Business: NIXON’S NEW MAESTRO OF MONEY

THOUGH he is normally one of the more obscure figures in Washington, the Chairman of the Federal Reserve Board has greater influence over the daily lives of all U.S. citizens than almost anyone except the President who appoints him. By performing some of the more arcane maneuvers in the realm of finance—raising or lowering bank reserve requirements, buying or selling Government securities—the Federal Reserve controls the supply of credit and the level of interest rates. It thus largely determines how much interest the consumer must pay to borrow for a new house or car, how much the businessman must pay to borrow for a new hamburger stand or a steel mill—and whether many kinds of loans will be available at all. By influencing the rate of business expansion, the board also helps decide the worker’s chances of finding a job or winning a raise and the corporate executive’s chances of making a price increase stick.

For the past 18 years, the seven-member board has been headed by William McChesney Martin, 62, who has become almost as much a fixture in the capital as the Washington Monument. But his term in the $42,500-a-year job ends on Jan. 31, and by law he cannot be reappointed. Last week President Nixon announced his choice as successor to Democrat Martin. The new economic maestro is Arthur Frank Burns, 65, a self-described “moderate Republican,” a longtime close aide of Nixon, and a stubborn anti-inflationist. For at least the next four years, the nation’s money and credit policies will bear his stamp.

“We Will Not Budge.” The change comes at a particularly sensitive time, when everyone is wondering when prices will stop going up and interest rates will start coming down. The Administration has given top economic priority to fighting inflation by sharply restricting Government spending at the same time that the Federal Reserve curbs the growth of credit. One purpose of Nixon’s timing in announcing the Burns appointment last week was to underscore the Administration’s determination to persevere with its policies of severely tight money, despite political pressures to relax. Burns has a reputation for doggedness in following just such anti-inflationary policies. Nixon himself, in a radio speech on inflation last week, said that the nation will have to accept some more “bitter medicine,” and counseled consumers and businessmen to slow their spending.

Burns, speaking in his role as Counselor to the President and coordinator of Administration domestic policies—a Cabinet-level position created specifically for him—strongly seconded Nixon.

He warned that Nixon might veto bills —possibly even the tax-reform bill—that involved excessive spending or loss of revenue. Almost his last words before his appointment to the Federal Reserve were: “We will not budge.”

Where He Stands. That comment was quintessential Arthur Burns. Around the White House, he has tirelessly preached the virtues of steadiness in Government policy. His favorite slogan for almost any situation is “Don’t panic.” He has written that “we need to learn to act, at a time when the economy is threatened by inflation, with something of the sense of urgency that we have so well developed in dealing with the threat of recession.”

Burns has consistently opposed big government generally; he is strongly for decentralization, through such measures as federal-state revenue sharing. He is so devoted to a free-market economy, that he has written of it with unaccustomed fervor: “By and large, it is competition—not monopoly—that has vast sweep and power in our everyday life.” This viewpoint leads him to consider wage-price “guidelines” to be almost as evil as statutory controls. “Free competitive markets would virtually cease to exist in an economy that observed the guidelines,” he once wrote.

On general monetary matters, Burns seems sympathetic to Conservative Economist Milton Friedman’s theory that the Federal Reserve should expand the money supply at a fairly steady rate of 2% to 6% a year, depending on economic conditions. Friedman often debates economic policy with Burns on holidays in Vermont, where the two economists have vacation homes next to each other. Not surprisingly, Friedman hailed Burns’ appointment as “splendid.” Friedman admits, however, that “Arthur takes a long time to make decisions, and once he has made them, it is very difficult to get him to change his mind.” Economist Raymond J. Saulnier adds that Burns “is ponderous and a little pontifical.” Because of these qualities, some other economists predict that there will be more than a few resignations from the Federal Reserve staff after Burns takes over on Jan. 31.

Flirting with Recession. The question that bothers some fellow economists is whether Burns will demonstrate the necessary flexibility and adopt an expansionary policy at the right time. His record in that respect is mixed. Intellectually, Burns recognizes the Government’s obligation to maintain prosperity. As chairman of President Eisenhower’s Council of Economic Advisers from 1953 to 1956, he agreed to increases in Government spending and in the credit supply that his successor, Saulnier, thought were too expansionist. In early 1960, he advised Nixon, then Vice President, that federal spending should be increased and credit eased to head off a recession that he correctly warned would hit its low point shortly before Election Day. Nixon could not persuade the Eisenhower Administration to adopt the Burns program. In Six Crises, Nixon wrote that “unfortunately, Arthur Burns turned out to be a good prophet.” Nixon has said in private that he would have beaten John F. Kennedy if Burns’ advice had been followed.

