Read our article in the Cayman Financial Review Magazine, eversion 

On 15 August, 1971, President Richard Nixon unilaterally ended the international system of rules that had governed the financing of international trade and investment since the end of World War II.

 By renouncing the United State’s obligation under the gold exchange standard (countries pegged their exchange rates to and settled international payments in the US dollar while the US pledged to exchange its currency for gold at $35 dollars an ounce), ie by closing the gold window, Nixon destroyed the Bretton Woods system of fixed exchange rates overseen by the International Monetary Fund since its creation in 1944. Nixon’s New Economic Policy announced that day also included the only peacetime wage and price controls in US history.

Arthur Burns’, Nixon’s counsellor from 1969-70 then chairman of the board of governors (1970-78), personal diary reflections on these and other Nixon era events are fascinating reading for those of us over 60 who remember them and can fill in the missing historical context. Regrettably, Robert H. Ferrell, the editor of “Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974,” provides little to none of this badly needed context. Characters such as John Connally, Spiro Agnew and Gerald Ford, appear and disappear in Burns’ notes without contextual explanation by Ferrell. This is a serious deficiency of this book, which nonetheless provides disturbing and sad insights into American government under Nixon and of Burns himself.

If the Tea Party wants evidence for why as little as possible should be trusted to government, here is a bundle. In addition to Nixon’s constant eye on the next election as he formulated policies, Burns observed in his 12 February 1969 entry:

“As I watch our Cabinet in action, I wonder more & more whether or how they differ from the LBJ people. They push for their departments, care not about money, rely on LBJ’s people, and talk like them. If this continues, people over the country will be asking what promises for change we are fulfilling. Fascinating to watch cabinet officers becoming so quickly the prisoners of the career civil servants.” (page 7)

It took Burns a long time to see Nixon for what he was, a duplicitous, insecure man, more interested in re-election than the nation’s well being. Nixon launched a campaign of leaked threats to curtail Federal Reserve independence to pressure Burns, who Nixon did not trust, to ease monetary policy (faster monetary growth and lower interest rates) well ahead of the 1972 elections in order to reduce relatively high unemployment rates (6 per cent). The contrast between Burn’s diary as he attempts to uncover Nixon’s true feels and involvement in these leeks and the White House tapes, in which Nixon plots against Burns behind his back is pathetic and shocking.

Burns correctly understood the bigger picture. Lowering interest rates (monetary stimulus) in 1970 and 71 would worsen the international pressure on the dollar and accelerate the drain of US gold under the terms of the gold exchange standard. It would destroy the international monetary system established in Bretton Woods, which was probably doomed anyway as a result of macro policy mismanagement by the reserve currency country, the United States.

Burns said the right things, tighter fiscal and monetary policy, but like Nixon seemed at times to be on all sides of the issues. While arguing with Nixon against lowering interest rates, he pushed for them at the Fed2. In October 1971, the White House tapes recorded this telephone exchange between Nixon and Burns: Nixon: “As a safeguard, I will ask the Congress [for standby controls on interest rates]. Now, that doesn’t bother ya?

Burns: “No, no. Mr President, I don’t think you have much of a choice.”

While opposing more than a temporary wage and price freeze, Burns argued for an “incomes policy” of wage and price guidelines to combat cost push inflation in an era of stagflation: “‘incomes policy’ – is absolutely necessary to shorten the transition phase, in which we are now caught, of moving from cost push inflation to economic balance.” (page 29) Herb Stein, chairman of Nixon’s Council of Economic Advisors explained that: “The theory was that the inflation then underway (about 4 per cent per year) was propelled by expectations of inflation, not by underlying demand and supply conditions. The 90-day freeze would shake those expectations, and then the economy would subside into price stability.”

Nixon was adamantly against wage and price controls almost until he imposed them on 15 August, 1971. On 21 July, 1971 Nixon instructed Connally to scare the public away from supporting them. “And the way you do it is talk up 50,000 OPA [Office of Price Administration] cops, you know running around, telling everybody, messing in your face and so forth. Everything is fixed. You can’t change jobs, you know. Rationing! Just, just, just point it out. What has happened abroad..… This is a socialist scheme, a scheme to socialize America.”

Burns’ tenure as chairman of the Federal Reserve is one of its worst. Money grew faster (the primary responsibility of the Fed) and inflation was consequently higher than under any other eight year period after WWII. The inflation rate, annual average rate of increase in the consumer price index, averaged about 9 per cent over the period of his chairmanship peaking at over 12 per cent/year in late 1974. See Figure 1.

"The only disagreement among economists is whether Burns fully understood the mistakes he was making, or was so wedded to incorrect Keynesian theories that he didn't realize what he was doing. The only alternative is that he was under irresistible political pressure from Nixon and had no choice. Neither explanation is very favourable to Burns. Economists now recognize the Nixon era as Exhibit A in how the adoption of bad economic policies in pursuit of short-term political gain eventually turns out to be bad politics as well."

