Presidential pressures on the Fed: Evidence from the Nixon tapes

Newswise — Although former President Richard M. Nixon is likely best remembered for the infamous Watergate burglary and subsequent cover-up that led to his resignation, a University of Delaware economics professor has uncovered evidence from archival audiotapes that expose various presidential shenanigans to affect national economic policy for short-term political gain.

Burton A. Abrams, professor of economics and acting chairperson of the Department of Economics in UD's Lerner College of Business and Economics, believes Nixon pressured the Federal Reserve, the central bank of the United States, to adopt policies that would work to his political advantage and that, in the long run, proved extremely costly for the nation as inflation wreaked havoc on the economy through the 1970s.

In an article published in the fall 2006 issue of the Journal of Economic Perspectives, one of three journals published by the American Economic Association, Abrams focuses on Nixon's interference with monetary policy by drawing upon conversations between Nixon and Arthur Burns, Nixon's appointee to chair the Fed, and conversations between the president and George Shultz, then director of the Office of Management and Budget.

Abrams said the conversations reveal how Nixon pressured Burns to adopt a highly expansionary monetary policy in the run-up to the 1972 presidential election.

"The Nixon tapes permit a unique opportunity to overhear the actual conversations between a president and the chairman of the Fed," Abrams said. "Burns was a long-standing friend of Nixon's and a Republican loyalist, and the tapes reveal that Nixon felt comfortable in pressuring him to change monetary policy. Whether Burns changed policy because of pressures from the president or whether he just mistakenly thought it was in the best economic interests of the country is impossible to definitively determine, but the timing of the Fed's actions in the run-up to the 1972 election suggests that short-run political motives played a role."

Regardless of the motives, Burns supplied the expansionary monetary policy that Nixon overtly desired. "The economy boomed and Nixon won reelection in a landslide, but the longer-run consequences of an over-heated economy were disastrous," Abrams said. "After the election, the inflation rate soared and it took nearly a decade, three recessions and millions of lost jobs to return the economy to reasonable price stability."

Abrams said economists generally agree that a central bank such as the Fed performs best when it operates independently from political influences. The Nixon tapes reveal how Fed independence might be compromised in order to further short-run election goals, he said.

Abrams said he believes reforms that make the Fed even more independent or that restrict its actions through the imposition of policy or performance rules would help to prevent future politicization of Fed policy.