The Supplement

On December 7, 1970, Arthur F. Burns returned to Los Angeles as Chairman of the Federal Reserve Board of Governors, addressing the Pepperdine College Great Issues Series before an audience at the Beverly Hilton Hotel that had come to hear the sitting Chairman explain what was happening to prices. This was not a commentator's diagnosis. It was the operative framework of the institution that sets the policy.

Burns spoke with the fluency of a man who had made this argument before, and with the restraint of an official who understood how far a Chairman could go in public. He reminded the room that he had stood in this same city once already. "Nearly three years ago, in a talk here in Los Angeles, I pointed out that once an economy becomes engulfed by inflation, economic policy makers no longer have any good choices," he told the audience, returning to a warning he had delivered before the current inflation had fully declared itself. The claim was not new. What had changed was how much of it had since come true.

He had come, in other words, to say something a Chairman is not expected to say: that the tools available to him might not be equal to the task in front of him.

This post belongs to a series that carries an open, falsifiable expectation on the record — whether a certified productivity crossover actually arrives on the schedule promised for it. This speech is a Chairman certifying exactly such a crossover in real time, in public, while his own institution's internal files were being written alongside him. This post arms that expectation, and arms it with the earliest instance in the series of a crossover announced as a foundation by the man whose institution would have to live with it. What follows are testable claims, set down by the Chairman himself, on the record of the institution he led.

We went into the archives.

The Admission

That candor is not incidental; it is the mechanism. Once Burns reaches the substance of his address, it produces the sentence the entire investigation turns on: the Chairman of the Federal Reserve tells the audience that the instruments he controls cannot reach the inflation the country actually has, and asks for something to be placed beside them. Here are his own words, at length, before anything is done to them:

Not imperfect, not slow — inadequate to a problem driven by costs rather than demand. A society committed to full employment, Burns argues, has ruled out the one response that would let those tools work on their own: unemployment sustained long enough to break a wage-price spiral. That, on his account, is a limit, not a preference.

He said as much elsewhere in the same appearance. "What I see clearly is the need for our nation to recognize that we are dealing, practically speaking, with a new problem-namely, persistent inflation in the face of substantial unemployment--and that the classical remedies may not work well enough or fast enough in this case." More directly: "Monetary and fiscal policies can readily cope with inflation alone or with recession alone; but, within the limits of our national patience, they cannot by themselves now be counted on to restore full employment, without at the same time releasing a new wave of inflation." The admission has a shape: two tools, each competent against one problem alone, neither competent against both at once, and a clock — national patience — that will not wait. A Chairman's public certainty is not evidence that the building agreed with him: (a later chair recorded a unanimous hold over a committee that was split, the disagreement kept out of the public account — see The Inference.)

The record the institution kept for itself does not contradict the pressure he describes. The following year, the Secretariat recorded internally what wages were doing to costs even as the recession should have cooled them:

That is the institution talking to itself, describing the same cost pressure Burns named in Los Angeles.

The archive supports the operative half of the claim: within the limits of national patience, the instruments could not then be counted on to restore full employment without releasing a new wave of inflation, and the cost pressure behind that judgment was real. The record documents that half directly. The premise underneath the limit — each instrument competent against one ailment alone — is a proposition the record does not reach. The post takes the limit claim as the record leaves it: operative half documented, premise unaddressed.

The premise is not neutral ground held in reserve. If it is real rather than convenient, then what Burns asks for next is a request the limit itself has made necessary. Whether the diagnosis underneath the limit will hold is the next thing the record has to answer.

The Diagnosis

The part of Burns's account easiest to check against what the Board already knew is also the hardest to dislodge: that the inflation of December 1970 no longer ran on demand but on the upward push of costs, wage rates chief among them, and that settlements struck under new collective bargaining contracts kept accelerating even as unemployment rose. Whether that diagnosis would hold was the question the admitted limit left open. "Moreover, wage costs under new collective bargaining contracts have actually been accelerating despite the rise in unemployment," Burns told the Pepperdine audience — a claim the Board's own record can be checked against, line by line.

The staff had already logged the weaker half of that pairing. The Greenbook prepared weeks before the speech recorded that nonfarm payroll employment fell by 480,000 in October, reflecting a sharp decline in factory employment. The same report placed the unemployment rate at 5.6 percent at mid-month, up from 5.5 percent in September. Wages were not following either signal down.

