Book Reviews
Chairman of the Fed: William
McChesney Martin Jr. and the
Creation of the American
Financial System.
By Robert P. Bremner. 2004. New Haven, CT: Yale University Press. Pp 374, $38.00, hardcover
William McChesney Martin (1906-98) served as Chairman of the Board of Governors of the Federal Reserve System from April 1951 through January 1970. Martin’s tenure, the longest of any Fed Chairman, spanned five presidents and ten Congresses—all of whom, to some degree, sought to influence monetary policymaking. Robert P. Bremner does a masterful job of recounting these and other tensions and crises that Martin faced.
For about a third of the book, Bremner delves into Martin’s career both before and after his Fed Chairmanship, periods that are probably less well known to most economists. Early on, we meet Martin’s father, William McChesney Martin Sr., who rose to prominence in the St. Louis banking community early in the 20th century and then served as president of the Federal Reserve Bank of St. Louis from 1929 to 1941. At home, the Martin family dinner table included such luminaries as New York Fed president Benjamin Strong, Senator Carter Glass, and Professor H. Parker Willis (the Federal Reserve’s first Director of Research). If ever a boy was groomed to be a Fed Chairman, it was Martin Jr.
After graduating from Yale, Martin Jr. joined the St. Louis investment firm A.G. Edwards in 1928 and had a ringside seat to the events that would scar the nation for years to come. The 1929 stock market crash and the subsequent Great Depression, coupled with the demise of his grandfather’s grain business in the aftermath of the 1893-94 financial panic, helped convince Martin that government policymakers should never stand idly by during boom and bust cycles. Martin’s economic views were also shaped to some extent by those who would help formulate government policies to combat the Great Contraction. While taking courses for a Ph.D. in finance at Columbia University, one of Martin’s professors was Raymond Moley, who at one time was a key economics adviser to President Franklin Roosevelt. Another of Martin’s influential professors at Columbia was Willis, who was a firm believer in the free market system and the self-correcting nature of market forces. Later on, as board member and president of the New York Stock Exchange, Martin, imbuing a synthesis of these views, would battle against the most strident of the reform and anti-reform initiatives sought by FDR’s Security and Exchange Commission and the Exchange’s “old guard,” respectively. According to Bremner, Martin was a firm believer in “flexible” regulation that sought to marry the interests of the governing authorities and private industry.
While serving as president of the New York Stock Exchange, Martin was drafted into the Army as a private (at his insistence) in 1941. He eventually worked for General James Burns, who oversaw the Russian lend-lease program. Burns gave Martin the thankless task of defending the program before Congress. After the war, President Truman appointed him head of the Export- Import Bank, where he battled, among others, General Marshall over loans to European countries.
Martin then moved to the Treasury Department as Assistant Secretary for International Affairs, where he played the lead role in negotiating the 1951 Treasury-Fed Accord, which officially ended the “peg” and thereby cemented the Fed’s independence in designing and implementing monetary policy. In battling the Fed, Truman obtained the resignation of Chairman Thomas McCabe. Despite his misgivings, Truman accepted the recommendation of Treasury Secretary John Snyder to appoint Martin, who then became the Fed’s ninth Chairman on April 1, 1951.
Most of the book details Martin’s role as Fed Chairman. It is in these pages that we learn the most about his economic philosophy, his approach to central banking, and his battles with five presidents and their economic advisers. First, Martin was a firm believer in the Fed’s independence within government, as Alan Sproul, one-time New York Fed president and sometime chief FOMC debater of Martin’s, once put it. Second, Martin was a firm believer in capitalism and the self-correcting nature of market economies: “The market’s objective measures of the forces of supply and demand give business and government alike a more reliable guide to policy and action than the subjective judgment of any man in government.”
Third, Martin believed the Fed had a crucial role to play in stabilization policy. In addition to his famous “punch-bowl” line, Martin said: “Our purpose is to lean against the winds of deflation or inflation, whichever way they are blowing.” Fourth, he did not believe that the Fed should undertake measures that opposed the president outright, nor did he believe it was his role to give advice on policy matters under the purview of the administration. However, this did not prevent him from pushing through an increase in the discount rate in 1965 against the wishes of President Lyndon Johnson—a move that earned him a trip to the woodshed at Johnson’s Texas ranch—nor did it preclude him from actively working in tandem with the Johnson Administration to pass the 1968 Tax Surcharge.
Fifth, although the level and sophistication of quantitative analysis took a major leap forward during Martin’s tenure, he preferred a less formal approach to policymaking, and often railed against “statisticalitis,” his term for an unhealthy reliance on statistical indicators. In his view, a Chairman must be prepared to put in place a policy that today might be termed pre-emptive: “I don’t believe in intuitive judgments, but we cannot always wait for statistics.”
Finally, Martin was a firm believer in the importance of low inflation: “I believe that economic growth in the long run cannot be soundly brought about except with stability in prices.” Yet, Bremner recounts how, in late 1968, Martin quixotically found himself opposed to those FOMC members who wanted to pursue a tighter policy. A year earlier, Martin said that “the horse of inflation is out of the barn and already well down the road.” Ever true to his principles, though, Martin wanted to secure the cooperation of the incoming Nixon Administration before launching a full-frontal attack on inflation.
Nearing the end his term in late- January 1970, Fed Chairman William McChesney Martin gathered together his fellow Governors one last time and privately told them, “I’ve failed.” For the previous few years, Martin had viewed with a sense of foreboding the rise in “inflation psychology” that had infiltrated the markets. (Martin had good reason to worry. After averaging a little less than 1.5 percent per year from 1952 to 1965, CPI inflation had averaged 4.5 percent from 1966 to 1970; in 1969 it had reached an 18- year high of about 5.75 percent. Eventually, inflation would climb even higher, averaging a little more than 8 percent per year from 1971 to 1980.)
In his book A History of the Federal Reserve (volume 1), Allan Meltzer argues that, at the end of the day, Martin was of the view that the Federal Reserve could not actively work against a Congress that willingly chose to finance a deficit through debt issuance. In view of the massive Treasury debt issuance that is projected to occur once the baby boomers start to retire and begin collecting on the income and health retirements currently promised to them, one wonders how future Federal Reserve policymakers will react to a similar problem—but one that is several magnitudes larger.
For the most part, Martin refused to comment publicly about the policies pursued by his successors, but he was not shy about jumping into policy matters that did not directly affect the Federal Reserve. Two noteworthy activities in Martin’s post-Fed years were a report he agreed to write for the NYSE, who sought out his views about yet another round of financial market reforms, and his 1970 Per Jacobsson lecture, which he argued forcefully for the creation of a world central bank. While such an institution seems unlikely for the foreseeable future—and probably for good reasons—reading of his desire for an institution that could promote “harmonization of the policies of the member states and maintenance of payments equilibrium among them” certainly rings of the goals of the European Central Bank. For the most part, Martin’s views were discounted as impractical.
The lessons to take away from this wonderful book are unmistakable: First, a low inflation economy will not long endure if good policy is not long practiced. Second, the incessant political machinations of monetary policymaking require a forceful Chairman who is willing to man the ramparts in defense of price stability. In his praise of Bremner’s book, former Chairman Paul Volcker calls the genial William McChesney Martin “a great man,” and “a hero to a generation of central bankers, including me.” Regrettably, though, for all his admirable qualities, Martin’s tenure puts him in closer proximity to Arthur Burns in the pantheon of Fed Chairmen than to Paul Volcker or Alan Greenspan.
A PDF version of the book reviews is available
Review by Kevin L. Kliesen, Federal Reserve Bank of St. Louis
