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You know, when you think about historical figures, a lot of them get reduced to, like, a single piece of trivia. Yeah, name any famous historical figure, like Napoleon. Short French General and the Funny Hat. Or Amelia Earhart.
Lady Pilate who disappeared? Woof. Now think about people like former chairs of the Federal Reserve Bank. They don't know what's achieved household name status while they're in office.
And after they leave, the passage of time usually boils down their tenure to a sentence. If they even get that. Take Arthur Burns, Chairman of the Fed in the 1970s. His name has been invoked recently by commentators of the Financial Press, but as a cautionary tale.
I don't think J. Powell wants to be the next Arthur Burns. He doesn't want to be Arthur Burns. He doesn't want to be Arthur Burns.
Or be being another Arthur Burns. Arthur Burns. Arthur Burns. Arthur Burns.
Woof. Again. Hello, and welcome to Planet Money. I'm Adrian Ma.
Arthur Burns does not have the best reputation. History remembers him as the Fed Chair who didn't raise interest rates enough and let inflation run rampant. This is the outcome that current Fed Chair Jerome Powell wants to avoid. Today on the show, we bring you two episodes of our daily podcast, The Inticator, that go inside the Federal Reserve, past and present.
Economics may seem like a cold, hard, data-driven endeavor, but at the heart of the Fed there are real, fallible human beings trying to figure out the best direction to steer the national economy. They are making decisions that history will remember and judge. First, we'll look back at the fraught tenure of Arthur Burns. Then we bring you a conversation with current San Francisco Fed President, Mary Daly, an instrumental figure in the decision-making of the modern-day Federal Reserve.
Arthur Burns was an Austrian-born, pipe-smoking economist. He was also a professor, taught at Rutgers, and one of his students happened to be one of the most notable economists of the 20th century, Milton Friedman. Arthur Burns was also friends with President Richard Nixon. The two men worked together in the Eisenhower administration, and Burns was Nixon's economic advisor for his 1968 presidential campaign.
Two years later, in 1970, Nixon gave Burns a warm, welcome as Fed Chairman at his swearing in ceremony. You see, Dr. Burns has a standing vote of appreciation in advance for lower interest rates and more money. Is that Nixon making a joke about how the Fed should keep interest rates low?
Yes, and that wasn't the only joke he made about what he thought his new Fed Chair should do. I respect his independence, however I hope that independently he will conclude that my views are the ones that should be popular. You can see Burns Grinnis. You see it in the video.
Chris Hughes is a senior fellow at the Institute on Race, Power, and Political Economy at the New School. He's also co-founder of Facebook and a former publisher of the New Republic, but all that aside, today we're talking to him because he studies the history of central banking. Do you love reading Fed meeting minutes? I do, particularly the ones from the early 70s and prior.
Chris says he's long been fascinated by the 1970s as a pivotal period in American politics and the economy. For him, the Fed is a major part of that story, and so is Arthur Burns, because he was Fed Chair for most of that decade. And the narrative that's developed around Burns is that he kept interest rates too low and allowed inflation to get out of control. To be honest, no one today thinks that Arthur Burns was a great leader of the Fed.
The convention of wisdom is that he was politically compromised, confused, ineffective. That is his reputation today. But when Arthur Burns first took a job, he came in and everybody expected him to be an inflation fighter. And Burns hated inflation.
He believed in eroded business confidence leading to reduced investment and high unemployment. And yet the Fed underburns eased up on rates in the early part of the 1970s when US inflation was already elevated around 5%. And there are some different theories about why Burns did this. One theory is political pressure from Nixon, and that brings us back to Burns grimacing at the President's joke about Fed independence.
The press laughs to everyone in the room laughs because Nixon's touting the official line of Fed independence, but he's going to apply political pressure. And Burns knows the guy. And he understands that's going to be a challenge. And it is.
Nixon wanted low interest rates to stimulate the economy and boost his reelection prospects for 1972. And Burns actually writes in his diary about getting pressure from the President on this. But Chris doesn't buy the idea that Burns caved to Nixon. And former Fed governor from that time who actually disagreed with Burns on rates, he later said that it wasn't about political pressure.
It was about avoiding a recession. And this tradeoff between corralling inflation and risking a recession is also the debate that's taking place today. As we've talked about on the show, keeping rates elevated can help bring down inflation because it raises the cost of borrowing across the economy and cools off demand. But sustained high rates can also cause pain in the form of unemployment.
