The reactions of politicians and the media to the death of Gerald R. Ford, the thirty-eighth president of the United States, were almost universal in their predictability. Terms such as "accidental" or "caretaker" president were widespread, while most agreed with President George W. Bush that, "For a nation that needed healing and for an office that needed a calm and steady hand, Gerald Ford came along when we needed him most" (Bush 2006). Though much has been made of Ford's integrity and honesty, there has been little discussion of his significance in terms of policy or even his legacy. But, as Fred Greenstein has argued, "Presidents and presidential advisers who dismiss the Ford experience will miss out on a rich set of precedents about how to manage the presidency. More fundamentally, they will fail to take account of the personal strengths of a chief executive who had an impressive capacity to withstand the pressures of office" (2000, 193). No more so was this true than with regard to economic policy.
This paper examines the Ford administration's reaction to the deepening recession of the mid-1970s and the unprecedented challenges of stagflation. This includes an analysis of the decision-making process within the White House, the administration's relationship with Congress, and the abandonment of almost 40 years of Keynesian orthodoxy that would see President Ford introduce a new conservative economic agenda as he sought to adapt traditional Republican economics to deal with new economic circumstances.
Most studies of post-World War II economic policy in America have defined a number of key stages in the development of the political economy, beginning with President Franklin D. Roosevelt (see., e.g., Hibbs 1987; Morgan 1995; Stein 1994; Spulber 1989). The Roosevelt presidency is significant because of its response to the Great Depression, which dramatically increased the role of the federal government in the management of the American economy as it sought to reverse the waste of human and material resources by deliberately creating an expansion of output, employment, investment and consumption. A major factor in Roosevelt's approach was the theories of British economist John Maynard Keynes, and particularly his General Theory of Employment, Interest, and Money, written in 1936. (1) Keynes rejected the classical nineteenth-century laissez-faire notion of a self-adjusting economy and argued that government had to intervene to correct market problems by manipulating aggregate demand to prevent unemployment and inflation.
As economist Herbert Stein noted, Keynes influenced politicians, economists, and intellectuals, as his theory appeared to offer the promise of economic prosperity and growth. This helped make expansionist fiscal policy the basis of an economic consensus that would last for 40 years. This was institutionalized and supported by the 1946 Employment Act, which committed future governments to seek "maximum employment." Observed Stein, "Without Keynes, and especially the interpretation of Keynes by his followers, expansionist fiscal policy might have remained an occasional emergency measure and not become a way of life" (1994, 39).
From 1945 through the early 1970s, the U.S. economy enjoyed international preeminence, and economic policy generally was successful at maintaining a strong growth rate, high employment, and low inflation. Such was the apparent success of Keynesianism that by the 1960s, economists and politicians alike believed that the economy could be fine-tuned to eradicate economic imbalances and make the business cycle obsolete (for insightful comments on this era, see, e.g., Okun 1970; Stein 1994; Tobin 1974). By the early 1970s, however, increasing competition from abroad, the economic consequences of the Vietnam War and the Great Society, and the oil price inflation that followed the OPEC price hike of 1973 had severely weakened the economy.
