In The Great Inflation and Its Aftermath, Robert J. Samuelson noted how a whole generation of "new economics" experts infiltrated the White House, Congress, and the Federal Reserve during the 1960s. As a result, our monetary guardians, according to Samuelson, "gradually deemphasized financial conditions and adopted the Keynesian goals of aiming for maximum performance." President Richard Nixon appointed Arthur Burns, Columbia University professor and former head of the National Bureau of Economic Research, as the new Fed chairman in 1970. Like his predecessor, William Martin Jr., Burns proved incapable of defying public opinion and political pressures.
In his PBS Free to Choose episode "How to Cure Inflation," Milton Friedman pointed out how the Fed tried to cope with the problem four times between 1957 and 1978: "But each time we lacked the will to continue. As a result, we had all the bad effects and none of the good effects."
Slowing the rate of growth of money brought painful recessions. It was more politically expedient to use a combination of voluntary and mandatory price and wage controls of the kind that seemed to work reasonably well during major wars. With the lack of patriotic props, explained Samuelson, such interventions "required almost inhuman self-restraint-companies, workers and unions had to renounce their immediate self-interest in raising prices and wages while tolerating the mistakes, inconsistencies and absurdities of government regulations and bureaucrats."
Nixon must have prayed for a miracle as he cut the link between the dollar and gold and enlisted a multitude of price commissions, pay boards, and committees on federal, state, and local levels to help him control billions of daily transactions. When the first freeze failed, the administration tried a second freeze. The result was disastrous. American farmers were squeezed between rising global feed costs and fixed prices for the meat they were trying to sell in the domestic market. People watched in desperation on national TV how the manager of one chicken hatchery was drowning thousands of baby chicks. Older Americans were remembering how FDR's New Deal had paid farmers to destroy food while millions were going to bed hungry in the 1930s. When the price controls were lifted in 1974, statistics measured inflation in double digits for the first time since Harry Truman removed the last WWII restrictions.
Gerald Ford succeeded the disgraced Nixon and was the first resident of the White House to declare inflation as "our domestic enemy number one." The recession that followed destroyed his chances in the 1976 election. With the coming of Jimmy Carter, the Fed once again reversed its contractionary policy and America entered its last and worst phase of its stagflation cycle.
Next week I will offer an account of our central bankers' complicity in weakening America's social fabric during the Keynesian era.