Arthur Burns: Born Again at 73

It was another one of those improbable scenes that are becoming a kind of trademark of the Carter Administration. Jimmy Carter was at Notre Dame's commencement last week to receive an honorary degree, and so was Federal Reserve Board Chairman Arthur Burns. When Burns' name was called, Carter did more than just join in the general applause, as he had for the others. He got up and walked to the podium with the patrician boss of the Fed. There, grinning broadly, the populist Chief Executive pointedly shook hands with the rock-ribbed Republican central banker and, clasping his shoulder, offered his congratulations.

Burns, at 73, is in an interesting and incongruous position of power. As Federal Reserve boss, he is at the controls of monetary policy, which is the key to the pace of the nation's economic recovery, and thus has enormous influence on jobs, prices, profits--and, ultimately, politics. What is intriguing is that he now wields this power in a Washington ruled by a Democratic Administration that suddenly finds him and his tight-fisted ways essential to its goals.

Signs of a spreading Burnsian influence in the Carter camp have been multiplying. As some Carter watchers have been telling it, the Chairman, as Burns is known, was a major influence behind the President's apparent swing toward more conservative budget policies. By some accounts, the Federal Reserve chief's arguments had a big role in persuading Carter to withdraw his proposal for an $11.4 billion tax rebate --framed by Liberal Charles Schultze, the President's chief economic adviser. And when Carter invited congressional leaders to a White House breakfast to try to sell his tightfisted fiscal policies, he brought along both Burns and Schultze to back him up. A disgruntled Thomas P. O'Neill Jr., the House majority leader, who has known the two men for years, later complained to newsmen: "One of the two has changed. Somebody has changed, and I'm damned sure it isn't Tip O'Neill."

Odd Couple. Even more galling to many Democrats are the stories that Carter has decided to reappoint Burns Federal Reserve chairman when his second four-year term expires in January. Press Secretary Jody Powell says that his boss has not even begun to consider the succession at the Federal Reserve. But liberals, who want one of their own at the nation's central bank, are unconvinced.

Just how close are Burns and Carter? Liberals fear that they might be turning into the political Odd Couple of all time--Carter the grinning lifelong Democrat; Burns the somber, smoke-wreathed Republican. Burns, after all, was Dwight Eisenhower's chief economic adviser, Richard Nixon's Counsellor and, though theoretically removed from politics when he was named Federal Reserve chairman in 1970, a close confidant of Gerald Ford's. During the campaign, Candidate Carter rapped Burns' Federal Reserve for its conservative monetary policies. He also made much of a proposal to make the term of the Federal Reserve head coincide with that of the President and hinted at otherwise curbing the independence of the Fed.

After the election, when it looked as if Carter and Burns were on a collision course over whether to stimulate the economy, there was speculation that Burns would try to thwart any presidential attempt at fiscal pump priming by tightening up sharply on credit. In recent weeks the Federal Reserve has indeed begun raising short-term interest rates--to try to rein in what it considers an overly rapid growth in the money supply now that inflation is bumping back up to double-digit levels. The Federal Reserve's move toward tighter credit, while welcomed by businessmen who share Burns' concern about inflation, helped to dash hopes of a spring rally in the stock market. Having worried down steadily from its close of 1004.65 last Dec. 31, the Dow Jones industrial average dropped another 31.63 points last week to 898.83, its lowest level in 16 months.

Yet for all the worries of the liberals, the closeness between President Carter and Burns is more apparent than real. Burns has met privately with Carter on only four occasions since the election--two of which were before the Inauguration. The two men have talked on the telephone perhaps half a dozen times, with Carter initiating most of the calls. Of course, Burns has been at the White House several times for group meetings with the President, such as the breakfast for congressional leaders.

But Burns has hardly become a key Carter adviser, however much Carter has come to respect him. Nor is Burns sure of his ground with Carter in the way he was with Ford, whom he had known for years. Overlooked in most of the speculation about the extent of Burns' clout in the new Administration is the possibility that Carter could be deftly stroking the Federal Reserve chairman in an attempt to influence him. Carter needs Burns' help if he is to meet his goal of balancing the budget by 1981. Carter also appreciates Burns' ties with businessmen. Says one veteran Fed watcher, William LeFevre, senior analyst of Wall Street's Granger & Co. brokerage house: "Burns is Carter's best avenue into the banking fraternity, where Carter would clearly love to be accepted."

