Jul

16

 The Secret Diary of Arthur Burns provides a first hand account of the Federal Reserve Board Chairman for the period of 1968 to 1974. It was an interesting time frame for Fed policy. Among the issue they faced were; leaving the gold standard, floating the currency, renewing deficit spending, managing tariff/price controls, and dealing with an energy crisis to name just a few.

The context of the book takes the reader back to the highly regulated world of pre-Reagan America. Industry, trade and currencies were overseen by technocrats and this Republican administration had their hands seemingly everywhere. Bureaucracies like a wage and price boards set industrial pricing. Tariff boards controlled international trade, and currency pegs served to formalize handshake agreements between countries. The Nixon administration, however, marked the beginning of the end for at least some of these controls. Gold, famously, was the first to go. The metal increased from the longstanding $35/ounce peg. Eventually it floated freely.

The book portrays a cabinet completely preoccupied with politics, internal power struggles, and meddling in economic areas beyond their competence. On the monetary side, Milton Friedman's ideas were used but they were misapplied. The Fed boosted M1 as stimulative, but then developed a spider web of price controls to reduce the inflationary results. Hubris and indifference to basic economics were displayed by all the central players, Nixon, Burns at the Fed, Shutlz on Budget and Connally at Treasury.

For example, in dropping the gold standard Burns was the first to admit they had no idea what the consequences would be. It was purely a politically expedient decision. They needed more paper dollars to fund the ending of the Vietnam War. Also, they wanted to begin what would become many decades of federal deficit spending. In one such discussion he outlines the dynamics of a typical meeting:

page 66. "Here we were Kissinger, a brilliant political analyst but admittedly ignorant of economics; Connally, a thoroughly confused politician… Shultz, a no less confused amateur economist; I (Arthur Burns) the only one there with any knowledge of the subject, but even I not a real expert on some aspects of the intricate international problem"

Burns did argue for some growth policies including tax reductions and industry incentives. However, he was not persuasive enough. Time and time again the economically correct course was discarded for the politically easy one. Tariffs were arbitrarily thrown up to protect certain jobs prior to an election. The currency was expended to allow for politically targeting spending. Double digit Inflation was an acceptable consequence for fiscal expansion.

As an unintended benefit the book gives an interesting preview of recognizable characters in their youth like, Volcker, Shultz, and Kissinger. Burns though is often brutal in his character assessments. Burns made clear the book was not to be released until 30 years after his death. I can see the reason why.


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