The postwar dominance of Keynesianism began to be undermined by slow growth and the emergence of stagflation, which simultaneously produced unprecedented high inflation and rising unemployment. Skepticism about the government's ability to manage the economy increased, not least from the monetarist school led by Milton Friedman. (2)
As unemployment and inflation rose together, there was no longer a clear choice between larger deficits to stimulate the economy at the price of higher inflation, and lower deficits to reduce inflation at the risk of recession. The Phillips curve, which expressed a simple trade-off between inflation and unemployment, no longer seemed valid. Inflation, which had remained relatively stable at 0.5%-2% between 1949 and 1965, rose to 12% in 1974. Unemployment, which had remained below 4% during the John E Kennedy and Lyndon B. Johnson administrations, rose above 5% at the beginning of 1974. This came at a time when the United States' share of world trade had fallen from 25% in 1948 to 10% at the beginning of the 1970s as America was challenged by the economic miracle of postwar recovery in Europe and Japan and the developing industrializing economies of Asia and Latin America (see Eckstein 1978; Hibbs 1987; Morgan 1994; Spulber 1989). The postwar "long boom" had run its course, and Americans now felt the dramatic repercussions of the end of American economic hegemony. It was at this crucial moment in America's political and economic history that Gerald Ford became president on August 9, 1974. (3)
He did so under a unique and difficult set of circumstances. Most dramatically, he was unelected. As the minority leader in the U.S. House of Representatives, he first had replaced Vice President Spiro Agnew after his resignation in October 1973, and then succeeded the disgraced Richard M. Nixon. As the one-time congressman for the Fifth District of Michigan, Ford assumed the highest office in the land with no national mandate at a time when the balance between the executive and legislature in the aftermath of Watergate and Vietnam was shifting dramatically to seriously undermine the authority of the president.
Ford also inherited from Nixon what the New York Times described as "the worst inflation in the country's peacetime history, the highest interest rates in a century, the consequent severe slump in housing, sinking and utterly demoralized securities markets, a stagnant economy with large scale-unemployment in prospect and a worsening international trade and payments position" (Ford 1979, 151).
Ford had a great interest in, and knowledge of, economic affairs. This had begun at the University of Michigan, where he had taken courses in economics, and had continued during his 25 years in Congress, where he had served on the House Appropriations Committee for 14 years and then as minority leader for nine years. (4) As president, he would be much more engaged in economic policy than his predecessor. (5)
Ford was a firm believer in the marketplace, convinced that a healthy economy could only be achieved through the revitalization of the private sector, not through government fiat or government-created jobs. He opposed the expansion of the federal government that had occurred since the New Deal and the postwar economic policies that had followed, particularly under the New Frontier and Great Society programs of Kennedy and Johnson. (6) He believed that the federal government had a responsibility to help create an environment that would encourage growth and discourage the forces of inflation, and part of the solution to achieve this was deregulation and reducing the role of federal government (see, e.g., Ford 1978, 8). As he explained in his autobiography, "On economic policy I was a conservative--and very proud of it. I didn't believe that we could solve problems simply by throwing money at them" (1979, 66). (7)
Ford biographer Yanek Mieczkowski argues that this led to comparisons with Dwight D. Eisenhower, whom Ford described as "one of his presidential heroes" (2005, 82). Like Ford, Eisenhower believed that balanced budgets, spending restraint, and the control of inflation were the essential prerequisites for sustainable economic growth. In his 1959 State of the Union message, he warned, "If we cannot live within our means during such a time of rising prosperity, the hope for fiscal integrity will fade" (Public Papers of the Presidents 1960, 12). But the Ford administration would differ significantly from that of Eisenhower, not least in terms of the context of economic policy.
As economist Nicolas Spulber argues, Eisenhower, like his predecessor Harry Truman, accepted as a key role of the federal government's economic policy "the moderation of cyclical swings," involving "partial compensation in the downswing and partial restriction in the upswing" (1989, 25). This countercyclical policy, which aimed at stabilization by avoiding both unemployment and inflation, was influenced substantially by Keynesian economics. In short, Eisenhower was trying to uphold anti-inflationary imperatives when the high employment and strong growth ideals of the Keynesian postwar orthodoxy--as operationally embodied in the Employment Act--were still dominant (see Morgan 1990; Sloan 1991).
During the Ford administration, however, both Keynesian economics and the Employment Act would be substantially undermined. Burton Malkiel, a member of Ford's Council of Economic Advisers, remembers that Ford's economic advisors felt that "the simple Keynesian model was inadequate." (8) As a result, developing a new conservative economic policy would become a central aim of the administration. As William Gorog, Ford's deputy assistant to the president for economic affairs, later observed, "Everything had been turned over on its head and nothing was really effective any more." (9)
It was this that would define Ford as being different from Eisenhower, and it is this that makes Ford important in economic policy terms, because he would become the first...