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.”