Nonetheless, Burns projected an aura of wisdom, integrity and arrogance, which from his diary he seemed to believe himself. He observed that “we often end up believing what we like to believe – about others and also about ourselves.” (page 120)

Burns was born in the Ukraine 27 April, 1904 and died 27 June, 1987 in Baltimore. I was one of about 300 people who attended his memorial service at the Adas Israel Synagogue in Washington on July 23, 1987 where he was eulogised by former Presidents Richard M. Nixon and Gerald R. Ford, former secretary of the Treasury for Nixon and current secretary of state for President Reagan George P. Shultz, Federal Reserve Board Chairman Paul A. Volcker, Sen Pete V. Domenici (R-N.M.) and economist Milton Friedman. In this Secret Diary Burns trashes almost all of them (he has little to say about Friedman and Ford and nothing about Domenici).

On Paul Volcker, undersecretary of the Treasury and later president of the Federal Reserve Bank of New York and the chairman of the board of governors of the Federal Reserve, Burns wrote on 20 February, 1969 that:

“Volcker troubled me, gave a stupid reply to president’s question why the British are interested in raising price of gold…” (Page 13) A year and a half later he wrote: “Somehow, poor and wretched Volcker – never knowing where he stood on any issue – had succeeded in instilling an irrational fear of gold in his tyrannical master [Treasury Secretary John Connally], whom he tried constantly to please by catering to his hatred of foreigners (particularly the French)…” (Page 65)

On George Shultze, director of the Bureau of the Budget and later the secretary of the Treasury (still later secretary of state under Reagan), Burns, in reference to a discussion on closing the gold window, wrote on 26 November, 1971 that “Shultz’s performance was an astounding exercise on the part of a man who should know that he has not the slightest understanding of international economics or finance. What a pity that this quiet, persuasive, but woefully ignorant ideologist has such influence with the President.” (Page 66) Two months later he wrote:

“Poor Shultz! He tried so hard to be a politician: he was entirely willing to politicize, if need be, the Budget Bureau; he actually did so in large part; and now he found himself the author of the most distressing budget in peacetime history.” (Page 71) A few years’ later Burn’s views of Shultz softened: “He has some fine qualities – character and decency.” (Page 103)

Still later in the context of the Watergate scandal Burns wrote on 9 June, 1973: “I can hardly recall a case when Shultz (in my presence) stood up against the president. I am sure, nevertheless that Shultz is thoroughly honest and had avoided wrongdoing. He is, unfortunately, not a leader, and while he’s become more pragmatic, he continues to worship classical principles of a free market (overlooking the fact that there is no free market to much of our contemporary economy). (Page 105) On December 16, 1973 he wrote:

“Shultz is tired, but I think he likes being secretary [of the Treasury] too much to give it up. I may be wrong. If he goes, I’ll miss him.” (Page 116)

On Richard M Nixon, Burns wrote on 8 July, 1971: “I had long suspected that the President lacked true self-assurance…. I was seized suddenly with fear for the safety of our country which depends so heavily on this insecure man….” (Page 46) And on 22 August, 1971:

“All in all, there was little room for any doubt – taking the president’s words as he moved from one subject to the next – that he was governed mainly, if not entirely, by a political motive, that he had reached the decision that the kind of changes that we were discussing – on price & wages, taxes, etc. – were essential for the campaign of 1972.” (Page 53)

On 14 July, 1973 Burns wrote of Nixon: “The president has many shortcomings. He has few convictions, but now and then he gets into a euphoric mood where he wants to persuade himself that he’s a statesman. But his sycophantic advisers cannot even recognize that. They know his prejudices and they cater to them. What a tragedy for this fine and noble nation!” (Page 107) In his last entry (25 July, 1974) Burns notes: “In my contacts, president has always been articulate, and rarely swore beyond saying ‘damn.’ In other words, he conducted himself with dignity. But, as the transcripts [of the famous White House tapes] show, he spoke in a private jargon, sounded illiterate, and used foul language all over the place, in his conversation with H [H. R. Haldeman], E [John D. Ehrlichman] & [Chuck] Colson. Kissinger said his experience was exactly same as mine, and that he could not recognize the man he thought he knew, as he read the transcripts.”

But Burns did not judge all of those around him negatively. On 29 February, 1972, nine months before Agnew resigned for corruption in office, Burns wrote: “Ted Agnew is an honest man. He has plenty of guts and good sense.” (Page 76)

1. I am grateful to Burton A. Abrams and James L. Butkiewicz for providing me with their manuscript: “The Political Economy of Wage and Price Controls: Evidence from the Nixon Tapes” and the extensive quotes from the tapes provided there.
2. Federal Open Market Committee minutes from 1970-71 indicate that Burns pressed for a more expansionary policy than did some other members of the Committee.
3. October 7, 1971 (10-121) Nixon and Burns on the White House telephone.
4. Stein, “Wage and Price Controls: 25 Years Later,” http://msjc.edu/econ/dpynn/article081902.htm
5. Nixon from the White House tapes of July 21, 1971 (541 – 2) Nixon, Haldeman, Connally, Shultz, Ehrlichman and Colson.
6. Bruce Bartlett, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, New York: Doubleday, 2006, p. 147
7. Ibid. Page 133. Having read some of these transcripts myself, I had the same reaction.