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Home , Alan Greenspan, Federal Reserve Bank, Paul Volcker, William McChesney Martin

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FEDERALRESERVE William McChesney Martin, Jr.: A Reevaluation BY JOHN H. WOOD

During his nearly t is high time that William model that was both sensible and 20 years as McChesney Martin, Jr., is sophisticated in the 1980s and Ireevaluated. He was subjected .” Average annual in Chairman of to virtually unanimous adverse criti- Martin’s first decade was 2.2 percent cism from the profession compared with 7.1 percent and 2.5 the Fed, Martin during his tenure as the longest-serv- percent in the 1970s and 1990s. The ing Chairman of the first period was also the least helped to establish Board, from March 1951 to February volatile, with a 0.87 percent standard the institution’s 1970 (three months longer than Alan deviation of inflation compared with Greenspan). For instance, all 23 pro- 1.60 percent and 0.93 percent in the independence and fessors who appeared before later periods. Congress’ hearings on “The Federal Robert Bremner’s recent biogra- to keep inflation Reserve System after Fifty Years” phy, Chairman of the Fed: William relatively low, supported Chairman Wright McChesney Martin, Jr., and the Creation Patman’s attack on the Fed’s inde- of the Modern American Financial despite numerous pendence and the use made of it. System, fills a gap in the history of Four, including , central banking, and of the financial pressures to follow favored money rules, and the rest markets generally. This is not only a different course joined in recom- because of Martin’s importance to mending the “coordination of through two event- monetary, fiscal, and debt policies” ful decades, but also because, as the under the direction of the Executive. first full-time president (at age 31) of This was before later monetary the Stock Exchange policies and caused us to (NYSE), he guided its accommoda- look back longingly at the record tions with the New Deal regulators under Martin. Christina and David who wanted to remake the financial Romer have summarized monetary markets. What we see is a tough and policy over “the past 50 years” as an consistent man. His principles were “evolution from a crude but funda- those of a conserver — of institu- mentally sensible model of how the tions and the value of money. economy worked in the 1950s, to Martin’s life is a story of battles more formal but faulty models in the for those principles even when, as 1960s and 1970s, and finally to a was usual, he was in the minority and had to use his considerable negotiat- ing skills. He can be viewed as the most determined fighter in the his- tory of the Fed. Without downplaying the successes of Benjamin Strong, , and , they benefited from government forbearance and considerable approval from the aca- William McChesney demic community. The last half of Martin, Jr., was sworn in Martin’s term, however, was a fight, as Chairman of the with limited help from a divided Federal Reserve System by Federal Reserve Board, against easy- Chief Justice Fred Vinson money administrations supported by on April 2, 1951. the majority of . He was Thomas McCabe, Martin’s known at once for his collegiality in

predecessor, looked on. PHOTOS AP WIDE WORLD PHOTOGRAPHY:

