Richard Nixon appointed Arthur Burns to the Fed in February 1970 with a clear mandate: keep money easy and the economy growing. Burns obliged. He cut rates to help Nixon win reelection in 1972, acquiesced to wage-price controls, and then watched helplessly as the oil shock of 1973 sent inflation to 12%. His stop-go policy — tighten when inflation surged, ease the moment recession threatened — created a ratchet that made each inflation cycle worse than the last.
Arthur Burns was everything William McChesney Martin was not. Where Martin was a Wall Street insider who governed by instinct, Burns was a distinguished academic economist — president of the National Bureau of Economic Research, professor at Columbia — who governed by theory. Where Martin resisted presidential pressure to the point of physical confrontation, Burns internalized the president's wishes and convinced himself they aligned with sound economics. Where Martin raised rates until the political cost became unbearable, Burns cut rates at the first sign of economic weakness and hoped inflation would sort itself out.
The result was the worst decade for American monetary policy since the Fed's founding in 1913. Under Burns, the Fed Funds rate swung wildly — from 9% to 3.5% and back to 13%, then down to 5% and up to 9% again — without ever establishing the credibility needed to anchor inflation expectations. The public, watching the Fed reverse course every eighteen months, concluded that the central bank lacked either the will or the ability to control prices. That conclusion proved self-fulfilling: if people expect inflation, they demand higher wages, which forces higher prices, which confirms expectations. Burns had created an inflation spiral that fed on its own momentum.
Stop 1: The Nixon ease (1970–72). Burns inherited Martin's 9% rate and immediately began cutting. By January 1972, the Fed Funds rate had fallen to 3.51% — the lowest since 1963. The cuts were defensible at first: the 1970 recession had pushed unemployment to 6%. But Burns kept cutting long after the recession ended, driven by Nixon's explicit desire for easy money ahead of the 1972 election. The Nixon tapes, released years later, captured the dynamic in devastating clarity. Nixon told aide H.R. Haldeman: "We'll take inflation if necessary, but we can't take unemployment." Burns delivered. Inflation, which had fallen from 6.2% to 3% by mid-1972, seemed beaten. It was a mirage.
Go 1: The first oil shock (1973–74). In October 1973, OPEC imposed an oil embargo against the United States in retaliation for American support of Israel during the Yom Kippur War. Oil prices quadrupled from $3 to $12 per barrel. The Fed Funds rate, which Burns had already been raising since mid-1972 as the post-election economy overheated, surged to 13% by July 1974. But the oil shock created a new problem the Fed had never faced: stagflation. Prices were rising (CPI hit 12%) while the economy was contracting. The 1974–75 recession was the deepest since the 1930s — GDP fell 3.2%, unemployment hit 9%. Burns faced an impossible choice: fight inflation with higher rates, or fight recession with lower ones.
Stop 2: The premature ease (1975–77). Burns chose to fight recession. He slashed rates from 13% to 5% between mid-1974 and early 1976. The economy recovered, but inflation never fell below 5.5% — a floor that was twice the level Martin had considered normal. By the time Burns left the Fed in January 1978, the rate was 6.7% and inflation was 6.8% — almost exactly where Martin had left it eight years earlier. Eight years of wild rate swings had accomplished nothing except to destroy the Fed's credibility and convince the public that inflation was permanent.
| Date | Fed Funds | CPI YoY | Unemployment | Key Event |
|---|---|---|---|---|
| Jan 1970 | 8.98% | 6.2% | 3.9% | Burns takes the chair. Martin's last month. |
| Oct 1970 | 6.20% | 5.6% | 5.5% | Recession. Burns cutting aggressively. |
| Aug 1971 | 5.31% | 4.4% | 6.0% | Nixon Shock: gold window closes. Wage-price controls. |
| Jan 1972 | 3.51% | 3.3% | 5.8% | Rates bottom. Election-year ease. Inflation looks tamed. |
| Jul 1973 | 10.40% | 5.7% | 4.8% | Economy overheating. Burns tightening late. |
| Oct 1973 | 10.01% | 8.1% | 4.6% | OPEC oil embargo begins. Oil quadruples. |
| Jul 1974 | 12.92% | 11.5% | 5.5% | Peak rate. Nixon resigns (August 9). |
| Jan 1975 | 7.13% | 11.8% | 8.1% | Deepest recession since 1930s. Rates slashed. |
| Jul 1975 | 6.10% | 9.5% | 8.6% | Unemployment peaks. Burns easing. |
| Jan 1976 | 4.87% | 6.7% | 7.9% | Recovery but inflation floor at 5.5%. |
| Jan 1977 | 4.61% | 5.2% | 7.5% | Carter inaugurated. Burns still chair. |
| Oct 1978 | 8.96% | 8.9% | 5.8% | Inflation surging again. Miller failing. Volcker coming. |
The pattern is unmistakable. Each easing cycle left inflation at a higher floor: 3% in 1972, 5.5% in 1976, and 9% by late 1978. Each tightening cycle came too late and ended too soon. Burns would raise rates reactively — after inflation was already surging — then cut at the first sign of economic pain, before inflation had been fully wrung out. The result was a loss of credibility so complete that by 1978, no amount of rate hiking could convince the public that the Fed was serious about fighting inflation.
The August 1971 decision to close the gold window deserves special attention. By abandoning the dollar's fixed convertibility to gold at $35 per ounce, Nixon and Burns removed the last external constraint on monetary policy. Under the gold standard, excessive money creation would drain gold reserves, forcing the Fed to tighten. Without that constraint, the Fed could print as much money as the political situation demanded — and under Burns, it demanded a lot. The gold price, freed from its $35 peg, would reach $850 by January 1980, a twenty-four-fold increase that reflected the market's judgment on the Fed's performance.
Burns's Fed is the cautionary tale that every subsequent Fed chair has studied. The lesson is not subtle: a central bank that prioritizes short-term economic comfort over long-term price stability will eventually lose both. Burns cut rates to help Nixon win an election, and within two years inflation had tripled. He cut rates to fight the 1974–75 recession, and within three years inflation was back at 9%. Each time the Fed flinched, the eventual cost grew higher.
By the time Burns left in January 1978, the situation was beyond conventional repair. His successor, G. William Miller, lasted only seventeen months — the shortest tenure in Fed history — and managed to make things worse by refusing to raise rates even as inflation accelerated toward double digits. By August 1979, when Jimmy Carter finally appointed Paul Volcker, inflation was 11.8% and the dollar was in free fall. The only remaining option was the monetary equivalent of radical surgery: interest rates so high they would deliberately cause a recession. It would take 19% rates and the deepest economic downturn since the 1930s to undo what Burns had allowed. That is the subject of the next episode.