NCPA - National Center for Policy Analysis

The Political Origin of Stagflation

April 29, 2004

In 1972, the Federal Reserve Board subordinated good monetary policy to politics, says Bruce Bartlett.

The Eisenhower administration was blamed for Fed tightening in late 1959 that brought on a recession beginning in April 1960. After being elected president in 1968, Nixon appointed Arthur Burns chairman of the Federal Reserve. Burns job was to make sure that money and credit stayed easy through the 1972 election.

The problem was inflation.

  • Price inflation had tripled to 6.2 percent in 1969 after having been in the 1 percent to 2 percent range for many years.
  • The recession which began in December 1969 and ended in November 1970 brought it down only very little to 5.6 percent in 1970.
  • In August 1971, Nixon imposed wage and price controls, reducing inflation enough to keep monetary policy expansive through November 1972.

In "Nixon's Economy," historian Allen Matusow says, " In 1971 Nixon controlled prices, and in 1972 Burns supplied money by the bushel. The policy helped reelect the president but also assured the next cycle of boom and bust."

Once past the election, the price controls began to break down.

  • Inflation jumped to 8.7 percent in 1973 and 12.3 percent in 1974.
  • Another recession began in November 1973 and didn't end until March 1975.

After Nixon resigned, analysts blamed Burns for stagflation. Economists agree that the Fed erred drastically by not tightening in 1972 and thereby allowing the inflation genie out of the bottle.

Today the Fed is under increasing pressure to tighten monetary policy. Although no one believes Fed Chairman Alan Greenspan would knowingly use monetary policy for political purposes, the longer he waits to tighten monetary policy, the more people are going to ask whether politics is playing a role.

Source: Bruce Bartlett, NCPA senior fellow, "Monetary Policy Lag?" Washington Times, April 28, 2004.


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