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the Federal Reserve and his firmness Chairman of the Board of the the sole member of a new research (approaching obstinacy, President of St. Louis in department. During the next few Lyndon Johnson thought) in dealing 1914, and served as president (called years he witnessed the financial ruin with threats from the outside, both governor before the Banking Act of of many of Edwards’ clients. of which contrasted with chairmen 1935) from 1929 to 1941. The St. Louis In 1931, he moved to New York as Marriner Eccles and Arthur Burns. Fed district was predominantly rural, Edwards’ floor broker at the NYSE. Martin was a conserver even in his and in his teenage years, junior often He took courses in economics and efforts in 1951 on the side of the finance at night school at the Fed’s independence. The reestab- New School for Social Research, lishment of the independence that His principles were and was a leader in the organiza- had been taken away in 1933 tion of the Economic Forum (although its subordination was those of a conserver — Quarterly. The journal included most obvious in the bond support articles by John Maynard Keynes program — the “peg” — which of institutions and the and Josiah Stamp, and Martin began in 1942) places Martin in continued as one of the publish- the pantheon of genuine central value of money. ers until they sold it in 1934. bankers. By this I mean those who Martin began to study for a focused on price stability instead Ph.D. in finance at Columbia but of thinking of the Fed’s actions heard his father “expressing concern his attention turned to the gover- as part of a coordinated fiscal and about excessive borrowing by overly nance of the Exchange. In May 1935, monetary program aimed at multiple optimistic farmers.” Farm values rose he was elected a governor. The goals. Martin’s overriding objective dramatically with farm prices during Exchange had been under attack at the Fed and NYSE was stability, and after , before they since the Crash and the new cooperatively if possible, digging in both collapsed in 1921. One-fifth of Securities and Exchange his heels when necessary. the banks in the district (and the Commission (SEC) pressed for Our knowledge of his conflicts is country) failed in the 1920s. reforms. Change was resisted by mainly from others, with a few from Martin attended Yale, majored in many, including Richard Whitney, Martin’s accounts for the Fed’s files. English, and took some courses in head of the Exchange, but a few Evidence of his backbone was shown economics, where, according to sought accommodation. Martin was during a meeting of the “quadriad” Bremner, he learned “that his father new and unsullied and found that (President Kennedy, Treasury and other Federal Reserve bankers “the out-of-town firms were glad to Secretary Douglas Dillon, Chairman were considered hopelessly out of support me” as a member of the of the Council of Economic Advisers date because of their misguided reform movement. , and Martin), when the warnings about excessive speculation He would rise quickly to the top “exasperated” President asked in the stock market.” The foremost of the NYSE, where he would serve Martin “why he would not agree with at Yale during this period as president for three years. Much of his other advisers” and “Martin was Irving Fisher, whose pronounce- his presidency was devoted to pre- responded that he was the only per- ment a week before the Crash that serving the Exchange’s position in son in the room that did not work for stock prices had reached a “perma- the financial industry and the profits the President.” nent high plateau” became famous. of its members. He was generous Martin’s monetary policy was root- Martin’s behavior three and four with promises of audits and stricter ed in his background, and his actions decades later demonstrates that he supervision, but there was no signifi- at the Fed are better understood in took the lesson. My job at the Fed, he cant change in membership or light of his behavior at the NYSE in would say, is to “take away the punch trading practices, particularly in the the 1930s and government service in bowl just as the party gets going.” dealer functions of the vilified spe- the 1940s. The following discussion of After a brief stint as a bank exam- cialists. Bremner writes of the Martin, the man, is taken largely from iner for the St. Louis Fed, Martin failures of Martin’s reform efforts Bremner. The economic interpreta- went to work for A.G. Edwards & but one could view his record more tions are mine. I hope the reader will Sons in November 1928, as a “board charitably, as resisting the call to agree that Martin’s economic views boy” who updated stock prices on a make widespread, and perhaps hasty, were more sophisticated than he was large chalkboard. His uncle, Albert changes. given credit for. Edwards, was managing director of Martin resigned his position at one of the few significant securities the Exchange in 1941, and entered Early Career firms away from the East Coast, which the Army as a private. He rose to William McChesney Martin, Jr., was continues today with headquarters colonel as he spent the war working born in 1906. His father was appointed still in St. Louis. Martin soon became on Russian lend-lease, becoming

