Contrary to the elaborate conspiracy theories favoured by critics of the Federal Reserve, the nation’s central bank didn’t enjoy a reputation for omnipotence in its earliest years. Decision-making power wasn’t concentrated in the board in Washington, but in the regional reserve banks. This federalist vision of central banking, where monetary sovereignty was divided and dispersed, yielded a system that historian Peter Conti-Brown has described as “institutional chaos”.
Put differently, presidents who might be tempted to blame the Fed for something in its earliest years couldn’t point to some all-powerful technocratic chairman or “maestro” who was responsible for monetary policy. There were simply too many cooks in the kitchen.
The Fed’s mandate was also pretty limited in these early years. Open-market operations only became a formal tool two decades after the creation of the Fed. Adherence to the gold standard also tied policymakers’ hands. Still, presidents grumbled about the new central bank. In 1921, Warren G Harding sounded off to a group of reporters that “The Federal Reserve
Board has to lower rates generally and help the farmers.”
Benjamin Strong, who served as governor of the Federal Reserve
Bank of the New York, eventually acceded to Harding’s wishes. In a letter to the head of the Bank of England, he noted that “bullheaded resistance” on the part of the Fed would “invite political retaliation.”
Illustration by Ajay Mohanty
But such direct, public pressure was a rare occurrence — until the Great Depression. President Herbert Hoover lobbied the Fed for a more expansionary monetary policy, but failed. His successor, Franklin Roosevelt, had more success. He pushed for legislation that centralised control over monetary policy in the Federal Reserve
Board in Washington. Roosevelt exercised considerable influence via his secretary of the Treasury, who held weekly meetings with the new Fed chairman, Marriner Eccles.
But overt pressure remained relatively rare, even if the executive branch and the Fed often worked hand in hand, particularly during the World War II years.
That changed in the post-war period, which ushered in a very different relationship between presidents and the Fed. The catalyst was an obscure conflict over the Treasury Department’s desire for very low short-term interest rates to facilitate refunding of the debt. The Fed resisted calls to keep interest rates low; President Harry Truman’s administration fought back.
The conflict went public in 1951. After much back and forth — and some interventions by Congress — the Federal Reserve and the Treasury signed an accord that basically granted the Fed genuine independence from the Treasury Department and, by extension, the president. An architect of the new policy, William McChesney Martin, became the new chairman of the Federal Reserve Board.
As Conti-Brown has observed, Martin fashioned a new image for the head of the Fed: an apolitical technocrat immune from politics. He faced significant pressure at the outset. President Dwight Eisenhower pressured Martin to ease monetary policy in the wake of a recession that began in 1953, and then asked him to resign if he refused. Martin grudgingly complied, easing slightly, but stuck to his guns otherwise.
Ironically, it was Eisenhower who helped cement Martin’s independence. In a press conference in 1956, Eisenhower was asked about Fed policies that the president had opposed. He replied: “The Federal Reserve Board is set up as a separate agency of government. It is not under the authority of the President, and I really personally believe it would be a mistake to make it definitely and directly responsible to the political head of state.”
But it wasn’t long before presidents went back to pressuring the Fed. President John Kennedy did so by various proxies. His successor, Lyndon Johnson, opted for a more direct approach, lobbying Martin directly. They soon came to blows, with Martin increasingly worried about inflation and Johnson desperate for money to pay for the Great Society and the Vietnam War.
In 1965, Martin reluctantly voted to raise the discount rate, fearing it would enrage Johnson. He was correct: LBJ summoned Martin to his ranch in Texas. The president took his Fed chairman into a room and, according to Martin, asked others to leave. Then Johnson, still recovering from gall bladder surgery, reportedly shoved Martin against the wall, towering over him while he railed away. Martin later recalled the president telling him: “My boys are dying in Vietnam, and you won’t print the money I need.”
Martin demurred, and eventually the meeting ended. His refusal to backtrack has often been held up as evidence of independence, but in the following years, Martin proved far more accommodating of Johnson’s demands for easy money.
President Richard Nixon went much further, effectively destroying the independence of the central bank. He appointed Arthur Burns as chairman in 1970 and then began pressuring him in public and in private. On the day he appointed Burns, Nixon drolly remarked: “I hope that independently he will conclude that my views are the ones that should be followed.”
A year later, the Wall Street Journal reported that Nixon had secured a “commitment” to easy money from Burns. For good measure, Nixon confessed that he had threatened to “unleash” congressional critics of the Fed if Burns failed to comply.
Burns proved a reliable sycophant. He punished dissenting board members and worked hard to insure Nixon’s re-election in 1972.
None of Nixon’s successors succeeded in so thoroughly bending the Fed to their will. President Jimmy Carter publicly criticised Chairman Paul Volcker’s attempts to slay inflation, but to no avail. Ronald Reagan put pressure on Volcker as well, but did so via back channels and proxies.
Subsequent presidents have followed a similar strategy. They eschewed public attacks on the Fed even as they have pushed for monetary policies that complemented their policies. The Fed, in other words, has continued to face presidential pressure — just more subtle, quiet and off the record.
But that’s not Trump’s style. Perhaps Jerome Powell will prove more capable than Arthur Burns, and stand up to the president. But the historical record is not entirely reassuring in this regard.