Trump is threatening the Federal Reserve's independence with a series of tweets, a pressure that has not been seen since 1971, on the eve of the Great Stagflation in the USA.

In 1971, the US economy was already facing the dilemma of "stagflation", with an unemployment rate of 6.1% and inflation exceeding 5.8%, while the international balance of payments deficit continued to expand. To secure re-election, President Nixon put unprecedented pressure on then-Federal Reserve Chairman Burns.

White House records show that in 1971, the interactions between Nixon and Burns significantly increased, especially in the third and fourth quarters of that year, where their formal meetings reached 17 times per quarter, far exceeding the usual communication frequency.

This kind of intervention manifested in policy operations as follows: that year, the US federal funds rate plummeted from 5% at the beginning of the year to 3.5% by the end, while the growth rate of M1 money supply reached a post-World War II peak of 8.4%.

In the year the Bretton Woods system collapsed and the global monetary system underwent dramatic changes, Burns' political compromise sowed the seeds for the later "Great Inflation", which was not resolved until Paul Volcker dramatically raised interest rates after 1979.

As a result, Burns bore the historical infamy. Today's Powell definitely does not want to repeat Burns' fate.

Burns' compromise: Political interests outweighed price stability.

In 1970, Nixon personally nominated Arthur Burns to be the Chairman of the Federal Reserve. Burns was an economist from Columbia University and had been an economic advisor during Nixon's campaign. The two had a close personal relationship. Nixon had high expectations for Burns—not as a gatekeeper of monetary policy, but as a "coordinator" of political strategy.

At that time, Nixon faced immense pressure to secure reelection in the 1972 election, while the US economy had not fully recovered from the recession of 1969, with high unemployment rates. He urgently needed a wave of economic growth, even if it relied on false prosperity created by "loose money."

Thus, he continuously pressured Burns, hoping the Federal Reserve would cut interest rates and increase the money supply to stimulate growth. Internal White House recordings captured several conversations between Nixon and Burns.

On October 10, 1971, in the Oval Office, Nixon told Burns:

"I don’t want to go out of town fast… If we lose, this will be the last time conservatives govern in Washington."

He hinted that if he failed to be reelected, Burns would face a Democratic-led future, and the political atmosphere would change completely. Faced with Burns' attempt to delay further easing policies by claiming that "the banking system is already very lenient," Nixon directly retorted:

"The so-called liquidity problem? That’s just bullshit."

Soon after, during a phone call, Burns reported to Nixon, "We have lowered the discount rate to 4.5%."

Nixon responded:

"Good, good, good…… You can lead 'em. You always have. Just kick 'em in the rump a little."

Nixon not only pressured in policy but also made clear statements on personnel arrangements. On December 24, 1971, he told White House Chief of Staff George Shultz:

"Do you think we have enough influence over Arthur? I mean, how much pressure can I still put on him?"

"If I have to talk to him again, I’ll do it. Next time I’ll just bring him in."

Nixon also emphasized that Burns had no authority to decide the candidates for the Federal Reserve Board:

"He needs to understand, this is just like Chief Justice Burger… I’m not going to let him name his people."

These dialogues come from White House recordings, clearly illustrating the systematic pressure the President of the USA put on the central bank chairman. And Burns indeed “went along” and defended his actions with a set of theories.

He believed that the tight MMF policy and the subsequent rise in unemployment were ineffective in curbing the inflation at that time, as the root causes of inflation were factors beyond the control of the Federal Reserve, such as unions, shortages of food and Energy, and OPEC's control over oil prices.

From 1971 to 1972, the Federal Reserve lowered interest rates and expanded the MMF supply, driving a brief economic boom that also helped Nixon achieve his re-election goal.

However, the cost of this "artificially created" economic prosperity quickly became apparent.

Bypassing the Federal Reserve's "Nixon Shock"

Although the Federal Reserve was the executing agency of the MMF policy, when Nixon announced the "suspension of the dollar's convertibility to Gold" in August 1971, he did not consider Burns' opposition.

From August 13 to 15, 1971, Nixon convened 15 key aides for a closed-door meeting at Camp David, including Burns, Secretary of the Treasury Connolly, and then Deputy Undersecretary for International Monetary Affairs Volcker.

During the meeting, although Burns initially opposed closing the dollar-Gold convertibility window, under Nixon's strong political will, the meeting directly bypassed the Federal Reserve's decision-making process and unilaterally decided:

To close the dollar-Gold convertibility window and suspend the rights of foreign governments to convert dollars to Gold.

Implement a 90-day wage and price freeze to curb inflation;

Impose a 10% additional tax on all taxable imported goods to protect American products from the impact of Exchange Rates.

This series of measures, known as the "Nixon Shock," undermined the foundations of the Bretton Woods system established in 1944, leading to a surge in Gold prices and the collapse of the Global Exchange Rate system.

Initially, wage and price controls suppressed inflation in the short term, keeping inflation in the USA at 3.3% in 1972. However, by 1973, Nixon lifted price controls, and the consequences of abundant circulation of dollars and supply-demand imbalance quickly became apparent. Coupled with the outbreak of the first oil crisis that year, prices began to soar.

The USA economy then fell into a rare "double whammy" situation, with an inflation rate of 8.8% in 1973 and even higher at 12.3% in 1974, while the unemployment rate continued to rise, forming a typical stagflation pattern.

At this point, Burns attempted to tighten monetary policy again but found himself having already lost credibility.

His reliance on political compromise and non-monetary measures sowed the seeds for "great inflation," until Paul Volcker took office in 1979 and implemented extreme interest rate hikes to completely "suppress" inflation, allowing the Federal Reserve to regain its independent prestige.

Powell absolutely does not want to be the next Burns.

Burns left an average inflation rate of 7% during his term, undermining the credibility of the Federal Reserve.

Internal documents from the Federal Reserve and Nixon's recordings show that Burns prioritized short-term political needs over long-term price stability, making his term a cautionary tale about central bank independence.

Some financial commentators jokingly said:

"Burns did not cheat, did not kill, and was not even a pedophile... His only crime was lowering interest rates before inflation was completely under control."

In contrast, Burns' successor, Paul Volcker, "choked off" inflation with a 19% interest rate. Although it caused a severe recession, he became a hero in Wall Street, economic history, and even in the public eye for ending inflation.

History has shown that Americans can forgive a Federal Reserve chairman who causes an economic recession, but they will not forgive one who ignites inflation.

Powell understands this well and certainly does not want to be the next Burns.

Editor/danial