Rethinking the Burns Legacy

Arthur Burns, who chaired the Federal Reserve Board of Governors from 1970 to 1978, is commonly held up as an example of a bad little central banker, the kind that parties instead of doing his homework and corrupts the younger kids with his spiked punch. I’ve made my own share of snide insinuations about Burns, but a recent look at the data has made me wonder if he really deserves the level of scorn he has received.

It seems pretty clear that Burns did succumb to political pressure from President Nixon for easy money during the time that Nixon was up for reelection; at the very least, Burns made some large errors in judgment at a time when those errors happened to benefit the man who appointed him. But Burns was certainly not the only central banker to be swayed by politics. In the eyes of history, Nixon turned out to be a particularly bad politician with whom to be associated. But if Burns gave the Republicans a free ride in 1972, they certainly paid for it in 1976.

One particular statistic interests me: for the 12 months ending in February 1970, when Burns began his chairmanship, the CPI inflation rate was 6.3%. For the 12 months ending January 1978, when Burns ended his chairmanship, the rate was 6.7%. On balance, that hardly looks to me like letting inflation get out of hand. Granted, the unemployment rate was considerably higher (6.4% vs. 4.2%), but it would be a stretch to blame Burns for that, considering the role of OPEC, and considering that many economists subsequently began to think 6.4% was, if anything, still too low.

Burns was no saint, but it now looks to me like his problem was largely an inherited one. The former Fed chairman, William McChesney Martin, had already allowed inflation to rise to an uncomfortable level. Martin later acknowledged (to his “everlasting shame”) having given in to political bullying himself. As a matter of personal character, I give Martin a lot of credit for confessing his sin, and perhaps history was right to absolve him and to open to him the pearly gates of that great Open Market in the sky. But just so we have the record straight, it looks like Johnson’s influence on Martin deserves as much blame for the subsequent high inflation rates as does Nixon’s influence on Burns.