19 From Kennedy’s “New Economics” to Nixon’s “New Economic Policy”: Monetary Inflation and the March of Economic Fascism Joseph T. Salerno

On August 15, 1971, President Richard Nixon in a nationwide radio and television address informed the American public that he was ordering the implementation of “the most comprehensive New Economic Policy to be undertaken by this nation in four decades.”[1] The centerpiece of his New Economic Policy was a wage-price freeze, which he introduced in the following words:

The time has come for decisive action—action that will break the vicious circle of spiraling wages and costs. I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. . . . I have today appointed a Cost of Living Council within the Government. I have directed this Council to work with leaders of labor and business to set up the proper mechanism for achieving continued price and wage stability after the 90-day freeze is over.[2]

Nixon proceeded to deny that the freeze would involve “the mandatory wage and price controls that crush personal and economic freedom.”[3] Nixon’s denial was a bald-faced and absurd prevarication, given his caveat that the wage-price freeze “will be backed by Government sanctions, if necessary.” The initial ninety-day wage-price freeze soon gave way to three subsequent phases of mandatory price controls that lasted until April 1974 and revealed the Nixonian New Economic Policy as the usual coercive and heavy-handed attempt at political price fixing involving gross abrogation of economic freedoms and private property rights.[4]

What was more surprising than the imposing of wage and price controls by a Republican president during peacetime, however, was the sparseness and mildness of the critical reaction among market-oriented economists and business leaders to Nixon’s announcement of a policy that would, in one fell swoop, effectively suspend the operation of the market economy. Indeed, for some time leading up to the imposition of controls, an important segment of the business community had been clamoring for “direct action” on inflation, particularly on its manifestation in rising wage rates.[5] Thus, The Washington Post was probably not exaggerating when, on the day after Nixon unveiled his wage-price freeze, it described the mood of business and banking as “almost euphoric.”[6] Also, in late 1970, the conservative economist Arthur Burns, a former chairman of the Council of Economic Advisers (CEA) during the Eisenhower administration and Nixon’s new appointee as the chairman of the Federal Reserve System, suddenly joined such longtime left-wing advocates of wage and price controls as John Kenneth Galbraith in the chorus of voices calling for an “incomes policy” to moderate inflation.[7] Moreover, a number of prominent conservative economists long associated with the Republican Party—including Burns himself, Paul McCracken, Herbert Stein, and George P. Schultz—were directly involved in crafting the Nixonian program of wage and price controls.

While there were a few free-market economists who did criticize the wage-price freeze, including Milton Friedman and a group of Chicago School economists headed by Allen Meltzer, their criticisms were relatively mild and did not reflect recognition that the New Economic Policy marked the abolition of the market economy and its replacement by a regime of national economic planning.[8] Perhaps the only economist to fully identify and clearly express the origins, nature, and momentous implications of the New Economic Policy was Murray Rothbard, a student of Ludwig von Mises and the leader of the Austrian School in the United States. Rothbard wrote:

It is now clear that price and wage controls of some sort will succeed the 90-day freeze—in short that we now have entered a political economy of permanent direct controls. There is only one word for this New Economic Policy, a word that is at first glance harsh and exaggerated, but in fact is precisely appropriate. That word is “fascism.” A system of permanent price and wage controls, administered by a central government bureaucracy, probably headed by some form of tripartite board including Big Business, Big Labor, and Big Government—this is precisely what fascism is, precisely the economic system of Mussolini’s Italy and Hitler’s Germany. This is the economy of the “corporate state,” administered by dictation from the top, controlled and monopolized by Big Business and Big Union interests, with the individual, and the consumer, the person who suffers. In short, the mass of the American public will suffer from this system of corporate statism, from the death of the free price system, from the invasion of individual rights, from the hampering of growth, efficiency, and productivity, that the system will entail.[9]

