Greenspan and pressure on independent central bankers

I’ve been reading a succession of long biographies of influential Americans.  The US election result prompted me to read biographies of the four presidents from Eisenhower to Nixon – one president with no prior experience in elected office, and three very flawed individuals –  and in the middle of all that I read (to review) Sebastian Mallaby’s big new biography of Alan Greenspan, The Man Who Knew.  There is some overlap:  Greenspan played a role in Nixon’s 1968 election campaign  – in domestic policy, and in doing polling analysis (his economic consultancy/forecasting firm had just acquired its first computer) –  and Greenspan was nominated to his first official government job, Chairman of the Council of Economic Advisers, in the last days of the Nixon administration.

I’d strongly recommend the Greenspan book.  It is well-written, deeply-researched (the author notes that one of his research assistants read the full transcripts of every FOMC meeting in the 19 year Greenspan term), and as interesting for the pre-Fed period as for Greenspan’s lengthy term as Chairman.  For some there might be a little too much on his succession of girlfriends over 40 years –  of one, we learn what she was wearing when Greenspan first encountered her in the Oval Office –  or the tennis holidays, but it is a biography of the man and his times, not the story of monetary policy.  Even in New Zealand bookshops, the price of the 750 page hardback isn’t extortionately expensive.

I’m not going to attempt a full review here.  Instead, I wanted to highlight Mallaby’s account of one interesting little episode from the early 1970s, when Greenspan was still prospering from his success as an economic adviser to major corporations (“the man who knew”).

As I noted, Greenspan had been quite involved in the 1968 Nixon campaign –  Nixon built a fairly formidable team of policy advisers, and carried many of them into the White House with him.    Greenspan had turned down the offer of a fulltime government position after the election, reckoning that the only positions that interested him were ones he was not yet senior enough to be offered (eg Secretary to the Treasury).  But he stayed involved, serving on the commission that (sucessfully) recommended the abolition of military consciption and on a presidential commission on financial reform.

By 1970, the chairman of the Federal Reserve was Arthur Burns, one of Greenspan’s former professors with whom Greenspan had stayed close.  Burns had also been quite involved in both Nixon presidential campaigns, and (somewhat against his own wishes, so his diary records) had been brought into the White House at the start of Nixon’s term as Counsellor, with Cabinet rank.

One of Nixon’s perennial concerns (he was a politician after all) was his re-election prospects.  As it happened he needn’t have worried –  his 1972 margin of victory was one of the largest ever – but he did, obsessively.  And in mid 1971 he was very concerned about what the state of the economy might be by the election time in 1972.   He had been convinced that Fed misreading of the state of the economy had contributed to his narrow defeat by Kennedy in 1960.

On 23 July 1971, Mallaby records,

Nixon invited three advisers to join him on the presidential yacht, Sequoia, for a Friday-night cruise on the Potomac.  The men kicked about ideas on how to deal with the wayward Fed chairman. Burns was behaving like a professional Eeeyore, talking down the economy with one gloomy comment after another…..Building on a suggestion from John Connally, the Treasury secretary, Nixon and his henchmaen settled on a plan.  They would make Burns shut up by planting a negative story in the press about him.

Burns had been urging the president to take a stand against inflationary wage increases. the Nixon men resolved to tell the press that Burns had simultaneously been lobbying behind the scenes for a personal pay raise [in fact, he had argued for an increase in the Chairman’s salary, but starting from the commencement of his successor’s term].  Coupling this charge of hypocrisy with crude intimidation, they would also inform reporters that Nixon was contemplating a reorganization of the Federal Reserve to curb the chairman’s authority.

Four days later the story appeared in the press, and the President’s press secretary “gave the story legs by refusing to deny it”.

With Burns now on the defensive, Nixon’s men moved in for the kill.  They would get a message to Burns demanding a positive speech on the economy. If the Fed chairman wanted to avoid all-out war he would have to cry uncle.

Charles Colson, a member of the Sequoia trio who would later serve jail time for organising Nixon’s dirty tricks, tracked down Greenspan.  He phoned him in New York and asked him to get Burns to change his tune on the economy.

Years later Greenspan insisted he refused to do Colson’s bidding.  But Colson’s handwritten notes from the conversation suggest otherwise.  After taking Colson’s phone call, Greenspan spoke at length to Burns.  Then he reported back to the White House.

Burns were seriously put out –  “very disturbed” was Greenspan’s description.  Mallaby continues for a couple of pages, with accounts of conversations between Nixon, his chief of staff Haldeman, and Connally about keeping up the pressure on Burns, including Greenspan’s role.

And then

Within twenty-four hours, the Fed chairman caved and Nixon appeared at a press conference to disavow the shameful attacks on his good character.  “Arthur Burns has taken a very unfair shot,” the President said, explaining how Burns had in fact turned down  a pay increase when the White House budget office had recommended one. A transscript of Nixon’s remarks was forwarded to Burns, who was soon on the phone to express his gratitude.

“It warmed my heart,” an elated Burns told Nixon’s speechwriter, William Safire.  “I haven’t been so deeply moved in years. I may not have shown it, but I was pretty upset.  This just proves what a decent and warm man the president is.  We have to work more closely together now.”

Burns’s diary for the years 1969 to 1974 has been published –  and is a good read for junkies.  Unfortunately, it is a little patchy and doesn’t cover July 1971.

