Passing the bucks: the weird history of the U.S. Federal Reserve

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Passing the bucks: the weird history of the U.S. Federal Reserve

Jeff Pearce on May 25, 2016

With the exception of Mark Carney, who earned headlines when he hit the “big time” two years ago leading the Bank of England, governors of the Bank of Canada aren’t superstars. And there’s only one vaguely memorable showdown between one of our top bankers and a PM—the “Coyne Affair,” involving James Coyne and a grumbling Diefenbaker.

Our central bank’s history is an Ambien capsule next to the Fed’s, and Roger Lowenstein can rattle you off scores of feuds between Fed chairs and presidents: how Lyndon Johnson “put some muscle” on William McChesney Martin; how Ronald Reagan outmaneuvered Paul Volcker; how Nixon resorted to crude lies about Arthur Burns.

In fact, when America’s odious, paranoid toad in the White House was heading into the 1972 election, he sent a series of notes to Burns. “They’re almost quite comical,” observes Lowenstein. “Nixon says things in a very crude Nixon-esque language: ‘No recession, you see to it,’ meaning don’t worry about inflation, just make sure there’s no recession.” But inflation by then was already recognized as a serious problem.

Of course, the Fed has always been a power struggle of personalities. And in America’s Bank, his new history of how the institution came into being, Lowenstein—who wrote for the Wall Street Journal for more than a decade— is wise enough to keep the focus on the men in the stiff, starched collars and their attitudes and foibles. There was a young German financier, Paul Warburg, for example, who drops his jaw over how ridiculously primitive America’s banking system is thanks to the signature distrust Americans historically bring to big government. A modern Canadian reader might be just as incredulous. Here is Lowenstein on how goofy it got—and this is in the post-Civil War era, when you’d think federalist soul-searching would be decided once and for all:

“In practice, since banks did not want to hold idle cash, reserves flowed to New York. And since New York banks did not want idle money either, they lent their spare cash to the stock market. Thus, America’s banking system was perched on a speculative pyramid. Whenever credit was in short supply, the entire chain backed into reverse, with country banks calling their loans, by means of urgent telegrams… This could precipitate panicky selling in the stock market.”

Paul Warburg, says Lowenstein, “pretty much dedicated his life” to establishing a central bank and “had the greatest hope for this. He said he hoped it would come to be seen as one of the great monuments of the country, like the old cathedrals of Europe.” (Given that some writer somewhere is always recycling the cliché that Fed board members are “high priests of finance,” you could argue he got his wish.)

All this makes for a highly engaging, informative read. When asked about the current Fed chair, Lowenstein points out the U.S. is now six years past the recession with “growth [in] every one of the last six years, unemployment’s down to five percent, maybe things aren’t hunky dory, but we’re certainly past the crisis. I think it’s very much time for Janet Yellen to assert her and her Fed’s independence, or reassert the Fed’s independence from the executive, and start to take decisions that maybe Jack Lew in the Treasury, or President Obama would want her to take.” (Note: this interview took place before the Fed broke its seven-year pattern of near-zero rates and raised its benchmark by a quarter of a percentage point).

But do Americans really understand such choices? The New York Times Magazine ran a feature late last year with the headline, “You’re Not Supposed to Understand the Federal Reserve.” Lowenstein clearly wasn’t impressed by it. “I think too much is made of the mysticism of the Federal Reserve,” a phenomenon he attributes mainly to Alan Greenspan who was “famously obscure in his preaching.”

For a man who put in a stint writing the Journal’s famous “Heard on the Street” column, the grey, serious folks at the Reserve are not wizards. “I think they’re just economists, public servants trying to do a good job,” and he rejects the idea put forth by some Republicans that an algorithm could do its job in setting the Federal Funds rate “I would rather have intelligent, well meaning human beings assessing the condition of the economy as best they can and setting interest rates, rather than I would have some formula do it.”

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Copyright 2016 Rogers Publishing Ltd. This article first appeared in the Summer 2016 edition of Corporate Risk Canada magazine.

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Passing the bucks: the weird history of the U.S. Federal Reserve