Arthur the Independent

Now let me be quite precise in this respect. The Federal Reserve is independent, and the new chairman, who will he sworn in here tomorrow, is one of the most independent men I know.

--President Nixon, Jan. 30, 1970

However, I hope that independently he will conclude that my views are the ones that should be followed.

--Nixon at swearing-in ceremonies for Arthur Burns the next day

The President has had many occasions lately to remember those remarks about his old friend and economics mentor. The Federal Reserve Board could pump enough money into the U.S. economy to increase greatly the chances that Nixon's glowing forecasts of fast production, profit and income growth in 1971 will come true. Since December, Nixon has been publicly implying that the board has a duty to do so; some aides make the argument in private with extraordinary vehemence. Last week Burns made it plain that despite this pressure he will be quite as independent as Nixon advertised and less accommodating than the President hoped.

Testifying before the congressional Joint Economic Committee, Burns was wreathed in his customary cloud of pipe smoke, but seemed somewhat less Delphic than usual. He pledged that the Federal Reserve would provide enough money and credit for "healthy economic expansion," but added that the board was already being "quite generous" in supplying funds. "The banks are flooded with money," he said. "What we have is not a shortage of money but a shortage of confidence [among borrowers]." Expanding the money supply at an annual rate above 5% to 6% for any long period, Burns said, intensifies inflationary pressures. Last year the growth in money supply averaged a moderate 5 1/2%, but some Administration officials think that Nixon's 1971 targets can be reached only with a 6% to 9% money growth.

The board "will not become the architects of a new wave of inflation," Burns told the committee. His apparent meaning is that the Federal Reserve will put out only as much money in 1971 as its seven governors judge the economy can absorb without adding to inflation. If that amount turns out to be enough to bring about Nixon's predicted 9% jump in gross national product, to $1,065 billion, this year, well and good. If not, too bad.

Flexible Scholar. Burns has already unified the Federal Reserve behind this policy. When Nixon appointed him, Burns was known as a rigid, terrible-tempered conservative; capital gossips predicted a wave of resignations from the Federal Reserve staff. Instead, Burns has won the admiration of staff economists by working them hard but listening closely to their views. The governors grant Burns their full respect. He is a stickler for clarity, who, according to one insider, sharply asks "What do you mean by that?" of speakers at Federal Reserve meetings.

A house painter's son who made his reputation as an arrogant scholar, Burns as head of the nation's supreme court of money has shown a diplomat's talent for flexibility. At 66, Burns is skeptical of all sweeping economic theories. Lately he has been expressing doubt that money supply is as important as his friend Milton Friedman contends. "I am less of a monetarist than when I came here," he says. The Federal Reserve is now giving primary attention to accelerating the decline in interest rates. Two weeks ago, the board cut its discount rate a quarter point to 4 3/4%, the latest in a series of reductions from the 1969-70 peak of 6%. Last week major banks lowered the prime rate on business loans from 6% to 5 3/4%, the ninth reduction in eleven months.

Like every other Federal Reserve chairman, Burns acts as an unofficial economic adviser to the Administration. In that role, he has been pushing strongly for an "incomes policy"--direct presidential pressure against excessive wage and price boosts--over opposition from George Shultz, director of the Office of Management and Budget. Burns renewed his efforts last week, telling the Joint Economic Committee that he discerns widespread public support for "vigorous efforts to bring wage settlements and prices in our major industries within more reasonable bounds."

He seems to be making progress; Nixon last week threatened unspecified "action" against the construction industry if unions and managements do not agree by this week on a voluntary stabilization plan. On other issues, Burns has lost; he suggested that the Administration forecast a $1,055 billion G.N.P. for 1971, but Nixon preferred Shultz's $1,065 billion figure. "As a target, I consider it admirable; as a prediction, I consider it optimistic," said Burns.

Whatever the merits of his independent course, Burns can expect little thanks. If the Administration meets its growth targets. Nixon and Shultz will take most of the credit. If not, old friendship notwithstanding, the White House may well put most of the blame on Burns and the Federal Reserve for not feeding the economy enough money.

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