administration waited until late spring to loosen up. debt. By then it was too late, because pumping requires a long lead time; and Nixon was forced to campaign against Kennedy with rising unemployment across the country in the fall. He had lost. He did not want to repeat that experience in 1972. Now, time was turning against him again.
”I have never seen anyone being beatenin the United States,” said Nixon, “I’ve seen a lot of people beat up because of unemployment.”
In one of the Secretly recorded Nixon interviewsArthur Burns, a Nixon appointee and now chairman of the Federal Reserve, told the president in February 1971:
In my opinion, the financial council…laid the foundation for the economy to go back…What makes the economy go back is not a lack of money but a certain lack of self-confidence. If we flooded the banks more than we have I think you could have serious problems in 1972 and beyond.
But with unemployment stuck at 6%, Nixon continued to pressure Burns to ease monetary policy. “We have to think about postponement… late summer and fall this year and next year. As you know there is hell to sleep,” Nixon told Burns in March, but Burns responded that “Lowering interest rates would risk precipitating an international financial crisis.”
Changing tack, in July, Nixon discussed a possible vacancy on the Federal Reserve Board with Office of Management and Budget director George Shultz:
I have already told you [Treasury Secretary John] Connally to find a man of the easiest money he can find in the country. And the one who will do exactly what he wants is Connally and who will talk to Burns…and Connally is searching the bad hills of Texas, California, Ohio. We will get a popular senator [sic] on that Board somehow…If you know of someone that crazy let me know too…I want a man on that board that I can control. I really do. Basically what Connally can control.
“To keep pressing Burns,” Burton A. Abrams he writes, “Nixon told his closest advisers, John Ehrlichman and HR Haldeman, to leak a story to Charles Colson” — all key figures in the Watergate scandal — “about a proposal to expand the Federal Reserve Board.” This “packaging” would undermine Burns’ authority. Haldeman was also to reward that Nixon was considering legislation to limit the independence of the Federal Reserve.
On November 10, Burns folded, telling Nixon “Look, I just wanted you to know that we’re lowering the discount rate today.” In December, Schultz told Nixon “[Burns] he agrees that the money should go up now. ” Later, Nixon urged Burns, “The whole point is, find out [the money supply] up. You know, enough? Kick it!”
He did so. Unemployment fell to 5.3% on election day. Nixon was re-elected in a landslide, though this had as much to do with Democrat ineptitude as anything else.
Wage and price controls announced in August 1971 temporarily quelled inflation. But in September, Milton Friedman had warned Nixon that price controls “may be able to continue [inflation] at least in the elections…After this, you will have a big increase in inflation.” Soon this happened. The annual inflation rate rose from 1.4% on election day to 4.9% when Watergate forced Nixon to resign in August 1974. One commodity after another rose against the dollar; soybeans, wheat, and finally fatthe latter, a the result of inflation, which is often mistaken for a cause even today. Unemployment was rising again, reaching a peak of 9.0% in May 1975. ‘Stagflation’ was here.
The American economy has experienced the “worst crisis” that Burns and Friedman warned about again the hyperinflation of the 1970s would not subside until the policies that caused it were changed by Paul Volcker.. Its origin is not in the oil fields of Arabia, but in the White House of Richard Nixon.
John Phelan is an Economist at the Center of the American Experiment.
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