By now Burns is the archetype of the Washington survivor. With his supreme self-assurance and deliberate manner, he can, and usually does, dominate almost any gathering, whether it is a small private group or a congressional hearing. His steely anger, rarely displayed in public, strikes with the force of a sledgehammer, even though he hardly raises his voice. His grandfatherly appearance--wavy white hair parted down the middle, rimless glasses, that ever-present pipe--gives him an aura of wisdom. His sharp political instincts usually keep him several steps ahead of his adversaries. Says a Burns friend, John Whitehead, senior partner at the Goldman, Sachs investment banking house: "He lives in a political world. He realizes that as head of the Fed he cannot operate in a vacuum." Indeed, Burns has been accused of playing politics--especially of allowing the money supply to overexpand in 1972 to spur the economy and thus ensure the re-election of Nixon. Burns calls the charge ridiculous.

Personalized Power. Burns' power is highly personalized. It does not stem entirely, or even mostly, from his position as chairman of the Federal Reserve's seven-man board of governors. In fact, Burns has only one vote on the twelve-member Federal Open Market Committee (FOMC), which actually sets monetary policy. A weak chairman could be outmaneuvered on the FOMC or the board, which handles bank regulation and some monetary policy decisions, such as the levels of bank reserves.

Yet Burns dominates the board and, to a lesser extent, the FOMC. He does so through a genuine talent for classic consensus decision making. Says one FOMC member: "Part of his dominance stems from his ability to know what is going on. I've seen him shift his position during a meeting, or shift from one meeting to another as the consensus changes." In other words, Burns takes care to move the discussion in the direction in which agreement seems to lie. The role of Burns' predecessor, William McChesney Martin, was far more passive.

The FOMC is where Burns exercises most of the influence he has on the economy. The committee meets in Washington on the third Tuesday of each month. All the twelve Federal Reserve bank presidents are there, even if they are not members of the committee at the moment. Their aim is to agree upon a policy directive to be passed on to the manager of the Federal Reserve system's open-market account at the Federal Reserve Bank in New York.

This directive presents a range for the growth target for the money supply in the month ahead; it also gives the desired range for the so-called federal funds rate. This is the interest rate that one bank charges another for the overnight loan of money the borrower needs to have as reserves. The open-market desk manipulates the federal funds rate by buying or selling Government securities. When it buys securities, the cash it pays goes on deposit with a commercial bank, thus effectively adding reserves to the banking system and lowering the federal funds rate. Selling securities draws reserves out of the banking system and drives up the rate. How have Burns and his colleagues been using their powers? Liberals charge that the Federal Reserve has overemphasized the threat of inflation. They are concerned that any trimming of the growth of the money supply could slow the economic expansion and pinch off any chance of pulling unemployment much below its current 7% level soon.

The Burnsian consensus reached at the April meeting of the FOMC was that some trimming of the growth of the money supply is necessary; too much money had begun to flood into the economy as it picked up steam in early spring. The group's decision was to push the federal funds rate up a bit, to as much as 5 1/2%. The Federal Reserve's tighter money policy is already showing up in higher short-term interest rates--to which the stock markets are keenly sensitive--as well as in a rise in the prime lending rate that banks charge their best customers. At week's end New York's Citibank raised its prime one-quarter point, to 6 3/4%, the second such raise in two weeks.

Increased Velocity. Top Administration policymakers, including Treasury Secretary Michael Blumenthal, do not feel that the upward kick in interest rates seriously endangers the recovery. But they are deeply concerned about the Federal Reserve's long-term targets for money supply growth. The problem is that it is hard to know just what rate of monetary growth is needed for a given rate of economic expansion.

Burns' admirers credit him with an instinctive feel for how fast money can move through the economy, something called "velocity." This is nothing more than the frequency with which dollars get used, and it has been speeded up in recent years by computerized bank accounts and lightning-fast electronic funds transfer. The effect is to increase the money supply even though no new money may actually be pumped into the system. At the depth of the recession in the spring of 1975, Burns resisted pressures to increase the money supply and relied instead on a much greater increase in velocity than anyone else thought possible. This year Burns is counting on a further increase in velocity to compensate for a slowdown in money supply growth.

Will Burns be right again? Even being "right" may lie more in the eye of the observer than in some objective measure. Republican Alan Greenspan, chairman of Ford's Council of Economic Advisers, believes that Burns "has done an extraordinarily effective job, especially in the economic and political environment of the last several years." On the other hand, Brookings Institution Economist Arthur Okun, a liberal Democrat who was Lyndon Johnson's chief economist, assesses Burns' performance harshly: "There is no way to exonerate monetary policy from the disastrous economic performance of the last six years." It is a measure of the Chairman's skill as a Washington power and survivor that so few seem to be neutral about him or his policies.

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