A Governor of the Board had reached the same conclusion months earlier, and in terms that isolated the mechanism rather than the symptom. Andrew Brimmer told an audience that post-war productivity for the private nonfarm sector had risen close to 3 percent a year, and that hourly compensation was now rising far faster than that, leaving unit labor costs, in his words, moving at "an extremely rapid rate." That establishes the channel Burns described; it does not settle where the impulse entering it came from.

Burns reached past the Federal Reserve's own jurisdiction for a third check. "As the experience of our neighbors to the north indicates, inflationary wage settlements may continue for extended periods even in the face of rising unemployment," he said, pointing to Canada. The Board's staff produced a figure of its own:

Nine percent, against rising unemployment.

Staff, Governor, and the foreign comparison converge on one reading, and a standing objection remains: Francis's monetarist view, that inflation is caused by monetary excess and cost-push is only short-run. The archive's readings split the question: they support cost-push as the description of what wages were doing to prices — the diagnosis holds as description — while crediting Francis's account of ultimate cause against the structural reading Burns built on. If the diagnosis holds, the limit Burns confessed to moments earlier in the same room was not a rhetorical retreat from a problem invented for the occasion. What the room still does not know is whether the rest of what it was told that afternoon — the good news he brought about costs and productivity, and then the institution's account of its own performance — holds up as well.

The Crossover

Burns then turns to what has plainly gone right. Because of vigorous efforts to cut costs, he tells the room, "the growth of productivity has resumed, after two years of stagnation." The retrenchment underneath that resumption reaches further than the productivity line alone: he lists advertising budgets curtailed, product lines discontinued, and layers of executive overhead removed, while non-production employment in manufacturing was falling at a pace the postwar record has not seen before. Corporate finance, chastened by the market stress of 1969 and 1970, has turned from the debt-financed acquisitiveness of the previous decade toward balance-sheet discipline. On that base, Burns tells the audience, a prolonged and stable prosperity can be constructed.

That shift from debt-financed acquisitiveness to balance-sheet discipline sits beyond this investigation's reach; the archive returns no verdict on Burns here, neither vindication nor conviction.

The archive backs the accounting at the level of the two phenomena. Output per manhour in the private nonfarm economy resumed growth after ceasing altogether from the middle of 1968 through the first quarter of 1970, and non-production manufacturing employment began declining. The resumption happened. The employment decline happened. The two phenomena are established.

The pace Burns puts on the resumption — a 4 percent annual rate in the second quarter of 1970 and at 5 percent in the third — stands on the Chairman's own figures from that afternoon, uncontradicted by the staff data supplied. His claim that the decline in non-production employment is unparalleled in the postwar period is corroborated by the staff record, not merely unchallenged by it.

What Burns does with the accounting is a separate claim, and a larger one. He tells the room that these same facts settle a question the institution has been fighting over for two years:

The record does not withhold support from the channel itself: efficiency and cost-cutting reducing prices is a channel it supports. The prescription Burns built on it is what failed, with inflation still entrenched at high levels afterward. Burns had reached for the same conclusion before: in testimony before the Senate Banking Committee on July 23, 1970, he told Congress the tranquilization of inflationary pressures "is within our grasp this year." In that same testimony he called the reduced rise of unit labor costs a sign the elimination of excess demand "is beginning to bear fruit." Three statements, two audiences, one author. A Chairman repeating himself is not the archive confirming him.

What the staff had told the Committee on November 10 appears in none of the three: the Greenbook tracked the wage settlements moving through the pipeline and reached a conclusion that runs against the afternoon's optimism:

Genuine progress was the word given to the room. Continuing pressure, regardless of demand conditions, was the word withheld from it. A crossover in the data is not a verdict on the inflation it is offered to explain, and what the institution itself was doing behind that same podium, while the crossover was being announced, has not yet been tested.

The Middle Course

Burns turns from diagnosis to performance, and states his own conduct in his own terms: money growth he concedes is high by historical standards and calls the clear duty of a central bank to accommodate, a crisis met in a single weekend without resort to excessive monetary expansion, and a budget deficit he says cushions the slowdown without releasing a new inflationary wave. He told his audience that afternoon:

Growth of the money supply through early December, he acknowledges, averaged "rather high by historical standards" — about a 5-1/2 percent annual rate. He treats the number not as a departure from the middle course but as the answer to precautionary liquidity demand earlier in the year, and calls meeting it the central bank's clear duty. Duty is a value judgment the archive does not adjudicate. The operative claim beneath it fares differently: the record grants that the 5-1/2 percent rate answered precautionary liquidity demand and rebuilt liquidity without producing excess aggregate demand.