Chris says not only did Arthur Burns worry about causing recession, but he also wanted other parts of government to pitch in on the inflation problem. He believed that interest rates were a powerful tool, but not the only tool. He wanted government to use things like tax policy and maybe even wage and price controls to also help fight inflation. He was trying to moderate the interest rate hikes that were necessary by getting the rest of government to do their job.
In other words, in the absence of other government action, he'd have to raise rates to such a high level, creating a recession, throwing millions out of work, and the guy didn't want to do it. In 1971, Nixon did put wage and price controls into place. This was a controversial move because these types of controls usually only bring down inflation in a temporary way. And they create other problems like shortages and layers of bureaucracy.
Over the next few years, the Fed raised rates to get a handle on inflation. Then it cut rates when it felt unemployment was getting too high. Inflation went up. And so did people's expectations of future inflation.
By 1974, inflation was in double digits and the economy was in a deep recession. Chris says in hindsight, even as an Arthur Burns defender, he can point to certain periods and say, mmm, rates should have been higher. But he also thinks Burns was dealing with a couple of big economic forces that shaped his approach to interest rates. One of those is that the American financial system was in a fragile state, and Burns didn't want to further destabilize it.
During his tenure, two important companies, including a major bank, ended up collapsing. There's a generalized fear that if the cost of money increases too fast or too high, it's going to cause the financial system to shake, if not even potentially come apart. The other big force was what was actually causing inflation. In the 1970s, inflation was a global issue.
There were big shocks coming from the supply side, like the Arab oil embargo of 1973. It wasn't clear that hiking rates, which would primarily affect demand, was the right approach for tackling this kind of inflation. It was a mystifying and wildly frustrating period because it was not clear what to do. In other words, when the sources of inflation, particularly in 74, were largely driven by supply side shocks.
Raising rates would certainly throw the economy into the deep freeze. It may help with inflation to some extent, but if it's not actually going to bring it back to a level that is reasonable, then what do you do? Today's economy has also seen supply side pressures drive inflation, and every time new data comes in on inflation and unemployment, the Fed has to think, do we stop raising rates now before we cause unnecessary economic pain? Or do we keep going to make sure this inflation is really vanquished?
I guess to bring things around to where we started. Everybody has one sentence that history sort of boils them down to you, right? Even if the old sentence about Arthur Burns is that he let inflation get out of control, what should his new sentence be? Well, for a Burns defender like Chris, maybe it's something like, he made tough trade-offs to stabilize the financial system and try to avoid recession.
That works? Or what about, he tried his best during unprecedented economic times? Like, he tried. He tried.
He tried. Yes, he gave it his best shot. After the break, our co-host Darien Wood speaks to Mary Daly, the current president of the San Francisco Fed. We hear how she grapples with the decisions that future historians and podcasts will look back on and judge.
Mary Daly remembers her parents struggling with inflation decades ago. You know, I still feel the feelings I could still get them at the top of my mind, the feelings I had growing up. They were about watching my parents. They would put the card table up in the living room and they would sit around it and they would work through the bills.
And the stacks of bills were high and inflation was making it more costly, so they would start sorting out how can we pay, what would we do, how can we manage this. And the stress I saw on their faces when they did that just kept increasing. And that's my first understanding of inflation on people. And inflation is still front of mind for Mary Daly.
She's now the president of the Federal Reserve Bank of San Francisco. When you think about the backgrounds of senior leaders at the Fed, you probably think prep schools, math tutors, MIT maybe, Stanford or Harvard, but Mary Daly is different. As a 15-year-old in the suburbs of St. Louis, Mary dropped out of high school.
My family needed to have an extra earner and experience like so many American families do, health and economic shocks that leave us with less than we need. After working at Target and Donut Shops, a mentor steered Mary Daly towards getting her GED and that GED led to the University of Missouri. That's where she discovered a love of economics. And later she would eventually get an economics PhD.
Now as president of one of the 12 regional Federal Reserve Banks, Mary is a key national decision maker. She's part of what's known as the Federal Open Market Committee or the FOMC. This is the group at the Fed that deliberates over raising or lowering interest rates to drive the economy. Mary says that when the FOMC meets, it's like passing through a portal.
Why don't you walk across that doorway? All political views, all any of the discussions that are part of the parlance of our everyday lives, they are put aside. And everybody walks in with the idea that our goals, our mandated goals are to ensure that we have a lot of responsibility, low in stable prices and full employment. Everyone who wants a job can count one.
The regional Fed presidents take turns each year to be able to vote on the committee. And in 2021, Mary Daly was a voting FOMC member. And so remember that 2021 was the year when inflation was starting to rise up. It was this very critical time.
