Is it possible that even President Obama sighed with relief when Lawrence Summers withdrew his name from consideration for the position of Chairman of the Board of Governors of the Federal Reserve System? Faced with near-continuous confrontation on the political battlefield that characterizes his second term in office, the President’s acknowledged respect for Summers would not have been enough to whet his appetite for the ensuing clash had Summers been nominated. Yet even though his nomination of the less-controversial Janet Yellen, media coverage of stories that include the Federal Reserve System emerge daily. This, along with James Bruce’s just-released documentary “Money for Nothing: Inside the Federal Reserve”, have ginned up what may be an unprecedented curiosity about the United States’ central bank. [1]
As one would expect during these years of the Great Recession, actions taken by the Fed under Chairman Ben Bernanke -- the only name many people associate with that position -- drew considerable and regular attention. Speculation concerning the person who will succeed Bernanke as Chair of the Board of Governors has ended, but continues with regard to when there will be a pull-back, or “tapering” from Quantitative Easing. Some of the interest and coverage no doubt has been fueled by the voracious content requirements of the 24-hour news cycle. Another attraction factor is the Federal Reserve System’s unique authority to print money. But what actually may draw the average citizen to read, watch, or listen to another news story about the Fed is this: a general awareness that the Federal Reserve represents a concentration of power that is poorly understood and a general dis-ease because we know very little about its leaders, who for the most part have been bankers, businessmen, or economists.
This subject of the leaders of the Federal Reserve System is one recently discussed with Richard E. Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets at New York University’s Stern School of Business. Of the 14 individuals who have led the Federal Reserve System, Professor Sylla elected to comment on, exclusive of current Fed Chair Ben Bernanke, six whose impact he views as noteworthy. Sylla reveals his interest in the distinctively stronger individuals who have led the Federal Reserve and his observations and perspective are well worth sharing.
President Woodrow Wilson’s Secretary of the Treasury, William G. McAdoo, is credited with having developed an operational central bank from the 1913 Federal Reserve Act. Though he served as an ex officio member of the central bank’s Board and was its Chairman, McAdoo by any measure might very well be labeled the most audacious of Fed’s leaders: With the Federal Reserve no more than months old, it was he who closed the New York Stock Exchange for four months in 1914 to protect the US dollar at the beginning of World War I. Sylla observed, as have others, that had the European investors been able to sell off their US investments suddenly in order to finance the War effort, U.S. securities markets and perhaps the American economy “would have been left in tatters”. Instead, as a result of McAdoo’s deft financial management, leadership of the world economy shifted to North America, and New York replaced London as the leading financial center..
Benjamin Strong, Jr., one of the ‘brain trust’ of New York bankers pushing for formation of the Federal Reserve, was named the first Governor of the New York Federal Reserve Bank in 1914. For all intents and purposes he led the United States’ monetary policy for the next 14 years. Following on McAdoo’s actions, European nations liquidated their American assets for the War effort in a non-disruptive way, and US debt held by European countries evaporated. The United Stated emerged as an economic power and, according to Sylla, Strong was the banker who made it possible to maintain price-level stability and the liquidity of the banks in the 1920s. Some economic historians have speculated that had he not died in 1928, he might have been able to stave off the bank failures that followed the Crash 1929. Sylla’s opinion on that: “Strong was a unifying force for Fed policy in the 1920s, and after his death disagreements between the Reserve Banks and the Board in Washington resulted in Fed inaction when action was needed as the Great Depression unfolded.”
Next among the six on whom Sylla commented is Marriner Stoddard Eccles, appointed in to the Federal Reserve Board in 1934 by FDR. In 1936 he became the first Chairman of the Board of Governors of the Federal Reserve System as we now know it. The 1935 Banking Act strengthened the Federal Reserve System by reducing the powers of the regional Federal Reserve Banks, centralizing more authority inits Board of Governors in Washington, and removing from the Board the Secretary of the Treasury and the Controller of the Currency. Chairman until 1948, Eccles served through perhaps the single most challenging period of Federal Reserve history marked by recovery from the Great Depression and the financing of World War II. The Great Recession may cause some to question this, but Eccles’ support for what became known as a Keynesian-based policies and his work during the negotiations at Bretton Woods remain as evidences of a strong legacy.
William McChesney Martin, Jr., Chairman of the Board of Governors from 1951 to 1970, also is on Professor Sylla’s list of noteworthy leaders of the Fed. Several facts justify this: Martin negotiated the 1951 Accord, which re-established the independence of the Federal Reserve from the Treasury Department and the executive branch of government.He then worked to sustain that independence through the administrations of five Presidents. What probably made possible the second of these accomplishments, in Sylla’s opinion, was long and general expansion of the economy and resulting prosperity with low inflation that characterized the 1950s and 1960s. Martin’s reputation, according to Sylla, nevertheless was undermined during the later years of his Chairmanship. He “knuckled under to President Johnson’s pressure for low, populist interest rates despite the overheating of the economy resulting from Johnson’s increased spending on his Great Society programs and the war in Vietnam.”
In part because he continues to be covered by the media, many people recognize Paul A. Volcker’s name even if it is not because of his having been Chairman of the Federal Reserve. Today Volcker frequently is sought out as one of the ‘wise men’ of economics who expresses himself succinctly and in a straightforward way. Certainly his ‘claim to fame’ as Fed Chair (1979-1987) is associated with his having brought to heel the rising inflation and ‘stagflation’ that characterized President Carter’s administration. By the end of Carter’s presidency in 1981, inflation had reached double-digit rates. Volcker’s general ly conservative approach to reining in monetary growth and letting interest rates rise to the highest levels in U.S. history reduced the inflation rate to 3.2% by 1983. Sylla views Volcker as an economist of centrist convictions whose strong commitment to reducing inflation while maintaining the independence of the Fed bore fruit.
Alan Greenspan, Volcker’s successor, by contrast is characterized by Professor Sylla as having an ideological free market bias, one that supported economic expansion, but in the end proved to be unsustainable as the financial crisis and Great Recession of 2007-2009 unfolded. As Fed Chair from 1987 to 2006, Greenspan leaned toward a loose money policy. With a few exceptions in this period (1994, for instance) the Federal Reserve generally kept interest rates low, as favored by Greenspan, Wall Street, and most Americans. This provided the wherewithal for an extended bull market run that aided some sectors of the economy and benefitted many. At the same time under Greenspan’s leadership, the stage was set for the drama of the dot.com bust (2000-2002) and seeds were sown for the bitter harvest of the housing bubble in the sub-prime mortgage crisis and the resulting Great Recession. Greenspan’s reputation has suffered significantly because he seemed unable to perceive the approaching limits of either of the two bubbles that formed during his tenure and, some would say, he became too self-assured by his faith in markets to recognize the need for mitigating action.
1. LA Times review, New York Times review, Forbes opinion piece, interview with filmmaker James Bruce