Arthur F. Burns and G. William Miller: 1970–1979

The recession that was announced by the jump in the unemployment rate in 1970:1 had actually begun in 1969:4; real GDP would not permanently move above the level it reached in 1969:3 until 1971:1, as can be inferred from data in Table 6. The new Chairman, Arthur F. Burns, had inherited a very challenging economy with high inflation and high interest rates. The situation would be further complicated when the Penn-Central Transportation Company defaulted on about $200 million of commercial paper over the weekend of June 19–21, 1970.

The Federal Reserve responded aggressively and successfully to this event by assuring banks of access to the discount window so that they might accommodate other corporations having difficulty rolling over their commercial paper. Its actions helped to prevent a collapse of the $40 billion commercial paper market. On June 24 the Federal Reserve took the opportunity to remove the Regulation Q ceiling on large certificates of deposits with a maturity of less than 90 days. Market interest rates fell through 1971:1 in response to this large intervention and the recession. The inflation rate continued to be high and the unemployment rate rose slowly to 6.0% in 1971:3. The federal government’s deficit rose sharply because of high continuing defense spending and the operation of automatic stabilizers.