Mallaby asserts that this episode, in which Greenspan appears to have played a not unimportant role, was a key turning point in the whole of monetary policy in the 1970s (Burns remained chair until 1977) when inflation became an increasingly serious problem, not just in the US, but around much of the advanced world.

In fact, distasteful as the episode is , reflecting no credit on anyone involved, Mallaby probably exaggerates when he writes that

The central bank had not been so clearly under the thumb of the White House since the Fed-Treasury accord of 1951. Politics had triumphed, and Greenspan had been a party its victory.

It is worth remembering the timing.  All this happened just a few weeks before the US suspended gold convertibility and the Adminstration imposed wage and price controls and temporary import levies.  They weren’t normal times, and nor  –  as the fixed exchange rate era broke down –  was it an era in which one might expect the usual distance between the White House and the Fed.

As importantly though, White House pressure on the Fed wasn’t new.  Burns’s diary on 21 March records his request for a meeting with Nixon “to have a candid talk about the war of nerves the White House gang had set in motion”.

And nor was the tension within Burns, between his anti-inflation instincts and his apparent desire for access to, and influence with, the President new.  In the same entry he records:

I informed the President as follows: (1) that his friendship was one of the three that has counted most in my life and that I wanted to keep it if I possibly could; (2) that I took the present post to repay the debt of an immigrant boy to a nation that had given him the opportunity to develop and use his brains constructively; (3) that there was never the slightest conflict between my doing what was right for the economy and my doing what served the political interests of RN; (4) that if a conflict ever arose between those objectives I would not lose a minute in informing RB and seeking a solution together; (5) that the sniping in the press that the White House staff was engaged in had not the slightest influence on Fed policy, since I will be moved only by evidence that what the Fed is doing is not serving the nation’s best interests

and so on.  He notes “RN seemed pleased by my reassurances to him, indicated that he never had  any doubts, that he would put an end promptly to the sniping about the Fed that has been going on at the White House…”

Perhaps more useful still, is Allan Meltzer’s comprehensive history of the Federal Reserve.  Meltzer was a monetarist and in the 1970s had not been particularly supportive of the rather ad hoc way in which the Fed ran monetary policy and allowed inflation to build up.   But in his careful discussion, and analysis of the documentary record, Meltzer absolves the Fed of the charge that in the run-up to the 1972 presidential election it was shaping policy according to political imperatives.  As he notes, the FOMC votes were rarely close (typically unanimous), and the FOMC itself was manned by plenty of independent-minded people who had been appointed by Presidents Kenndy and Johnson (one of the most independent had been appointed first by another Democrat president, Truman).

As he notes

Burns was able to get a majority vote of the FOMC because he could appeal to beliefs that considerable resources were idle, that inflation would be held back by price controls, and that their principal mandate was to contribute to full employment.  This was compatible with service to the president’s reelection campaign.

It is an alien world in many respects –  quite different models of how to think about inflation, the primary role of the central bank etc –  and none of the key figures emerges that well –  Nixon, Burns, Greenspan, Colson, Connally, Haldeman.  Some of that is clearer with hindsight, others should have been clear at the time.  But it wasn’t a case of the President’s placeman successfully orienting policy simply to re-election.

One of the themes of Mallaby’s book is how Greenspan, who started out very close to Ayn Rand, quickly gravitated towards the centre of affairs –  at times willing to compromise perhaps rather too much to retain that place. Mallaby praises Greenspan’s deft political management skills.  I couldn’t help feeling slightly uncomfortable.  One example was the account of the way Greenspan hosted annual 4 July parties at the Fed, at his own expense, for the movers and shakers of Washington and their families –  effectively buying influence and regard.  I came away from the book with a strong sense that 19 years was just too long for any one unelected official to hold such an influential office –  and as the book illustrates there is no evidence that Greenspan was uniquely well able to read the economy, or judge the best policy response –  but perhaps that is a topic for another post another day.

6 thoughts on “Greenspan and pressure on independent central bankers

  1. An alien world indeed but I guess not that long ago: a little reminder that the (currently dominant) idea of central bank inflation targeting alongside a floating FX rate is still a relatively young pup.

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    • Thanks. Yes, I largely agree with Bernanke’s points, and raised some of the same issues in my own review. Might pick them up in a separate post when I’m back from holiday, in the context of thinking about the next NZ PTA, to be signed by Sept.

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  2. As for reading the economy for NZ in 2007? Banks seem rather short on deposits and therefore interest rates are rising at the moment. The 115,000 international students play a major role in interest setting behaviour and therefore also the NZD. This segment will spend $4 to $5 billion in 2017. Due to money transfer restrictions in countries like India and China, large amounts will transfer once a year for the $1 billion school fees and the daily expenditure for the year. Some students will receive hundreds of thousands to buy a property instead of renting. Expect downward pressure on interest rates around Feb/Mar and a rising NZD as bank liquidity improves markedly.

    As students start re-entry, expect upward pressure on rents. With 90,000 international students, expect the Auckland property market to possibly re-ignite.

    As rents rises and there is downward pressure on interest rates expect upward pressure on house prices.

    As dairy prices recover, banks feel more comfortable and start to take farming debt off the bad and doubtful debt reserves, therefore allwing for more lending liquidity.

    Tourism will continue at record levels possibly getting to 4 million up from 3.5 million by end of 2017 spending perhaps $16 billion up from currently $14.5 billion.

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