11 - Carter, Burns, and Miller

Summary

The assumption that monetary policy had a responsibility to manage aggregate demand to maintain low unemployment reached its high point in the Carter administration. The activist consensus also held that inflation was a nonmonetary phenomenon. Until 1980, the administration, constrained by labor union aversion to wage controls, considered moral suasion its primary tool for inflation control. The last experiment in classifying inflation as demand-pull or cost-push and tailoring policy accordingly occurred in 1979 when the FOMC decided to accommodate the price-level rise produced by the December 1978 oil price shock. That accommodation took the form of leaving the funds rate unchanged as inflation rose. In the event, the public's expectation of inflation rose; the real rate of interest fell; and money growth surged. Financial markets began to talk about Latin American style inflation.

Humphrey–Hawkins

The activist spirit peaked in the first half of the Carter administration. The deepest economic downturn since the Depression created a demand for economic stimulus to lower unemployment. Almost all members of the FOMC shared a commitment to “low” unemployment. Although Congress and to a lesser extent the administration pressured the Fed for a stimulative policy, stimulative monetary policy derived from the common intellectual environment of the time rather than from political pressures.

The Humphrey–Hawkins full employment bill exemplified the activist character of the times. Representative Augustus F. Hawkins (D. CA) and Senator Hubert H. Humphrey (D. MN) introduced it in 1974.