Nixon Captures the Fed
Nixon was elected partly on the promise to assign a higher priority to stopping inflation and the Fed switched to a restrictive stance as soon as he was elected. The administration signaled for tightness and rates rose, nearly producing a savings and loan crisis. By early 1969, President Nixon was already privately walking back the support for restrictive policy that candidate Nixon had promoted so strongly.
In an April 1969 meeting of the Board, Governor Sherman Maisel noted that administration officials “had made clear that they wanted to attempt a gradualist approach to the ultimate goal of price stability,” and that “they had repeatedly stated their hope that the Federal Reserve would cooperate in such an approach” Nixon himself directly challenged Martin on the direction of monetary policy in a meeting in October, but the tight policy stance remained in place.
Unfortunately, Nixon did not install his secret recording systems until after Martin’s chairmanship had ended so little record of their interpersonal interactions exists. However, the simple fact that Martin was not an irredeemable Nixon loyalist makes it likely the two men did not get on well. Nixon hoped to pressure Chairman Martin into resigning early, but Arthur Burns – waiting in the wings for the job – knew that Martin would not leave the chairmanship until “the last day at the stroke of midnight, Hawaii time”.
Martin’s sensitivities towards the goals of the Executive Branch were notably less active under a Republican president than they were under Johnson. Indeed, Martin testified in Congress in 1969 that “a credibility gap has developed over our capacity and willingness to maintain restraint.” And that “We have been unwilling to take any real risks.” Martin found his passion for risk again and the fed funds rate rose three percentage points to over 9 percent by April 1969 and remained at that level until the February 1970 meeting chaired by Arthur Burns. Martin’s term ended with the Fed still committed to a contractionary course despite opposition from the Nixon Administration and the Committee’s understanding that the economy was on the brink of recession.
In 1970, Nixon announced that he was a Keynesian and gave up on balanced budgets. Arthur Burns was named chairman and public signaling by the Administration switched to ease. Arthur Burns served on Nixon’s staff in 1969 and promoted himself heavily to the President as a superior replacement for Martin. Burns’ appointment as Chairman set in motion a turn toward a more expansionary monetary policy. Burns’ first meeting as chair in February 1970 has been described as “one of the most raucous in the institution’s history” as Burns steered the Committee toward the more expansionary of two alternatives despite uncomfortably high inflation. By 1971, Nixon had brough Burns into his inner circle of political advisors.
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