Monetary Policy a Half Century Ago, and Now

Today I  published an article in Project Syndicate. It starts with a memo sent fifty years ago, on June 22, 1971, by Fed Chair Arthur Burns to President Richard Nixon. Inflation was rising and Burns wrote to Nixon that the Fed was not to blame. Rather the economy had changed and a new policy – a wage and price freeze and controls—was needed.  

The memo convinced Nixon, and wage and price controls were implemented. But the intrusive nature began to show and the government controls were failing. Moreover, the Fed let the money supply increase, inflation rose to double digits, and the unemployment rate rose.

Last year, George Shultz and I wrote a book about this period, and we included the full text of the Burns memo because it is a perfect example of how bad ideas lead to bad policies, which in turn lead to bad economic outcomes. By the same token, good ideas lead to good policy and good economic performance, as Schultz and I showed.

The lesson for today is clear: inflation is picking up, and the Fed is once again claiming that it is not responsible for that development. Rather it is simply a bounce back from low inflation of 2020.

Moreover, the Fed’s policy is interventionist. The balance sheet has exploded, the growth rate of M2 has risen sharply, and the federal funds interest rate is now low compared to monetary policy rules in the Fed’s Monetary Policy Report.

It is not too late to learn and to change, but time is running out.

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