Tuesday, January 29, 2008

The FED Shades of 1970's William Miller

Miller succeeded Arthur Burns as Fed Chairman in January of 1978. He inherited a high inflation economy, still suffering from the increase in oil prices from OPEC. The change in the Consumer Price Index was 4.9% in 1976 and 6.7% in 1977.[3] Nevertheless, Miller maintained a Keynesian belief that inflation could "prime the pump" of the economy, and would at any rate be self-correcting.[4] He thus pursued a strongly doveish policy and opposed raising interest rates. The effect of this was to send the dollar's value spiraling downward. In November 1978, only 11 months into his term, the dollar had fallen nearly 34% against the German mark and almost 42% against the Japanese yen, prompting the Carter administration to launch a "dollar rescue package" including emergency sales from the U.S. gold stock, borrowing from the International Monetary Fund, and auctions of Treasury securities denominated in foreign currencies.[5][6] This proved only a short-term fix; while temporarily steadying the dollar, it soon resumed its fall.[7] The portmanteau stagflation, the combination of stagnation and inflation, increased in popularity during this time to describe the high rate of inflation that was failing to spur the economy.

Miller's lackadaisical measures against inflation caused distress among members of the Carter Administration itself. Treasury Secretary Blumenthal, Inflation Adviser Alfred Kahn, and Chief Presidential Economist Charles Schultze all advocated for increasing the interest rate prior to the April 1979 meeting, where Miller opposed such measures. Carter had to admonish his own staff over the press leaks used to carry on the dispute.[8]

Miller was not perceived as having great prestige; not coming from an economics or Wall Street background, he was seen as an "outsider."[9] A 2003 article in The Economist said that "America's central bankers have all made their weight felt across the political sphere, with the possible exception of William Miller, whose brief tenure in 1978-79 was notable for his attempts to ban smoking at the board."[10] It is rare for the influential chair's opinion to not carry the vote at the Federal Reserve's meetings, but Miller was outvoted by the Board of Governors at a meeting in 1979 where he opposed an increase in the discount rate, the rate at which the Federal Reserve lends to banks.[9]

Economic historians have generally considered Miller's short tenure unsuccessful. The high inflation that Miller allowed required harsh "shock therapy" treatment by his successor Paul Volcker to bring under control, which sent the U.S. economy into recession from 1980-1982. Steven Beckner, a Federal Reserve analyst, offered a particularly harsh assessment:

Under Arthur Burns, who chaired the Fed from 1970 to 1978, and under G. William Miller, who was was chairman from January 1978 to August 1979, the Fed provided the monetary fuel for an inflation that began as a flicker and grew into a fearsome blaze... If Nixon appointee Burns lit the fire, Miller poured gasoline on it during the administration of President Jimmy Carter. Without question the most partisan and least respected chairman in the Fed's history, this former Textron executive worked in tandem with fellow Carter appointee, Treasury Secretary W. Michael Blumenthal, in pursuit of monetary policies that were expansionist domestically and devaluationist internationally. The goals were to spur employment and exports, with little thought to the dollar's value. By early 1980, inflation was running at 14 percent.[6]

—Steven Beckner, Back from the Brink: The Greenspan Years

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