Nixonflation – Econlib

In April 1971, President Nixon became concerned. Inflation had fallen from an annual rate of 6.2% in February 1970 to 4.2%, but unemployment3.5% in December 1969, had not been below 5.9% since October 1970. Nixon’s ratings plummeted; since the New Year, his approval rating had dropped from 56% to 49%, and against his likely opponent in the 1972 presidential election he had gone from a 43-40 lead to a 47-39 deficit. He had to act.

An avid sports fan, Nixon pulled an old favorite from his playbook. “One of the sharpest memories [Nixon’s] experience,” Theodore H. White wrote was:

…the campaign against John F. Kennedy in 1960, and how the economy affected that campaign. As early as 1959, Nixon, then vice president, recognized the political danger when the second Eisenhower recession began. He had advocated an easy money-pumping policy early in the cabinet to get the economy going before the 1960 elections. His only ally had been economist Arthur Burns, but the Eisenhower administration had waited until late spring to ease the economic situation. credit. By then it was too late, because priming the pump requires a long lead time; and Nixon was forced to campaign against Kennedy as unemployment rose across the country in the fall. He had lost. He did not want to repeat that experience in 1972. Now time began to work against him again.

‘I’ve never seen anyone get beat upflin the United States,” Nixon said, “I have seen many people beaten because of unemployment.”

In one of Nixon’s famous secretly recorded conversationsArthur Burns, nominated by Nixon and now chairman of the Federal Reserve, told the president in February 1971:

In my opinion, the monetary authority… has laid the foundation for recovery… What is holding the economy back now is not a shortage of money, but a certain shortage of confidence. If we were to flood the banks even more than they are now, I think you could have terrible problems in 1972 and beyond.

But as unemployment remained stuck at around 6%, Nixon continued to pressure Burns to ease monetary policy. “We really need to think about making it happen… late summer and fall of this year and next year. As you know, there is a tremendous slowdown,” Nixon told Burns in March, but Burns responded that “cutting interest rates would risk accelerating an international monetary crisis.”

Nixon changed course and discussed a possible vacancy on the Federal Reserve Board with Office of Management and Budget Director George Shultz in July:

I told you [Treasury Secretary John] Connally to find the easiest money man he can find in the country. And one who will do exactly what Connally wants and one who will speak out against Burns… and Connally searches the damn hills of Texas, California, Ohio. We’re getting a populist senator [sic] on that board somehow…If you know anyone crazy like that, let me know too…I want a guy on that board that I can control. Really and truly. Actually, Connally can exercise control.

‘To put further pressure on Burns’ Burton A. Abrams writes: “Nixon told his closest advisers, John Ehrlichman and HR Haldeman, to leak a story through Charles Colson” – all key figures in the Watergate scandal – “about a recommendation to expand the Federal Reserve Board.” This “packing” would undermine Burns’ authority. Haldeman would also leak that Nixon was considering legislation to curb the independence of the Federal Reserve.

On November 10, Burns folded and told Nixon, “Look, I just wanted to let you know that we’re lowering the discount rate today.” In December, Schultz told Nixon: “[Burns] agrees that the money supply must increase now.” Later, Nixon urged Burns, “The whole point is, get it [the money supply] upwards. You know, fair enough? Kick it!”

He did. Unemployment fell to 5.3% on election day. Nixon was reelected in a landslide, although this had as much to do with the Democrat’s missteps as anything else.

The wage and price controls announced in August 1971 temporarily dampened inflation. But in September, Milton Friedman had warned Nixon that price controls “might hold.” [inflation] at least through the elections… After this you will see a big increase in inflation.” This soon became reality. Annual inflation rose from 1.4% on Election Day to 4.9% when Watergate forced Nixon’s resignation in August 1974. One commodity after another rose sharply against the dollar; soybeans, wheat and finally oilthis last one, a consequence of inflation, and is often mistaken for a cause even today. Unemployment was rising again, reaching a peak of 9.0% in May 1975. There was ‘stagflation’.

The American economy was experiencing the “terrible problem” that Burns and Friedman had warned about The great inflation of the 1970s would not abate until the policies that caused it were reversed by Paul Volcker. Its origins were not in the Arab oil fields, but in Richard Nixon’s White House.