Today, Powell absolutely does not want to repeat the fate of Burns.

Written by: Ye Zhen, Wall Street Insights

Trump is threatening the independence of the Federal Reserve with tweet after tweet, and the last time a U.S. president exerted such pressure on the Fed dates back to 1971, on the eve of the era of stagflation in the United States.

In 1971, the U.S. economy was already facing the dilemma of "stagflation," with an unemployment rate of 6.1% and an inflation rate exceeding 5.8%, while the international balance of payments deficit continued to expand. To secure re-election, President Nixon exerted unprecedented pressure on then-Fed Chairman Burns.

White House records show that in 1971, Nixon's interactions with Burns significantly increased, especially in the third and fourth quarters of 1971, where the two met formally 17 times each quarter, far exceeding the usual communication frequency.

This intervention manifested in policy operations as follows: that year, the U.S. federal funds rate plummeted from 5% at the beginning of the year to 3.5% by year-end, and the growth rate of M1 money supply reached a post-World War II peak of 8.4%.

In the year when the Bretton Woods system collapsed and the global monetary system underwent dramatic changes, Burns' political compromises laid the groundwork for the subsequent "Great Inflation," which would not be resolved until Paul Volcker significantly raised interest rates after 1979.

As a result, Burns bore the historical infamy. Today, Powell absolutely does not want to repeat Burns' fate.

Burns' Compromise: Political Interests Over Price Stability

In 1970, Nixon personally nominated Arthur Burns to be the Chairman of the Federal Reserve. Burns was an economist from Columbia University and had served as Nixon's economic advisor during his campaign, and the two had a close personal relationship. Nixon had high hopes for Burns—not as a guardian of monetary policy, but as a "cooperator" in political strategy.

At that time, Nixon faced immense pressure to secure re-election in the 1972 election, while the U.S. economy had not yet fully recovered from the recession of 1969, and unemployment remained high. He urgently needed a wave of economic growth, even if it was a false prosperity created by "easy money."

Thus, he continuously pressured Burns, hoping the Fed would lower interest rates and increase the money supply to stimulate growth. White House internal recordings captured multiple conversations between Nixon and Burns.

On October 10, 1971, in the Oval Office, Nixon told Burns:

"I don’t want to go out of town fast… If we lose, this will be the last time Washington is governed by conservatives."

He hinted that if he failed to secure re-election, Burns would face a future dominated by Democrats, and the political atmosphere would change drastically. When Burns attempted to delay further easing policies by arguing that "the banking system is already very loose," Nixon directly rebutted:

"The so-called liquidity problem? That’s just bullshit."

Soon after, in a phone call, Burns reported to Nixon: "We have lowered the discount rate to 4.5%."

Nixon responded:

"Good, good, good… You can lead 'em. You always have. Just kick 'em in the rump a little."

Nixon not only pressured Burns on policy but also made clear statements regarding personnel arrangements. On December 24, 1971, he told White House Chief of Staff George Shultz:

"Do you think we’ve influenced Arthur enough? I mean, how much more pressure can I put on him?"

"If not, I’ll just bring him in (If I have to talk to him again, I’ll do it. Next time I’ll just bring him in)."

Nixon also emphasized that Burns had no authority to decide on the appointments to the Fed Board:

"He needs to understand, this is like Chief Justice Burger… I’m not going to let him name his people."

These dialogues from White House recordings clearly demonstrate the systematic pressure the U.S. president exerted on the central bank chairman. And Burns indeed "complied," justifying his actions with a set of theories.

He believed that a tight monetary policy and the resulting rise in unemployment would be ineffective in curbing the inflation of the time, as the roots of inflation lay in factors beyond the Fed's control, such as unions, food and energy shortages, and OPEC's control over oil prices.

From 1971 to 1972, the Fed lowered interest rates and expanded the money supply, driving a brief economic boom and helping Nixon achieve his re-election goal.

However, the costs of this "artificially created" economic prosperity soon became apparent.

The "Nixon Shock" Bypassing the Fed

Although the Fed is the implementing agency of monetary policy, when Nixon announced the "suspension of the dollar's convertibility into gold" in August 1971, he did not heed Burns' opposition.

From August 13 to 15, 1971, Nixon convened 15 core aides for a closed-door meeting at Camp David, including Burns, Treasury Secretary Connally, and then Deputy Undersecretary of International Monetary Affairs Volcker.

During the meeting, although Burns initially opposed closing the dollar-gold convertibility window, under Nixon's strong political will, the meeting directly bypassed the Fed's decision-making process and unilaterally decided to:

• Close the dollar-gold convertibility window, suspending foreign governments' rights to convert dollars into gold;
• Implement a 90-day wage and price freeze to curb inflation;
• Impose a 10% surcharge on all taxable imported goods to protect U.S. products from exchange rate fluctuations.

This series of measures, known as the "Nixon Shock," undermined the foundations of the Bretton Woods system established in 1944, leading to a surge in gold prices and the collapse of the global exchange rate system.

Initially, wage and price controls suppressed inflation in the short term, keeping U.S. inflation at 3.3% in 1972. However, by 1973, Nixon lifted price controls, and the consequences of the excessive circulation of dollars and supply-demand imbalances quickly became apparent. Coupled with the outbreak of the first oil crisis that same year, prices began to soar.

The U.S. economy soon fell into a rare "double whammy," with inflation reaching 8.8% in 1973 and soaring to 12.3% in 1974, while unemployment continued to rise, forming a typical stagflation pattern.

At this point, Burns attempted to tighten monetary policy again but found that he had already lost credibility.

His reliance on political compromises and non-monetary measures laid the groundwork for the "Great Inflation," which would not be resolved until Paul Volcker took office in 1979 and implemented extreme interest rate hikes to thoroughly "suppress" inflation, allowing the Fed to regain its independent prestige.

Powell Absolutely Does Not Want to Be the Next Burns

Burns' tenure left an average inflation rate of 7% and weakened the credibility of the Fed.

Internal Fed documents and Nixon's recordings show that Burns placed short-term political needs above long-term price stability, and his tenure became a cautionary tale against central bank independence.

Some financial commentators have quipped:

"Burns didn’t commit fraud, didn’t kill anyone, and wasn’t even a pedophile… His only crime was—lowering interest rates before inflation was fully under control."

In contrast, Burns' successor, Paul Volcker, "choked" inflation with a 19% interest rate, creating a severe recession but becoming a hero in Wall Street, economic history, and even in the public eye for ending inflation.

History has shown that Americans can forgive a Fed chairman who causes an economic recession, but they will not forgive a chairman who ignites inflation.

Powell is well aware of this and absolutely does not want to be the next Burns.

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