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head of the program in 1945. Being a became President in March 1933. tionary pressures of the Korean War Democrat did not damage Milton Friedman and Anna Schwartz that began in June 1950, his postwar prospects, and in have referred to the prosperous and and it broke into open rebellion November 1945, John Snyder, St. stable-price 1920s as “the high tide of as President Truman’s political Louis banker and adviser to the Federal Reserve System.” The position weakened. Martin represent- President Truman, asked Martin to massive falls in money, prices, and ed the administration in negotiating become president of the Export- employment during the Great the Treasury-Federal Reserve Accord Import Bank. Bremner describes Depression of 1929 to 1933 produced a that was announced on March 4, 1951: Martin’s term at Ex-Im as a succes- reaction in which the Roosevelt sion of run-ins with the State and administration assumed control of The Treasury and the Federal Treasury departments as he defend- monetary policy. Reserve System have reached full ed the institution’s independence of The only significant changes in the accord with respect to debt-man- politics. Fed’s structure were made by the agement and monetary policies to On Jan. 1, 1949, Martin became Banking Act of 1935, under the influ- be pursued in furthering their assistant secretary of the Treasury for ence of Mariner Eccles, a Utah common purpose to assure the International Affairs under Snyder, businessman who was attracted to successful financing of the who had become secretary in 1946. Washington by the New Deal, and Government’s requirements and, He was involved in the negotiation of became Chairman of the Federal at the same time, to minimize currency realignments following the Reserve Board in 1934. The most monetization of the public debt. British devaluation in September important change affecting policy in 1949, and for the occupied former the long run was the formalization of Part of the agreement was Martin’s enemies. He became Snyder’s confi- the open market committee that had appointment as Fed Chairman. dant on a wide range of policy been a voluntary vehicle for coordina- matters, and was drawn into the tion between Reserve banks. The new Chairman of the Fed Treasury’s dispute with the Federal Federal Open Market Committee Although coming to the Fed from Reserve. (FOMC) consisted of the seven gover- the Treasury, Martin, like Paul The Fed was fighting for its inde- nors of the Federal Reserve Board, the Volcker later, insisted on the inde- pendence from the Treasury — not president of the Federal Reserve Bank pendence of monetary policy. for the first time. To put the dispute of New York, and four more Bank Martin’s long tenure was filled with in historical perspective, the Federal presidents on a rotating basis. The conflict but his positions in all of Reserve Act of 1913 created a System Chairman of the Board also chaired them redound to his credit when of 12 district banks with general the FOMC. viewed from later perspectives of oversight by a Board in Washington Structural changes were irrelevant monetary theory and policy. The whose members were appointed by while monetary policy was directed by distinguishing features of his career the President of the United States the Treasury, which decided on a low- are seen in four conflicts that (five members with rotating 10-year interest war, in particular, a Treasury extended over the five presidential terms, changed to seven members for bill rate pegged at 0.375 percent, and administrations during which he 14-year terms in 1935). The Federal an average yield on U.S. long-term served. Reserve banks were owned by their bonds of about 2.4 percent. The (1) Bills Only. The development member banks, and their heads were administration’s pressure to maintain of open market operations as the chosen by their boards of directors. low rates persisted even longer than main instrument of monetary poli- So the Fed was given considerable after World War I. The peg continued cy meant that the Fed had to be freedom from the Executive — if it unchanged until July 1947, and bills concerned with the performance of chose to exercise it, which is not pos- had risen to only 1.14 percent at the the government securities market. sible in wartime because it is cyclical peak in November 1948, Standards had been set for securi- duty-bound to support the war despite average annual inflation of 10 ties dealers during World War II but effort. That means the monetization percent from 1946 to 1948. The long the stability and liquidity of the of government deficits. The Treasury bond yield was virtually unchanged at market were unthreatened under kept up its pressure on the Fed to 2.44 percent. the peg. One of Martin’s first prevent interest rates from rising Throughout this period the actions at the Fed was to chair an after the end of World War I, a poli- Federal Reserve tried to negotiate the Ad Hoc Subcommittee “to study cy that caused the consumer price freedom to fight inflation. It had and report on the operations and index to rise 31 percent between occasional support from Congress but functioning of the Open Market October 1918 and June 1920. the administration would not aban- Committee in relation to the The Fed was relatively free from don its low-interest policy. The Fed’s Government securities market” early 1920 until Franklin Roosevelt resistance increased with the infla- under the new free-market regime