In January 1971, eight months before the imposition of the wage-price freeze, Rothbard had foretold the coming of wage and price controls, which he characterized as the natural culmination of fascistic trends in the U.S. economy that had been developing since the beginning of the 1960s and that had gathered significant momentum during the Nixon administration. He also foresaw the surprising complicity of conservative “free-market” economists in bringing about these controls and the favorable reaction of the leaders of big business to their implementation. Rothbard’s prescient and perceptive analysis of the emerging fascist political economy is worth quoting at length:

Well, we have had two years of Nixonism and what we are undergoing is a super-Great Society—in fact, what we are seeing is the greatest single thrust toward socialism since the days of Franklin Roosevelt. It is not Marxian socialism, to be sure, but neither was FDR’s; it is . . . a big-business socialism, or state corporatism, but that is cold comfort indeed. There are only two major differences in content between Nixon and Kennedy-Johnson . . . (1) that the march into socialism is faster because the teeth of conservative Republican opposition have been drawn; and (2) that the erstwhile “free-market” conservatives, basking in the seats of Power, have betrayed whatever principles they may have had for the service of the State. Thus, we have Paul McCracken and Arthur F. Burns, dedicated opponents of wage-price “guideline” dictation and wage-price controls when out of power, now moving rapidly in the very direction they had previously deplored. . . .

But now the administration has swung around to the Liberal thesis of monetary fiscal expansion to cure the recession, while yelling and griping at labor and employers not to raise wages and prices—a “guidelines” or “incomes” policy that is only one step away from wage and price controls. . . .

Not only is it impossible for direct controls to work; their imposition adds the final link in the forging of a totalitarian economy, of an American fascism. What is it but totalitarian to outlaw any sort of voluntary exchange, any voluntary sale of a product, or hiring of a laborer? But once again Richard Nixon is responsive to his credo of big business liberalism, for direct controls satisfy the ideological creed of liberals while at the same time they are urged by big business in order to try to hold down the pressure of wages on selling prices which always appear in the late stages of a boom.[10]

Early in this passage, Rothbard hints at the substantial continuity between the economic policies of the Kennedy and Johnson administrations on the one hand, and the Nixon administration on the other. This chapter elaborates this hint into the thesis that much of the ideological and institutional groundwork for the economic fascism of Nixon’s New Economic Policy was laid by the proponents and policies of Kennedy’s “new economics” in the early 1960s. It argues, in particular, that monetary inflation was a neglected but key element propelling the march toward the corporate statism that emerged during the Nixon administration. Furthermore, it seeks to demonstrate that the unleashing of the long-running monetary inflation that was initiated during the Kennedy years and culminated in the inflationary recession of 1973–1975 was a direct result of the radical reshaping of the opinions of the political establishment and the general public toward monetary policy, which was accomplished in a remarkably short time by Kennedy’s new economist-advisers.

The chapter is structured in the following way. Section 2 presents a rigorous definition of economic fascism adopted in emended form from the American journalist and political commentator John T. Flynn. Section 3 is devoted to a discussion of the origins of the new economics, which was developed in the latter half of the 1950s by American followers of John Maynard Keynes, most of whom served in some administrative capacity in the U.S. planned economy during World War II. Section 4 critically analyzes the main tenets of the new economics and argues that the doctrine served as a blueprint for the macroeconomic national planning regime that began to take shape under Kennedy and that progressively evolved through the Johnson and Nixon administrations. The influence of the new economics on Kennedy and the implementation of its fiscal policy during his administration are detailed in Section 5. Section 6 discusses the radically inflationary shift in monetary policy that was inspired by the new economics and argues that it was this change and not the much-ballyhooed revolution in fiscal policy that constituted the core of Kennedy’s economic policy revolution. Finally, Section 7 examines Kennedy’s attempt in 1962 to compel leading steel corporations to rescind an announced price increase, an event that foreshadowed and facilitated the economic fascism of Nixon’s New Economic Policy.