The Day Lyndon Johnson Pushed the Fed Chairman Around the Room While Shouting Curses at Him

Yet it turns out that the president still isn’t the boss of America’s central bank.

Published in The New York Sun.

Whether President Trump could fire Chairman Jerome Powell of the Federal Reserve has become the subject of front-page stories and public speculation. It highlights the constitutional and legal question, “Who is the boss of the Fed Chairman?” It’s the Congress. The Fed, though, is always in a web of presidential politics. 

So recurring tension between presidents and Fed chairmen is to be expected. Presidents naturally would like to be able to create, as desired, all the money they want to spend and to keep down the interest cost of our Treasury’s debt. Presidents are boss of the Treasury Department, but not of the Fed. This has often led to frustration.

When the Fed had raised interest rates that President Lyndon Johnson opposed, LBJ angrily demanded: “How can I run the country and the government if… Bill Martin is going to run his own economy?” The Fed chairman at the time, William McChesney Martin, went to Johnson’s Texas ranch to discuss the issue. Johnson called Martin’s action “despicable,” and, it is said, physically pushed Martin around the room while shouting and swearing at him.

“He was very disagreeable,” said Martin later, though the higher interest rates stayed.

There is one case in history where a President actually forced out a Fed chairman, though unable to formally fire him. President Truman and Chairman Thomas McCabe had been disagreeing about whether the Fed should keep buying Treasury bonds at the pegged wartime rate of 2.5 percent, which Truman and his Treasury Secretary wanted. 

There was still a war on — the Korean. About the Fed’s allowing higher interest rates on Treasury bonds, Truman told McCabe, “That is exactly what Mr. Stalin wants.” Finally, Truman told McCabe, whom he had appointed as Fed chairman three years before, that “his services were no longer satisfactory.” McCabe bitterly resigned.

Truman then appointed Martin as Fed Chairman, thinking Martin would be loyal to the Treasury. Yet Martin did not wish to continue the peg, and Truman called Martin a “traitor” to his face. Then Martin stayed on as Fed Chairman for 19 years, overlapping with five presidents.

About Martin’s relationship to the executive branch, the Fed chairman said, “That is not to say that the Federal Reserve should operate in isolation from the Treasury. On the contrary, we enjoy cordial and close relations…and we are working together in harmony.” However, this was not always the case.

President Nixon seems to have had better luck with Chairman Arthur Burns. “Ample evidence…supports the claim that President Nixon,” with his eye on re-election, “urged Burns to follow a very expansive policy and that Burns agreed to do it,” wrote Allan Meltzer in his history of the Fed.

With wit and cynicism, Nixon said that he hoped the independent chairman would independently decide to agree with the President. The key principle in political philosophy behind the tension between presidents and Fed chairman was well stated in congressional testimony by Martin in 1964.

“The question is whether the principal officer in charge of paying the Government’s bills should be entrusted also with the power to create the money to pay them,” Martin said. We must agree with Martin that the answer to that question is no. That does not mean the Fed is accountable to no one.

The case for accountability was forcefully put by Congressman Wright Patman, chairman of the House Committee on Banking between 1963 and 1975: “I have long been concerned about the aloofness of the Federal Reserve from both the executive branch and the Congress,” Patman said. 

Congressman Wright Patman, right, speaks with monetary expert James H.R. Cromwell, left, and Speaker Bankhead at the Capitol in 1937. Library of Congress via Wikimedia Commons

“Although the Federal Reserve is a creature of Congress, it is not subject to any of the usual Government budgetary, auditing, and appropriations procedures,” he added. “Also, the Federal Reserve is not required to obtain approval for its policies.” Today’s Fed thinks it can unilaterally commit the country to perpetual inflation at 2 percent a year without congressional approval.

Patman continued, “This sort of unbridled freedom… isn’t compatible with representative democratic government.”  I would say that he was right. It is compatible with a Platonic theory of rule by philosopher-kings, but not compatible with our constitutional republic.

The new president should work with the new Republican Congress, which has undoubted Constitutional authority over the Fed and over the nature of our money, to bring accountability to the Fed and move America in a direction of sound and stable money.