AILSA CHANG, HOST:
Whether the Federal Reserve raises, lowers or maintains baseline interest rates is one of the most important economic decisions it makes. And that decision is made outside of presidential control, at least theoretically. Kenny Malone and Mary Childs from our Planet Money podcast had the story of what happened when one president wanted more control over interest rates.
MARY CHILDS, BYLINE: In 1971, President Richard Nixon began secretly recording basically everything.
KENNY MALONE, BYLINE: Thirty-three years later, virtually all of those tapes were publicly available.
BURTON ABRAMS: Well, everyone else was interested in Watergate. I was interested in monetary policy.
CHILDS: Economist Burton Abrams drove down to the National Archives.
ABRAMS: They were available on reels, and then you had to put on earphones and try to make out the garbled conversations that existed.
(SOUNDBITE OF ARCHIVED RECORDING)
RICHARD NIXON: Arthur, how are you? (Inaudible).
CHILDS: Arthur, how are you? Nixon says to Arthur Burns, chairman of the Federal Reserve.
MALONE: Nixon was one year away from reelection, and unemployment had been rising.
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: So this will be the last conservative administration in Washington.
MALONE: This will be the last conservative administration in Washington.
CHILDS: Nixon seems to tell his Fed chair to let more money flow through the economy, which generally helps unemployment but risks inflation.
MALONE: Arthur Burns seems to push back and also seems to tap on the table to make this point.
(SOUNDBITE OF ARCHIVED RECORDING)
ARTHUR BURNS: I don't want to see interest rates exploding (inaudible).
ABRAMS: Burns is making an appeal to Nixon that he doesn't want to stimulate anymore. He's still holding out. Yep.
MALONE: So I assume Nixon is not super jazzed about that meeting.
ABRAMS: No, so I suspect that behind the scenes, pressure is still to give Nixon the monetary policy he wants.
MALONE: According to Arthur Burns' personal diary, he was warned that White House operatives had their bayonets out for him and that Nixon was threatening to pack the Fed board and completely take control.
CHILDS: The next month?
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: (Inaudible) Arthur...
MALONE: Burns began to give Nixon the monetary policy he'd asked for.
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: I know. Yeah.
BURNS: Look, I want you to know that we are reducing the discount rate today.
NIXON: Oh, I see.
CHILDS: Next month?
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: Oh, Arthur, how are you?
CHILDS: More rate cuts.
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: Yeah, good, good. What is it now - four or four and what?
MALONE: It is possible that Burns believed this was the right move. Nixon had put price controls in place. Inflation appeared low.
CHILDS: But economist Burton Abrams thinks Burns capitulated to Nixon.
ABRAMS: The Federal Reserve should not be treated as a branch of the administration.
MALONE: Are you saying the fact of the meetings alone is troubling?
ABRAMS: Yes.
MALONE: I see.
ABRAMS: When you get a personal conversation between the president and the Fed, there's too much possibility for a manipulation to take place.
CHILDS: Perhaps the most telling call came Christmas Eve, 1971.
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: You feel, as far as Arthur a money supply, we've got that about as far as we can turn it right now, have we? I mean, as far as my influence on him. That's what I really ask.
MALONE: Nixon's talking to a cabinet member about Arthur Burns.
(SOUNDBITE OF ARCHIVED RECORDING)
NIXON: All right. Well, you watch it and then remind me if I have to talk to him again, and I'll do it.
GEORGE SHULTZ: Well, I'm sure...
NIXON: Next time, I'll just bring him in. What?
SHULTZ: I'm sure we'll have to keep after him on it.
NIXON: Yeah.
CHILDS: Saying, we'll have to keep after him. Next time, I'll just bring him in.
MALONE: The loose money supply, the price controls - they likely helped reelect Nixon in a landslide. They also get a lot of blame for, the following year, inflation doubling and then doubling again.
CHILDS: It was the beginning of one of the worst stretches of inflation in American history.
MALONE: There's no law protecting the independence of the Fed. It is a norm, a kind of agreement that what's good for the sitting president is not always good for the economy in the long run.
CHILDS: Richard Nixon, it would seem, did not care at all about that norm. I'm Mary Childs.
MALONE: And Kenny Malone.
CHILDS: NPR News. Transcript provided by NPR, Copyright NPR.
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