Financial History Issue 131 (Fall 2019) - Page 21

duties in the wake of the 2008 financial cri- sis effectively constitutes a third mandate.) As the Fed’s mandate has expanded into the macroeconomic realm, it has necessar- ily been tied increasingly to elected offi- cials. Add in the unique characteristics of monetary policy—that unlike fiscal policy, it can be implemented effectively imme- diately, affects the economy generally and requires neither deal making within or the approval of the Legislative Branch—and the litany of incentives for exerting politi- cal influence upon Fed officials is clear. Monetary Versus Fiscal Policy The inclination to influence the Fed has essentially everything to do with the sepa- rate and distinct attributes of the federal government’s two means of impacting the domestic economy: fiscal policy and monetary policy. Fiscal policy targets spending levels (consumption) via taxation and stimu- lus measures; it is enacted by Congress. Monetary policy, enacted by the Fed, involves influencing the money supply and interest rates. Not only is the mon- etary policy route faster-acting, cheaper (no debt is incurred) and arguably more powerful (money “touches” everything), it additionally doesn’t require the sort of horse-trading and lengthy negotiation that legislative efforts take. Monetary pol- icy measures can be implemented in a very short amount of time (hours) and via the decisions of a mere handful of top people. A Brief History of Jawboning There’s little doubt that in an age of social media, it has become easier to rally public opinion in favor of Fed action. But Presi- dents attempting to influence the Fed did not start (and probably will not end) with the current Chief Executive. With specific reference to direct, public jawboning of the type which the current President has been taken to task for, a partial list of pre- vious examples bear listing. Harry S. Truman, in early 1951, sum- moned the FOMC to a meeting at the White House in which he insisted that they continue to support Treasury bond prices. Lyndon Johnson, in his 1967 State of the Union address, made the following statement: “Monetary conditions are also easing. Most interest rates have retreated from their earlier peaks. More money now seems to be available. Given the coop- eration of the Federal Reserve System, which I so earnestly seek, I am confi- dent that this movement can continue. I pledge the American people that I will do everything in a President’s power to lower interest rates and to ease money in this country…toward easier credit and toward lower interest rates.” The Nixon tapes hold copious evidence of direct and indirect attempts to influ- ence the Fed. Publicly, Richard Nixon had this to say upon appointing Arthur Burns to the Fed Chairman position in 1970: “Ladies and gentlemen, as all of you know, the Federal Reserve is indepen- dent, certainly independent of the Pres- ident, although the Congress would suggest that it is not independent of the Congress. I respect that indepen- dence. On the other hand, I do have the opportunity as President to convey my views to the Chairman of the Federal Reserve in meetings with … the Secre- tary of the Treasury and the Chairman of the Council of Economic Advisers … I have some very strong views on some of these economic matters and I can assure you that I will convey them…I respect his independence. However, I hope that independently he will con- clude that my views are the ones that should be followed.” And in a later phone call between Nixon and Burns (via transcript): Nixon: “Arthur, [garbled]. You’re independent! [Burns laughs]. Inde- pendent! You get it up. I don’t want any more nasty letters from people about it. OK?” Burns: “That [no more nasty letters], I can’t guarantee.” Later, Nixon: “The whole point is, get it [the money supply] up. You know, fair enough? Kick it!” With skyrocketing inflation in the late 1970s, the Fed under Chairman Paul Vol- cker began a grueling interest rate hiking campaign. Knowing that the continua- tion of continually higher rates would be politically damaging with an election a few months away—and under pressure from both certain sectors of Congress and orga- nized labor—Jimmy Carter announced the following alternative, a restraint on the growth of credit, during a televised broad- cast in 1980, despite the Fed’s opposition: Left: President Barack Obama announces Janet Yellen as his choice to chair the Federal Reserve, October 9, 2013. (Credit: Win McNamee) Right: President Ronald Reagan announces that Alan Greenspan will replace Paul Volcker as Federal Reserve Chairman at a press conference on June 1, 1987, as Treasury Secretary James A. Baker III looks on. (Credit: Diana Walker)  |  Fall 2019  |  FINANCIAL HISTORY  19