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of fluctuating yields. The subcom- monetary policy meant the readiness that aimed at the triple objectives of mittee’s objective was effective to force sudden and substantial growth, surplus, open market operations, which changes in interest rates, especially and price stability by twisting the requires “an efficiently functioning long-term rates. yield curve. The Fed would stimulate Government securities market Outside the interventionist aca- long-term investment by buying characterized by depth, breadth, demic atmosphere of the 1950s and long-term securities. At the same and resiliency.” 1960s, though, Martin is more easily time, it would help the balance of This was remarkably simi- payments by attracting short- lar to the goals of the New term investments through the York Stock Exchange, which The last nine years of higher short-term yields that regularly publishes “indicators would result from sales of of market performance” con- Martin’s term were a short-term securities. The pro- sisting of price continuity, gram would not be inflationary market depth, and quotation continuous battle with because the added reserves spreads. Martin’s quiet inflationary administrations. from purchases of long-terms obstruction of the SEC attack would be offset by the sales of on the integrity of stock trad- short-terms. ing was carried over to the defended. The prevailing IS-LM The candidate had promised: “I promotion of similar performance in policy framework was a comparative- have no doubt that any new government securities. His purpose statics equilibrium model for given Democratic President will find the was to achieve flexibility in the expectations. We have learned that Federal Reserve pursuing a some- determination of bank reserves with- short-term fiscal policies (such as the what different policy,” and hinted out interfering with the efficient 1967 tax surcharge) which are known that Martin might be replaced. After transfers of saving to investment. to be short term are ineffective. the election, when the chairman-des- Therefore: Ephemeral interest-rate policies may ignate of the President’s Council of be even less effective. Whether the Economic Advisers Walter Heller When intervention by the Federal aim is reflation or disinflation, effec- called on Martin, the latter warned: Open Market Committee is tive monetary policy requires the “I’m not going to give up the necessary to carry out the market’s confidence in its serious- independence of the Fed.” But he System’s monetary policies, ness. Martin’s agreement is seen added: “There’s plenty of room for the market is least likely to below. cooperation.” be seriously disturbed if the (2) Operation Twist. The “bills only” The administration persuaded intervention takes the form of policy was terminated in 1961 under Martin (despite dissents at the Fed) purchases or sales of very short- pressure from President Kennedy’s to nudge short-term rates upward term Government securities. New Frontier program, which while keeping long-term rates low.

demanded no restrictions on policy Operation Nudge turned into BACHRACH Although the subcommittee’s instruments. The last nine years of Operation Twist, which would report correctly pointed out that Martin’s term were a continuous bat- involve vigorous actions to reduce “bills only,” as the policy came to be tle with inflationary administrations. long rates. “This is a historic reversal called, was in “the best - Kennedy’s advisers were inclined of policy,” Heller wrote the ing traditions,” it was received with toward fiscal policy but came up with hostility by economists for whom a challenging program for the Fed Martin served under these five presidents during his tenure as the Chairman of the Federal Reserve Board.

Harry S. Truman Dwight D. Eisenhower John F. Kennedy Lyndon B. Johnson Richard M. Nixon (1951-1953) (1953-1961) (1961-1963) (1963-1969) (1969-1970) PHOTOGRAPHY: : TRUMAN PHOTO, LOC, COPYRIGHT BY EDMONSTON STUDIO; EISENHOWER PHOTO, LOC, COPYRIGHT BY FABIAN FABIAN BY COPYRIGHT LOC, PHOTO, EISENHOWER STUDIO; EDMONSTON BY COPYRIGHT LOC, TRUMAN PHOTO, OF CONGRESS: LIBRARY PHOTOGRAPHY:

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President, “for which Chairman inflation hawks in such a way as to ate; those in the middle had to be Martin deserves our appreciation.” combat inflation without endanger- sure of themselves before they joined Heller’s satisfaction was prema- ing the integrity of the Federal the restrictivists.” ture. Several members of the FOMC Reserve System. His difficulties It was in this atmosphere that “were strongly opposed to the end of were increased by the absence of Martin urged the administration to ‘bills only’ [as] a step back toward any real discussion, or even under- ask Congress for a tax increase. political interference in monetary standing, with the Johnson When promises to do so were not policy and a pegged bond market,” administration. When Martin pub- kept, Martin obtained a commit- wrote political scientist Donald licly warned that inflation might call ment to act from a narrow majority Kettl, and Martin managed to obtain for monetary restraint, Johnson’s of the Board. With his penchant and keep the majority’s support for Chairman of the Council of for personalizing disagreements, Operation Twist only by an execu- Economic Advisers Johnson announced to Martin: “I’m tion that bordered on the told the President: “I don’t think scheduled to go into the hospital imperceptible. The administration we’ll ever have a Chairman of the tomorrow for a gall bladder opera- was disappointed with Martin’s Federal Reserve who is so completely tion. You wouldn’t raise the discount “team spirit.” The trouble, Heller out of the mainstream of economics.” rate while I’m in the hospital, would recalled, was that: Ackley’s own 1959 paper on inflation you?” Martin paused, and in a reply had ignored money and “argued that that became legendary at the Fed, …we’d have a meeting with the inflationary process is essentially said: “No, Mr. President, we’ll wait Kennedy … and before the meet- an administrative one. It arises from until you get out of the hospital.” ing Bill would be out there buying a largely autonomous upward Treasury Secretary Henry those long-term securities, but pressure on wage rates relative to Fowler’s recommendation that afterwards his buying would the cost of living, interacting Martin be replaced by Volcker (at the flag. ... [CEA member] Jim Tobin with administered-price markups time, deputy undersecretary of the would keep track of this and he’d applied to rising wage costs … in Treasury for monetary affairs) was say, “Walter, you’d better … endless chain.” not pursued, and on Dec. 6, 1965, the arrange another meeting … The Board consisted of Martin, discount rate was raised. Johnson because Martin isn’t buying three Kennedy-Johnson appointees was enraged but the Fed kept up the enough long-term bonds.” So I’d (George Mitchell and Dewey Daane, pressure. Free reserves at member call a meeting and sure enough business economists from Federal banks turned negative, and the the purchases would rise again, Reserve banks, and academic econo- Treasury bill rate rose from 4 percent and Martin would be able to tell mist Sherman Maisel), government to 5.5 percent. But inflation was not Kennedy, “We’re doing everything lawyer James Robertson, appointed touched. In fact, the CPI rose 3.8 we can.” by Truman, and Canby Balderston percent (at an annual rate) during the and Charles Shepardson, college first six months of 1966 compared Kennedy’s advisers initially deans appointed by Eisenhower. The with 1.9 percent in 1965. Federal opposed the Fed Chairman’s reap- Vice Chairman of the FOMC was spending and the deficit continued pointment in 1963, but backed away New York Fed President Alfred to rise. However, the policy of from that position when they discov- Hayes. Hayes, Balderston, and restraint was ended by a “credit ered the level of support for Martin Shepardson were anti-inflationists crunch” at the end of August. in the business community, both at who were usually joined by two of the Rising deposit rates threatened home and abroad. rotating Bank presidents, while the solvency of institutions making (3) The Vietnam War and the “Credit Robertson, Mitchell, Maisel, and two long-term loans. In addition, banks Crunch” of 1966. The Federal Reserve other presidents generally favored an and S&Ls lost time deposits because was expected to finance government easy-money approach aimed at market rates rose above the legal spending, and presidents had demon- keeping employment robust. maxima on deposit rates. The Fed strated that they would make a This five-to-five split left the gave way and resumed purchases. political issue of price and interest deciding votes to Martin and Daane, Martin resolved that next time they increases. Martin wanted to address who also leaned toward a policy of would stay the course. inflation by monetary restraint, but in price stability. So, Maisel later wrote, (4) . Though he cam- addition to political threats, he had to decisions “generally favored the paigned on a largely conservative deal with increasing opposition with- more restrictive targets. However, platform, President Nixon recoiled in the Federal Reserve as the “New because a strong minority stressed from the political costs of ending the Economists” came to the Board. broader objectives, as did the admin- inflation that he inherited. He did Martin tried to steer a course istration, moves to restrict credit not trust Martin, whom he blamed between the Keynesians and the were less frequent and more moder- for the that had cost him

