The last time a U.S. president put so much pressure on The Federal Reserve (FED) was in 1971 during Nixon's presidency, and two years later, the U.S. entered a period of stagflation.

Powell does not want to be the next Burns.

Written by: Ye Zhen

Source: Wall Street Journal

Trump is threatening the independence of the Federal Reserve with a series of tweets, and the last time a U.S. president applied such pressure on the Fed dates back to 1971, on the eve of the Great Stagflation.

In 1971, the U.S. economy was already facing the dilemma of “stagflation,” with an unemployment rate of 6.1% and an inflation rate surpassing 5.8%, while the international balance of payments deficit continued to expand. In order to secure re-election, President Nixon exerted unprecedented pressure on then-Federal Reserve Chairman Burns.

Records from the White House indicate that in 1971, the interactions between Nixon and Burns significantly increased, especially in the third and fourth quarters of 1971, where the two formally met 17 times each quarter, far exceeding the usual frequency of communication.

This intervention manifested at the policy operational level as follows: that year, the U.S. federal funds rate dropped sharply from 5% at the beginning of the year to 3.5% at the end, and the growth rate of the M1 money supply reached a post-World War II peak of 8.4%.

In the year when the Bretton Woods system collapsed and the global monetary system underwent dramatic changes, Burns’ political compromises laid the groundwork for the later “Great Inflation,” which was only resolved after Paul Volcker significantly raised interest rates in 1979.

Burns thus bore the historical infamy. Today’s Powell certainly does not want to repeat Burns’ fate.

Bernanke’s Compromise: Political Interests Overwhelm Price Stability

In 1970, Nixon personally nominated Arthur Burns as the Chairman of the Federal Reserve. Burns was an economist from Columbia University and had been an economic advisor during Nixon’s campaign; the two had a close personal relationship. Nixon had high hopes for Burns—not as a guardian of monetary policy, but as a “coordinator” of political strategy.

At that time, Nixon was under immense pressure to seek re-election in the 1972 election, while the U.S. economy had not yet fully recovered from the recession of 1969, and unemployment was high. He urgently needed a wave of economic growth, even if it was a false prosperity created by “printing money.”

Thus, he continuously pressured Burns, hoping the Federal Reserve would cut interest rates and increase the money supply to stimulate growth. Internal recordings from the White House documented multiple conversations between Nixon and Burns.

On October 10, 1971, in the Oval Office, Nixon said to Burns:

“I don’t want to go out of town fast… If we lose, this will be the last time Washington is governed by conservatives.”

He hinted that if he fails to be re-elected, Burns will face a future dominated by Democrats, and the political atmosphere will change completely. In response to Burns trying to delay more easing policies by claiming that “the banking system is already quite loose”, Nixon directly rebutted:

“What is the so-called liquidity problem? That’s just bullshit.”

Soon after, in a phone call, Burns reported to Nixon: “We have lowered the discount rate to 4.5%.”

Nixon responded:

“Good, good, good… You can lead 'em. You always have. Just kick 'em in the rump a little.”

Nixon not only pressured on policy but also made clear statements regarding personnel arrangements. On December 24, 1971, he told White House Chief of Staff George Shultz:

“Do you think we’ve had enough influence on Arthur? I mean, how much more pressure can I put on him?”

“If it doesn’t work, I’ll just bring him in (If I have to talk to him again, I’ll do it. Next time I’ll just bring him in).”

Nixon also emphasized that Burns had no authority to decide on the candidates for the Federal Reserve Board.

“He needs to figure this out, just like Chief Justice Burger… I’m not going to let him name his people.”

These dialogues come from White House recordings, clearly demonstrating the systematic pressure the President of the United States exerted on the central bank chairman. And Burns indeed “went along with it” and defended his actions with a set of theories.

He believes that the tight monetary policy and the subsequent rise in unemployment are ineffective in curbing the inflation at that time, as the roots of inflation lie in factors beyond the control of the Federal Reserve, such as unions, food and energy shortages, and OPEC’s control over oil prices.

From 1971 to 1972, the Federal Reserve lowered interest rates and expanded the money supply, driving a brief economic boom and helping Nixon achieve his re-election goal.

However, the cost of this “artificially created” economic prosperity quickly became apparent.

Bypassing the Federal Reserve’s “Nixon Shock”

Although the Federal Reserve is the monetary policy implementing institution, it did not take into account Burns’ opposition when Nixon announced the decision to “suspend the convertibility of the dollar into gold” in August 1971.

From August 13 to 15, 1971, Nixon convened 15 key aides for a closed-door meeting at Camp David, including Burns, Treasury Secretary Connally, and then-Under Secretary of International Monetary Affairs Volcker.

During the meeting, although Burns initially opposed closing the dollar-gold convertibility window, under Nixon’s strong political will, the meeting directly bypassed the Federal Reserve’s decision-making process and unilaterally decided:

Close the window for exchanging US dollars for gold and suspend the rights of foreign governments to exchange US dollars for gold;

Implement a 90-day wage and price freeze to curb inflation;

Impose a 10% surcharge on all taxable imported goods to protect American products from the impact of exchange rate fluctuations.

This series of measures known as the “Nixon Shock” undermined the foundation of the Bretton Woods system established in 1944, leading to a surge in gold prices and the collapse of the global exchange rate system.

Initially, wage and price controls suppressed inflation in the short term, keeping U.S. inflation at 3.3% in 1972. However, by 1973, Nixon lifted price controls, and the consequences of a large circulation of dollars and supply-demand imbalances quickly became apparent. Coupled with the outbreak of the first oil crisis that same year, prices began to soar.

The U.S. economy subsequently fell into a rare “double whammy” scenario, with an inflation rate reaching 8.8% in 1973 and even higher at 12.3% in 1974, while the unemployment rate continued to rise, forming a typical stagflation pattern.

At this time, Burns attempted to tighten monetary policy again, only to find that he had already lost credibility.

His reliance on political compromise and non-monetary measures laid the groundwork for “stagflation” until Paul Volcker took office after 1979 and completely “suppressed” inflation with extreme interest rate hikes, restoring the Federal Reserve’s independent prestige.

Powell absolutely does not want to be the next Burns

Burns left an average inflation rate of 7% during his term, undermining the credibility of the Federal Reserve.

Internal documents from the Federal Reserve and Nixon’s recordings show that Burns prioritized short-term political needs over long-term price stability, making his term a counterexample of central bank independence.

A financial commentator joked:

“Burns didn’t cheat, he didn’t kill, he wasn’t even a pedophile… The only crime he committed was to cut interest rates before inflation was fully under control.”

In contrast, Burns’ successor Paul Volcker ‘choked’ inflation with a 19% interest rate, which caused a severe recession but made him a hero in Wall Street, economic history, and even in the eyes of the public for ending inflation.

History shows that Americans can forgive a Federal Reserve chairman who causes a recession, but they will not forgive a chairman who ignites inflation.

Powell is well aware of this and certainly does not want to be the next Burns.