Nixonflation

In April 1971, President Nixon was worried. Inflation had fallen from an annual rate of 6.2% in February 1970 to 4.2%, but unemployment, 3.5% in December 1969, hadn’t been below 5.9% since October 1970. Nixon’s ratings were tumbling; since the New Year, his approval rating had fallen from 56% to 49% and against his likely opponent in the 1972 presidential election, he had had flipped from leading 43-40 to trailing 47-39. He had to act.

An avid sports fan, Nixon pulled an old favorite from his playbook. “Among the sharpest recalls of [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 as the second Eisenhower recession began. He had pleaded, early, in the Cabinet for an easy-money, pump-priming policy to get the economy moving before the election of 1960. His only ally had been economist Arthur Burns, but the Eisenhower administration had waited until late spring to loosen credit. By then it had been too late, for pump-priming requires long lead-time; and Nixon had been compelled to campaign against Kennedy with unemployment rising all across the country in the fall. He had lost. He did not want to repeat that experience in 1972. Now, time was running against him once more.

‘‘I’ve never seen anybody beaten on inflation in the United States”, Nixon said, “I’ve seen many people beaten on unemployment.’’

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

In my view the monetary authority…has laid the foundation for recovery…What is holding back the economy now not any shortage of money but a certain shortage of confidence. If we flooded the banks even more than we have I think you could have awful problems in 1972 and beyond. 

But with unemployment stuck near 6%, Nixon continued pressuring Burns to ease monetary policy. “We’ve really got to think of goosing it…late summer and fall of this year and next year. As you know there’s a hell of a lag,” Nixon told Burns in March, but Burns replied that “To drive interest rates lower would run the risk of accelerating an international monetary 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’ve told [Treasury Secretary John] Connally to find the easiest money man he can find in the country. And one that will do exactly what Connally wants and one that will speak up to Burns…and Connally is searching the god damn hills of Texas, California, Ohio. We’ll get a populist Senator [sic] on that Board one way or another…If you know of someone that’s that crazy let me know too…I want a man on that board that I can control. I really do. Basically that Connally can control.

“To further pressure Burns,” Burton A. Abrams writes, “Nixon told his close advisors, John Ehrlichman and H. R. 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 was also to leak that Nixon was considering legislation to curb the Federal Reserve’s independence. 

On November 10, Burns folded, telling Nixon “Look, I just wanted you to know that we are reducing the discount rate today.” In December, Schultz told Nixon “[Burns] agrees that the money supply should now go up.” Later, Nixon urged Burns, “The whole point is, get [the money supply] up. You know, fair enough? Kick it!” 

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

Wage and price controls announced in August 1971 muted inflation temporarily. But in September, Milton Friedman had warned Nixon that price controls “might be able to hold [inflation] down at least through the election…After this, you’ll have a great upsurge in inflation.” This soon materialized. The year-on-year inflation rate rose from 1.4% on election day to 4.9% when Watergate forced Nixon’s resignation in August 1974. One commodity after another surged against the dollar; soybeans, wheat, and finally oil, this latter, a consequence of inflation, being frequently mistaken as a cause even today. Unemployment was on its way up again, to a peak of 9.0% in May 1975. ‘Stagflation’ was here. 

The American economy experienced the “awful problem” Burns and Friedman had warned about and the great inflation of the 1970s would not subside until the policies which caused it were reversed by Paul Volcker. Its origins lay not in the Arabian oilfields, but in Richard Nixon’s White House.