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the 1960 election, and wanted Martin apologized to the Joint changed direction. The rest, as they Arthur Burns at the Fed. However, Economic Committee for past errors say, is history. Martin told the President that he and said they would not be repeated: would not step down before the end Conclusion of his term on Jan. 31, 1970. In 1963, It appears that the Federal Martin voiced the same sense of fail- Martin had to be persuaded by Reserve was overly optimistic in ure in 1970 as in 1941. He had left the Kennedy to accept reappointment anticipating immediate benefits Fed at a time when inflation was on and three times he offered his resig- from fiscal restraint … but now we the rise, as he had left the NYSE nation to Johnson. Why the mean business in stopping infla- without instituting major reforms. In difference? Nixon did not seem likely tion. ... A credibility gap exists in his defense, however, he fought infla- to pursue more inflationary policies the business and financial com- tion as hard and as successfully as than his Democratic predecessors. munity as to whether the Federal anyone could have done, and he pre- That may be the answer. Kennedy Reserve will push restraint hard served the Fed as he preserved the and Johnson felt they needed Martin enough to check inflation. The NYSE. Bremner may be right when as a symbol of sound money and Board means to do so and is unan- he says that Martin’s greatest contri- Martin knew it, whereas in addition imous on that point. bution was the strengthening of the to his personal animosity the Fed as an independent monetary Republican President did not feel He addressed the apparent lack of authority, although that independ- the same need for a sound-money resolve on the part of the govern- ence still must be seized. stamp. ment, which “has raised the ghost of Skeptical of staff analyses and Nixon’s Council Chairman Paul overkill at the first sign of a cloud on forecasts, he never saw any redeem- McCracken hoped that inflation the horizon.” ing qualities in inflation. His could be slowed without unemploy- reported: “Martin strongly implied statements did not meet the explicit ment by a policy of “gradualism,” that this will not happen again and standards of modern monetary theo- when what was needed was just the that restraint will persist even when ry, but the positions to which they opposite: to convince the markets there are clear signs the economy is referred were consistent with what is that something significant was going slowing and in the face of some now thought to be the best in theory to happen. Martin and the majority increase in unemployment.” and policy. This includes his anticipa- of his colleagues had stronger medi- The rate of money growth fell and tions of later moves toward the cine than the Council’s in mind. unemployment rose, but inflation transparency of the Fed’s intentions Worried about the administration’s remained above 6 percent and the and the willingness to take preemp- commitment and market expecta- Fed raised the discount rate to 6 per- tive actions. RF tions, they had raised the discount cent in April. The Fed kept its nerve rate in December 1968, before Nixon until February 1970, when in Burns’ John H. Wood is the Reynolds Professor took office. In February 1969, first meeting, monetary policy of Economics at Wake Forest University.

R EADINGS Ackley, Gardner. “Administered Prices and the Inflationary ____. “After the Accord: Reminiscences of the Birth of the Process.” American Economic Review, May 1959, vol. 49, no. 2, pp. Modern Fed.” Federal Reserve Bank of Richmond Economic 419-430. Quarterly, Winter 2001, vol. 87, no. 1, pp. 57-64. Bremner, Robert. Chairman of the Fed: William McChesney Martin, Kettl, Donald F. Leadership at the Fed. New Haven: Yale Jr., and the Creation of the Modern American Financial System. New University Press, 1986. Haven: Press, 2004. Maisel, Sherman J. Managing the Dollar. New York: Norton, 1973. Friedman, Milton, and Anna J. Schwartz. A Monetary History of Romer, Christina D., and David H. Romer. “The Evolution of the United States, 1867-1960. Princeton: Economic Understanding and Postwar Stabilization Policy.” Press, 1963. National Bureau of Economic Research Working Paper no. 9274, Hargrove, Erwin C., and Samuel A. Morley. The President and the October 2002. Council of Economic Advisers: Interviews with CEA Chairmen. U.S. Congress. “The Federal Reserve after Fifty Years: Hearings Boulder: Westview Press, 1984. before the Subcommittee on Domestic Finance of the House Hetzel, Robert L., and Ralph F. Leach. “The Treasury-Fed Committee on Banking and Currency.” 1964, 88th Congress, Accord: A New Narrative Account.” Federal Reserve Bank of 2nd session. Richmond Economic Quarterly, Winter 2001, vol. 87, no. 1, pp. 33-55.

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