In view of his steadiness and stubbornness, it is paradoxical that Burns’ principal advice to Nixon lately has been that the Government has to create economic “uncertainty.” Burns believes that inflation can be stopped only if the Government persuades businessmen and consumers that prosperity is not necessarily perpetual and price rises are not inevitable. Right now, there is quite a bit of uncertainty. Last week, for example, the Government reported that in September personal income showed the smallest rise in 17 months, and industrial production dropped for the second straight month.

Some high Administration officials have come closer than ever before to saying that recession may be the price of curbing inflation. At a meeting of the Business Council in Hot Springs, Va., Treasury Secretary David Kennedy predicted last week that in early 1970 there will be a decline in real gross national product. While Kennedy would not use the word recession, some economists define recession as a decline in real G.N.P. for two straight quarters.

Surviving a Slowdown. Burns has suggested that a recession might not be so bad. He has often said that the U.S. can survive a business slowdown, or even downturn, without necessarily incurring a sharp increase in unemployment. He reasons that the economy has become service-oriented, and that service workers are less likely to be laid off than those in manufacturing. Even in manufacturing, he thinks, shortages of skilled labor have been so severe that companies will continue to hoard workers rather than fire them as sales and profits decline.

By contrast, Bill Martin over the years has been much more worried about the perils of recession. Martin’s real hallmark at the Federal Reserve was a willingness to switch from easy-to tight-money policies and back again as he thought the situation required. He cooperated with the expansionist policies of President Kennedy when the nation’s economic problem was sluggish growth and persistent unemployment. In late 1965, however, he refused to accept Lyndon Johnson’s line that the U.S. could escalate the Viet Nam war, keep taxes and interest rates down and still avoid inflation; the Federal Reserve tightened credit, to L.B.J.’s displeasure.

Impetus to Inflation. Toward the end of Martin’s tenure, the Federal Reserve became rather too flexible. Between late 1966 and mid-1967, for example, it swung from expanding the money supply at a 1% annual rate to letting it grow at a 13.5% annual rate, then tightened it again. The last loosening occurred in the summer of 1968, and Martin now admits that it was a mistake that gave a fresh impetus to inflation.

Burns will hardly have the trouble with Nixon that Martin had with Johnson. Burns is Nixon’s favorite economist, and the saying in Washington is that “when Arthur talks, Nixon listens.” The President has said that his choice of Paul McCracken to head the Council of Economic Advisers was made on the advice of “my good friend,” Arthur Burns. It was Burns who also recommended Herbert Stein as a member of the three-man council and George Schultz to become Labor Secretary. His closeness to Nixon raises a somewhat ironic problem. The Federal Reserve is supposed to be independent of the President, and those who cherish this concept usually worry that the President might put too much pressure on the Board. In Burns’ case, the question might rather be whether the Federal Reserve chairman would put pressure on the President.

Computerized Job Bank. As a policy adviser, Burns’ record is uneven. He opposed repeal of the 7% investment tax credit—and lost. He won on another question by persuading the Administration to come out against taxing the interest on state and municipal bonds. He sold Nixon on the idea of a computerized job bank that would list jobs offered by employers all over the country to aid in placement of the unemployed. On the other hand, the President sent to Congress a billion-dollar program to combat hunger, despite Burns’ strenuous objections that it was unnecessary and cost too much. To intimates, Burns has characterized Nixon’s Urban Affairs adviser Pat Moynihan in one word: “Spender.”

On the crucial matter of handling the economy, Nixon has been following Burns’ advice. They are in agreement: the pressures that are being applied are right, and results will come if the Government stays on its course. Because Burns is reluctant to change his mind once he has made it up, he could stay on that course too long. Burns will unquestionably continue to have Nixon’s ear. But there is some doubt in Washington about what will happen when the President decides that the time has come to switch from anti-inflation to antirecession policies—and quietly calls on the Chairman of the Federal Reserve to ease up on money. At that time, will Nixon have the ear of strong-willed Arthur Burns?