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Exploring the causes of the Great Inflation

Authors
Disciplines
  • Economics
  • Political Science

Abstract

Arthur Burns and Inflation Arthur Burns and Inflation Robert L. Hetzel A rthur Burns, Chairman of the Federal Open Market Committee(FOMC) of the Federal Reserve System (the Fed) from February1970 until December 1977, was fiercely opposed to inflation. For the public, and especially for the business community, Burns embodied opposition to inflation. Nevertheless, during his tenure as head of the Fed, high rates of inflation became a pervasive fact of American life. How could that have happened? The puzzle is especially striking as Burns became Chairman with an ex- traordinarily distinguished background as an economist. He had been president of the American Economics Association and had headed the prestigious Na- tional Bureau of Economic Research (NBER) since the late 1940s. As head of the NBER, Burns gained worldwide recognition as the leading scholar of the business cycle. Based on his work on the business cycle, he concluded that inflation itself sets in train forces that cause recession. As an economist, how did Burns think? How did he shape the data he studied into a coherent view of the world—a view that could lead him far away from the control of inflation? 1. EXPLAINING MONETARY POLICY To explain monetary policy, one requires more than an understanding of the views of the Chairman of the FOMC. One must understand the general political and intellectual environment of the time as well. If Burns had been Chairman in another era, say, in the 1950s or 1990s, the environment, and therefore monetary policy, would have been quite different. So to attribute the inflation of the first part of the 1970s solely to Burns’s leadership is wrong. Monetary policy under Burns’s FOMC was never as expansionary as vo- cal congressmen urged and, through 1972, was less expansionary than the Nixon Administration desired. In fact, throughout his tenure, monetary policy The views expressed herein are the author’s and do not necessarily represent the views of the Federal Reserve Bank of

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