When Penn Central filed for bankruptcy on a Sunday in June, the Federal Reserve advised larger banks that the discount window would cover firms unable to roll maturing commercial paper, and suspended the interest-rate ceiling on large certificates of deposit. The Committee's own memorandum of discussion recorded what followed — both the discount-window assurance and the ceiling suspension — as "basically a healthy development": credit rechanneled into the banking system, not new monetary excess. On the crisis met in a single weekend without resort to excessive monetary expansion, the Committee's own memorandum concurs — though no adjudicated channel reaches the measure itself.

The deficit is the harder case. The revenue shortfall behind the 1971 deficit supports the cushion he describes, and (the series has read accommodation like this running on until the staff called inflationary psychology present — see The Analogue.) He goes further, crediting the fiscal stance itself with lowering excess demand and lifting real activity — and that step is where the record reads differently. Francis made the point to his own audience the following June:

Francis went further: beyond a year, "the net effect on the growth rates of spending, output, and prices is near zero." An unidentified member told the Committee in November 1969 that fiscal restraint was rapidly disappearing if it had not already done so, and Hickman reported in April 1969 that the projected second-quarter deficit had been revised from a $6.7 billion annual rate to $11.2 billion. On the 1971 deficit, the staff's reading agrees with him that it reflects a shortfall in receipts from the slowdown. The expansive shift the staff measured belongs instead to calendar 1972 — the year Burns himself named in this same speech as the mounting threat to present fiscal policy. What fails is not that reading but the step built on it: his crediting the fiscal stance with lowering excess demand and lifting real activity. What this audience heard about liquidity rebuilt and stresses relieved also leaves out what the internal record was tracking in the same weeks: corporate cash flow under stress the public account never mentions, and banks rebuilding liquidity while screening loan applications with greater care — (the lending channel the series found never reaching small business — see The Game.)

The diagnosis still stands. The account of his own performance does not divide so cleanly — part of it the record confirms, part of it the record has not yet judged, part of it the record answers differently than he does. What remains untested is not his conduct. It is the request he is about to make of the room.

The Request Answered

Diagnosis is not a program. Having just told the room that his own instruments cannot reach the inflation, Burns turns to what might.

Around that Board he hung the rest of the list: import quotas liberalized, antitrust enforcement pressed harder, Federal training expanded where wages were climbing fastest, local productivity councils formed nationwide, computerized job banks built out, depreciation allowances liberalized, the Davis-Bacon Act suspended, the minimum wage modified for the young, national building codes written, and compulsory arbitration reserved for disputes where the public interest was directly engaged. The Review Board he put at the center of that list had no power to compel anyone, exactly as he described it, and the exception on the list is compulsory arbitration, which the record itself describes as binding, and an arbitral award sets the wage. Among its items, liberalized import quotas and more vigorous antitrust enforcement go untested rather than agreed, since no query in this investigation reaches either channel, and the record neither confirms nor convicts him there. He is asking the President and the Congress for tools to meet a cost-driven inflation beyond what monetary tools could reach — (the same friction the series later saw from the other end, in a chairman's weekly breakfasts with the Treasury Secretary — see The Inference.)

The incomes policy central to the request separates into two readings once tested. In a Greenbook dated September 15, 1971, the staff set down what it expected the freeze to deliver: "average wage rate increases will be kept to about 5 per cent annual rate and price increases to about 2 - 2-1/2 per cent." By November, Burns said the freeze appeared to have "effectively halted the spiral of prices and wages." It was adopted and found insufficient, on the record's realized outcomes, and the shortening of the transition he asked for by name operated and left its target unmoved, on the record's realized outcomes. The readings differ: moving the price level for a season is not shortening the interval between suppressed demand and restored wage-price relations. By October 1974 the staff had stopped hedging.

Burns reached the same conclusion himself in November 1973, three years after asking for the tool, telling colleagues that "controls on wages and prices cannot be expected to yield the benefits they did in 1971 and 1972, when economic conditions were much different."

