------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (October 2005)  
  
Robert P. Bremner, _Chairman of the Fed: William McChesney Martin Jr.   
and the Creation of the American Financial System_.  New Haven: Yale   
University Press, 2004. vi + 357 pp. $38 (cloth), ISBN: 0-300-10508-8.  
  
Reviewed for EH.NET by Mark Toma, Department of Economics, University   
of Kentucky.  
  
  
Robert Bremner's _Chairman of the Fed_ begs to be read at   
multi-levels.  At surface level, _Chairman_ is a standard biography   
of an important public figure, William McChesney Martin, whose life   
story has been relatively neglected.  The story line, summarized on   
the jacket-flap, portrays Martin as a courageous bureaucrat, whose   
lifelong struggles converted the nineteenth-century boom-bust U.S.   
financial system into a twentieth-century efficiently run machine.   
Just below surface lurks a more nuanced biography, where Bremner   
reveals Martin as a sometimes-troubled figure, who at the end of a   
career as chairman of the Fed under five Presidents (1951-1970),   
judged his professional life a failure.  Finally, the deepest reading   
of Bremner's biography, at least from an economic historian's   
perspective, is as a real world economic experiment that addresses   
the hypothesis that appointment of a "conservative" central banker   
helps offset the inflationary bias of discretionary monetary policy.  
  
Although _Chairman of the Fed_ covers Martin's entire life, the book   
focuses on Martin's professional career starting with his   
breakthrough as the first paid President of the New York Stock   
Exchange in 1938.  For me, the book starts to shine and the multiple   
levels of interpretation come to center stage in chapter 5, "From   
Crisis to Crisis: The Truman Administration and the Fed."  In 1949,   
Martin joined the Truman administration as assistant secretary of   
Treasury for International Affairs.  From that position, he served as   
a go-between for Treasury secretary John Snyder and Fed chairman   
Thomas McCabe in the famous March 1951 Accord, which ended the   
decade-old bond price support program. During these negotiations,   
Martin defended the status of the Fed as an independent agency,   
institutionally insulated from short-run money creation pressures.   
By the time Truman appointed him to chair the Fed in the aftermath of   
the Accord, Martin had established a reputation as one willing to   
compromise, but not to the point of forsaking the monetary policy   
goal of long run price stability.  
  
Martin solidified this reputation as chairman of the Fed in the   
1950s. By implementing the bills only policy calling for the Fed to   
conduct open market operations exclusively in short-term Treasury   
bills, he sought to preempt pressures to peg long-term interest   
rates.  To be sure, by the end of the 1950s there were chinks in   
Martin's anti-inflation armor -- he abandoned the bills only policy   
(with some reluctance) and generally was more receptive to use   
monetary policy to "pick up" the economy in the short run (p. 142).   
But for the most part, his public persona as a conservative central   
banker remained intact.  
  
Turning to the Kennedy and Johnson years, Martin faced challenges   
that ultimately defined his career.  The Kennedy administration's New   
Frontier economists (most notably Walter Heller and James Tobin, with   
Paul Samuelson behind the scenes) transformed the political landscape   
from one where government fine-tuning was anathema to a stable   
economy to one where fine-tuning corrected economic instability and   
monetary expansion was necessary for economic growth.   
Intellectually, the New Frontier was aware that there could be too   
much of a good thing -- high inflation could lead to its own set of   
problems.  Nevertheless, the New Frontier philosophy rationalized an   
inflationary bias in monetary policy.  
  
Three chapter titles -- "Gunfight in the New Frontier," "Sowing the   
Wind," and "Reaping the Whirlwind" -- reveal much about not only the   
tenor of the times and Martin's personal struggles, but foretell the   
outcome of a novel monetary experiment.  "Does appointment of a   
conservative central banker in a New Frontier environment make a   
difference?"  The experiment could play out in two ways: (1) Martin,   
as the conservative holdover from the Eisenhower years, could stake a   
claim to low inflation and stand ground or (2) Martin could succumb   
to administration money creation pressures by giving ground in   
piecemeal fashion.  
  
Even though the reader knows the overall results of the experiment   
up-front, Bremner's rendering of the details is sobering.  While   
Martin puts up a good fight at first ("Gunfight in the New   
Frontier"), it is a losing fight.  By the time Kennedy is   
assassinated and Johnson assumes the presidency, inflation is   
rearing.  Bremner paints Martin during this period as a tragic figure   
who feels trapped by circumstances outside his control but who deep   
down knows that the finger of blame must point inward.  The reader   
can feel the pain of the conservative central banker in Martin's 1963   
remarks to his Federal Open Market Committee: "For the first time in   
a long while, the committee might find itself faced with serious   
problems with prices and with an incipient expansion at an   
unsustainable rate" (p. 184).  
  
The spending propensities of Lyndon Johnson would be the true test of   
the efficacy of central bank conservatism.  In the early years of the   
new administration, Johnson's fiscal strategy crystallized: Secretly   
understate the military expenditures associated with the Vietnam War   
and then pressure Martin to finance the excess with money creation.   
That Martin became aware of the strategy made little difference.   
Nominally, Martin's quest for increases in the discount rate during   
this period signaled monetary tightness, but in reality increases   
simply matched the upward climb of market interest rates fueled by   
inflation expectations.  All the while, the monetary base expanded   
rapidly, _sowing_ the seeds of inflation (hence the chapter title,   
"Sowing the Winds").  
  
By late in Johnson's administration, inflation had become a whirlwind   
("Reaping the Whirlwind") with Martin abashedly playing the reaper.   
Bremner ponders, "We are left to speculate as to why he did not move   
decisively against inflation when its effects were so plainly   
visible" (p. 255).  Ultimately, Bremner answers with Martin's own   
words in a statement to the Federal Open Market Committee: "'The line   
between political and economic decisions has been almost   
obliterated.' Politicians who once left economic issues to   
technicians were no longer willing to do so, and 'that was causing a   
great deal of trouble on a world-wide basis'" (p. 250).  Though only   
one data point, this economic experiment offers scant support for the   
hypothesis that the steely-will of a conservative central banker   
could trump a policy-induced inflation bias.  Human psychology seems   
to be sufficiently malleable, that few real world central bankers are   
able to act as technical eunuchs, oblivious to the incentives and   
pressures presented by bureaucratic institutions in a discretionary   
environment.  
  
Bremner's biography is a sympathetic one.  First and foremost,   
Bremner portrays Martin as a public servant whose heart was in the   
right place.  But reading a little between the lines, Bremner also   
casts the New Frontier monetary policy in a sympathetic light.  One   
can almost hear Bremner saying, "With a little luck, William Martin's   
fortunes as a _modern_ manager of the economy would have turned out   
better."  Here, Bremner's faith in human reason as a method of   
controlling a macro-economy seems misplaced.  I came away convinced   
that if the same scenario played out one hundred times, in   
ninety-something cases the beginnings of an inflation wind would have   
turned into a whirlwind.  My skepticism here does not detract from   
Robert Bremner's authoritative and fascinating account of William   
Martin's years as chairman of the Fed.  
  
  
Mark Toma is an Associate Professor of Economics at the University of   
Kentucky.  His recent research is on "The Deflationary Bias of   
Government Central Banking under a Gold Standard."  
  
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