------------ 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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Published by EH.Net (October 2005). All EH.Net reviews are archived
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