The record fares no better. The template inverts: (where the series found a reformer prescribing new machinery for her own institution, Burns prescribes supplements to tools he already holds — see The Game.) In March 1971 Minneapolis reported construction people expected "no effect on the rise in construction costs," and one director judged the move "a weak-kneed backdown". Wage settlements ran "at least 10 per cent a year" against a 6% limit — the Davis-Bacon suspension operated and left its target unmoved, on the record's realized outcomes. A Fed staff simulation found the depreciation incentive's price effect negligible, its price index staying near base level; Coldwell's Dallas businessmen called it "not economical, considering the substantial volume of unused capacity, the heavy cost of pollution controls, and the limited returns foreseen." The depreciation allowance was adopted and found insufficient, on staff simulation, not on a measured outcome. In June 1972 Zeisel told the Committee a decade of manpower training "had accomplished relatively little" toward a wage-unemployment link — Federal training was adopted and found insufficient, on the record's realized outcomes. Burns reached for the companion measure that December:

The computerized job bank — a "feeble effort" in scattered urban centers — was adopted and found insufficient, on the record's realized outcomes. Compulsory arbitration was adopted, and the record does not establish an outcome for it — its own impact was never tested apart from the controls suite it was folded into. Burns told the Committee in April 1972 that comparing recent wage and price increases with the months before the freeze, "one would find a little improvement, but only a little, and the differences were narrowing." Darryl Francis had dissented from this approach as early as March 1971:

But the reworking of labor-market structure was adopted and found insufficient, on the record's realized outcomes — a finding that rests less on Francis than on Burns's own words in November 1973. A chairman confirming himself is not the archive confirming him; a chairman conceding failure is different — the concession runs against his own case, and that is what lets it carry the verdict. The national building code proposed in February 1970 was adopted, and the record does not establish an outcome for it — national codes were never implemented at a scale that could test them. And the local productivity council was adopted and found insufficient, on the record's realized outcomes, with an honest complication attached — a supported channel is not a vindicated prescription, and here it was the prescription that failed. Francis drew the same distinction in June 1972, arguing that price stability "would be enhanced by focusing, not on direct government intervention in the market place, but on prudent monetary and fiscal stabilization policies."

The youth wage differential stands apart from all of it. It was asked for and refused, never tried — the record yields no effectiveness verdict on it. The Board wanted it, and Bruce MacLaury argued for it publicly, calling a differentially lower minimum wage for the young "in their own interests." The House wrote something narrower instead, limited to full-time students, and Congress never let the institution learn whether the broader version would have worked.

His claim about the Review Board lands in between: on its design, the record matches him exactly — broad authority to investigate, advise, and recommend, no power to compel anyone. But the mechanisms he leaned on to make that authority work land on mixed ground, and a few of his formulations that afternoon never reduce to a claim the record can test at all — they stand neither proven nor disproven. Of the instruments the record actually tested, every one that operated was judged by the institution's own voices, and none returned to confirm him. One was asked for and refused before it could be tried, and the record never even reached the import-quota and antitrust channels. The problem he named that afternoon is still the reader's problem, and what the record tested against it has already been spent.

What Is Left

Burns closes on a promise. "The stage has been set for a recovery in production and employment," he tells the room, "a recovery in which our needs for housing and public construction can be more fully met." Ten of the record's eleven channels were adopted; eight came back judged, and not one of the eight confirmed him. Two the record could not sign either way. One was declined, untried. What remains is what the promise depends on.

The promise depends on housing and public construction moving with the general recovery he describes. The record reads the channel the other way, but not by one mechanism common to both sectors: housing is interest-sensitive and counter-cyclical, starved when credit tightens in a boom and reviving only once the economy turns slack rather than when it recovers. Most public construction is only mildly cyclical. Peter Wagner, the Board's senior economist, wrote two years later that most such demand was little affected by cyclical considerations:

Burns reported in February 1970: "the availability of mortgage credit declined substantially, despite massive funds poured into the mortgage market by FNMA. and the Federal Home Loan Banks, and housing starts fell to an annual rate of 1.3 million by the fourth quarter—one-fifth below the year-earlier level." A general recovery is not the mechanism that reaches either one.

That leaves the people. "Reductions in employment have occurred among all classes of workers — blue collar, white collar, and professional workers alike," Burns says, and he does not distance himself from what they carry: "I fully understand the frustration of workers who have seen inflation erode the real value of past wage increases." They are the ones waiting on whichever instrument is left standing, and (a later call to redeploy liquidity toward the people who needed it most found no trace of the pipe carrying it their way — see The Game.)

The diagnosis stands. The instruments he asked for beside his own have already been spent everywhere the record reached them: every one that operated came back judged insufficient or left its target unmoved. Another was refused before it could be tried, and the record never entered some of the channels on his list.

What is left in the building is the instrument he told this room could not do the job alone. The question is not which doors stayed open. It is which were already shut before he reached the podium — and which he had decided not to open.