G. William Bernanke
On March 8, 1978, G. William Miller replaced Arthur Burns as chairman of the Federal Reserve. His time at the Fed offers a worthwhile perspective on the tenure of our present Fed chairman, Ben Bernanke. From the central bankers both replaced, to the Treasury Secretaries each served alongside, to the falling dollar both oversaw, the comparisons are many.
Though history hasn’t shone brightly on Burns, it should be remembered that he passionately defended the Bretton Woods gold standard amidst Nixon Administration deliberations about same. As Allen Matusow wrote in his book Nixon’s Economy, “Burns shrewdly played on Nixon’s fears of political injury if he quit the gold standard.” Burns pointed out that Nixon would be condemned for “devaluing the dollar,” that “Pravda would hail these developments as a sign of disintegrating capitalism,” plus it would be “hated by business and financial people.”
Ben Bernanke of course replaced Alan Greenspan at the Fed, and Greenspan cited Burns as one of his mentors in his autobiography, The Age of Turbulence. Like Burns, Greenspan understood the value of money measured in gold; acknowledging that he has "always harbored a nostalgia for the gold standard's inherent price stability."
Politics ultimately won out over dollar-price stability with Burns, and in order to keep his position as Fed Chair, Burns gave into political pressure for cheap money. When asked if the Fed was actually independent of Congress, Burns is said to have replied with some irony, “If we don’t do what the politicians want, we won’t be able to maintain our independence.” Just the same, Greenspan acknowledged about the gold standard that there is "no likelihood of its return" due to constant political pressures for cheap money.
Neither Burns’ nor Greenspan’s replacement had any notable orientation in fixed exchange rates, let alone money measured in gold. Indeed, in discussing the classical gold-standard era, Bernanke once asked without a hint of irony, "Why was there such a sharp contrast between the stability of the gold standard regime of the classical, pre-World War I period and the extreme instability associated with the interwar gold standard?"
According to William Greider’s Secrets of the Temple, Fed insiders frequently blamed Burns for the rising inflation experienced under his successor, Miller. Even though the price of gold rose nearly 50 percent on Miller’s watch, some thought he was the victim of excessive money growth from 1976 to 1977 that somehow didn’t register in the dollar’s value during the time in question. In much the same way, Greenspan is frequently targeted for criticism when the dollar’s decline is discussed today. Despite the fact that gold was trading in the $400 range when Fed funds was at 1 percent on his watch, the aforementioned low nominal rate is said to have caused the dollar’s collapse in the two years since he departed.
Not often discussed is that while the Federal Reserve is the sole originator of money, it is the Treasury’s job to communicate to the markets the proper level for the dollar. In this sense, Miller was ill-served by Michael Blumenthal, and present Treasury Secretary Henry Paulson is doing very little to help Bernanke’s cause. In Miller’s case, his time at the Fed was marked by frequent jawboning of the Japanese when it came to the value of the yen. Despite the yen’s rising strength against the dollar during ‘70s, Blumenthal decried yen “weakness” such that the dollar fell 42 percent against the yen eleven months into Miller’s term. It took a dollar-rescue package to stem the greenback’s decline.
While Blumenthal’s crutch was Japan, Paulson has frequently decried the allegedly weak Chinese yuan given his flawed belief that manipulation of paper currencies somehow opens markets. Paulson’s attempts to get China to revalue the yuan upward have been met by further declines in the dollar. Indeed, a dollar decline essentially accomplishes the same thing as a yuan revaluation; particularly if as China’s done, the “competing” currency is allowed to rise somewhat to partially avoid the inflationary result wrought by a peg to the falling dollar.
The problem for Bernanke is that unlike the briefly successful dollar rescue package during the Carter years, the Paulson Treasury has done nothing to rescue the greenback in recent times. Adhering to what is ultimately a non- policy of “markets” setting the dollar’s value, the latter is being ignored by the Treasury with the exception of occasional empty statements of the “strong dollar is in our interest” variety. With the Treasury not communicating a floor for the dollar, or better yet, a higher value in terms of gold or another currency, traders continue to sell it downward.
The comparison between Miller and Bernanke is perhaps greatest on the subject of inflation. Greider noted that when it came to inflation, Miller “was regarded as too complacent and too responsive to the Carter White House.” Just the same, despite a dollar that is at historical lows versus gold and other currencies, Bernanke’s Phillip's Curve orientation has him believing that projected slower growth in coming quarters will contain any inflation pressures. Though it’s said that Bernanke regarded the late Milton Friedman as his hero, apparently he missed the latter’s admonition that “inflation is always and everywhere a monetary phenomenon.” Worse, he channeled the White House last week with his remarkable contention that a silver lining to the dollar’s decline would be a lower trade deficit.
Miller ultimately left after 17 undistinguished months at the Fed, and while his replacement oversaw an even greater near-term decline in the dollar, and worse, a totally unnecessary recession purported as the cure for inflation, Paul Volcker ultimately returned to his fixed-exchange rate moorings in such a way that the Reagan Revolution was able to proceed. Sadly there’s no evidence at present that the Bush Administration will fix its mistake with Bernanke. Instead, the White House maintains an impressive ignorance when it comes to the dollar, and George Bush’s approval ratings (not to mention the Republicans’ electoral chances in November) continue to wither on the vine.
Whatever the electoral outcome in November, the dollar’s collapse suggests the markets would like a change at the Federal Reserve. The question now becomes one of politics. Though there are varying opinions on Paul Volcker, history credits Jimmy Carter for inserting him where Miller failed. Will George Bush get credit for correcting the Bernanke mistake, or will Ben Bernanke’s failures remain those of Bush; mistakes that Bush’s successor will almost surely have to correct.