People were debating whether inflation would stay high or whether it was transitory. And the Fed seemed to be on the side that thought inflation would be transitory. It was keeping interest rates very, very low, close to zero. And a lot of economists and commentators have since argued that this decision of keeping interest rates low fueled inflation.
Because the data come in, you have to say, wow, inflation has surprised us in its persistence. So I just want to go back in time to early 2021. Inflation was starting to creep up higher. It was getting to around 4%, 5% much higher than what the Fed wants, which is 2%.
And in that early moment when inflation is starting to rise, what were you thinking at the time? So go back to that time. Here's a couple of things that I think have been forgotten basically, but it may be lost. But one of them was that if you did a decomposition of inflation, that means simply you'd switch all the inflation data, you said, what kinds of goods and services are moving prices up.
And what you found is it was in airline fares and used cars and some things that were very narrow and directly related to supply chain disruptions caused by ongoing COVID. So then the thinking is, well, we still have that early period of 21, unemployment was still in just around 6%. And the inflation we were seeing seemed directly related to COVID related supply disruptions. And I think if I went back and said, what did I miss?
What I missed was that we wouldn't get COVID behind us. I thought with the vaccinations rolling out here in the United States, other countries that we would have COVID put down earlier than it was, but that didn't happen. And as a consequence, supply chains didn't recover. Mary says that policy supported demand also contributed to inflation, that $5 trillion in government spending during the pandemic.
A policy makers on the fiscal head monetary side were trying to build a bridge for people so that nobody fell through or as few people fell through because the pandemic is possible. And yet policy supported demand collides with COVID constrained supply and the result is inflation. Would you have done things differently? If you knew everything you knew now, would you have argued for and it's just right rise earlier?
Well, you know policy is in a really good place now. And we've seen monetary policy work quite effectively. So when I do the postmortem go back and look at the data, here's what I learned from the entire sequence of events. I learned one that, you know, pandemics are harder to get rid of than you think.
And that's a key lesson. I learned that the balance sheet or asset purchases, we always say we want them to work together with the fund train. Right. So a bit of an explainer here.
Asset purchases is sometimes known as quantitative easing. And that's when the Fed was buying up government debt and other assets to stimulate the economy during the pandemic. And at the same time in mid 2021, the Fed was looking at whether or not to raise interest rates and that's also known as the funds rate. Because one is a slow moving tanker ship that's asset purchases and the other is a speedboat, that's the funds rate.
We need to get people prepared for the fact that we might turn our speedboat before the tanker ship can turn. So down the road, I would suspect that we won't be in that situation where we feel somewhat constrained. And so I think that's the humbling experience of this episode is that, wow, we need to be thoughtful about the long term effects of events. They're so hard on an economy and all the individuals in it.
And now the Fed is raising interest rates. It's done that at very, very fast pace. The idea is to slow the economy down and bring inflation back down to hopefully around 2%. And so a lot of people are nervous about a possible recession around the corner.
The FOMC projection is that unemployment will rise. And this is kind of the implicit message or the explicit message is that unemployment needs to rise to contain inflation. Do we really need to raise unemployment to bring inflation down? So maybe I can unpack that a little bit because I think speaking in unemployment and inflation can sometimes lose the important things that are going on underneath.
So the job market is out of balance. Demand is outstripping supply. All that means is there are more posted vacancies or hope-wanted signs that we have people interested in filling those jobs. And so that wages are a form of prices.
And when demand is outstripping supply, prices rise. So we bridle the economy. We bring supply and demand of workers back in balance. And the consequence of that is lower inflation and also most likely a rise in the unemployment rate.
So I think about it as we need to bring supply and demand back in balance to deliver low and stable prices. And that will result in unemployment rising a bit. But we're not trying to orchestrate an increase in unemployment to get low inflation. If inflation comes back down and unemployment just goes up a little bit, there will be no one happier than me because I don't understand deeply.
I mean, my parents went from high inflation to lost jobs. And I really recognize that people need both things. And the job of the Fed is to as carefully and consciously as we can navigate through this so that there's the least pain in the economy as possible while we restore price stability. So we're going to be conscious that we had to slow the pace of increases, look around, watch the data, see how things are coming out, and then make decisions meeting by meeting by meeting.
The president of the Federal Reserve Bank of San Francisco, it's been a real pleasure talking to you. Oh, it's my complete pleasure. Thank you. These two indicator episodes were originally produced by Beatle and Brittany Cronin, who are fact-checked by So Juarez and Dylan Sloan and Kicking Cannon edits the show.
The Planet Money version was produced by Dylan Sloan and edited by Dave Blanchard. I'm Waylon Wong, this is NPR. Thanks for listening.