JasonI've been re-reading parts of two terrifically enlightening books on the Federal Reserve this week, "The Creature from Jekyll Island" and "Secrets of the Temple".

In the course of my review, I was reminded of a gentleman who once was the head of the Federal Reserve System who believed in sound money and hard banking, William McChesney Martin. Appointed by Truman in 1951, Martin would last through 5 Presidents, finally retiring in 1970 during the Nixon administration. A Yalie that had concentrated in English and Latin, McChesney Martin had deep family ties to the Federal Reserve. His father, William McChesney Martin Sr., had been both the Governor then President of the St. Louis branch of the Fed as well as helping to craft the original Federal Reserve Act of 1913. Junior himself was instrumental in the 1951 Accord, the agreement that is seen as re-establishing the Fed's independence.

Harry S. Truman thought that by appointing Martin Jr. to head the Fed, he could over-ride the agreement. Despite being a Democrat and growing up in the bosom of the private-public power duopoly of NYC and Washington D.C. elites, William Jr. did not play ball. Instead he ran monetary policy in a strong, counter-cyclical manner and was very mindful of inflation - refusing to return to the practice of debt monetizing as Fed Chairman Eccles had been apt to do.

He was a hard-nosed real money man who lectured Congress sternly on what he saw as excesses in spending and a growing lack of appreciation of the two-sided nature of capitalism. In August of 1957 he told the Senate "We are dealing with waste and extravagance, incompetence and inefficiency; the only way we have in a free society is to take losses from time to time. This is the loss economy as well as the profit economy."

50 years hence the man that occupies the seat at the head of the Fed's table is completely devoid of such character. Instead of warning Congress that inflation causes mal-invest, encourages excess speculation (NASDAQ, real estate), and particularly afflicts "hardworking and thrifty… little man on the fixed income who could protect neither his income nor the value of his savings. Often, he was also the unemployed victim of the collapse", B.S. Bernanke recommends easy money and opening the spigots of government largess.

The history of the Fed is intriguing and insightful, giving generous lessons to those that would heed such knowledge. The obvious message today is that the current Fed is much like that of Arthur Burns or George Miller, men who would quickly acquiesce to the whims of politicians. In stark contrast to William McChesney Martin, Benjamin Bernanke wants to be loved and accepted and is willing to commit grave errors in monetary policy to achieve that aim. Speculators and pensioners beware!

Edward Talisse adds:

The most recent offering of Grant's Interest Rate Observer includes a witty cartoon. A local motorist pulls up to his nearest filling station and exclaims to the station attendant that "the recent price increase in gasoline is outrageous." The Greenspan-Bernanke schooled attendant coyly replies "yeah, but is not a core increase!" Correctly assessing the medium to longer term inflation outlook has always been a key to investment success and preservation of wealth in real terms. The problem is that inflation forecasting is a tall order and even the pros cannot agree on an appropriate methodology. Today's CPI readings are met with much cynicism and skepticism. The bond trader's lament "that of course when you take out everything that went up, it goes down! Anyway, here is a PDF that explains the difference between the CPI and the PCE. CPI typically runs higher than PCE. Chose your poison carefully.





Speak your mind

5 Comments so far

  1. orson terrill on May 5, 2008 4:59 pm

    Murray Rothbard's "The Great Depression" is also an interesting look at the early years of the Fed. My stomach began to hurt by the time Rothbard was through itemizing all the misdeeds of the Federal Reserve in the 1920s. Which Rothbard argues that monetary expansion, like that in 1920s, and the subsequent realization of malinvestment that was encouraged by government intervention in the supply of money, is the root of the problem. The mises institute still publishes the book, and has to be ordered from their website The book was written in the 60s, and Rothbard was an earlier adopter of Austrian Economics, so many of his theoritical underpinnings may or may not be wholly sound. Neiderhoffer would probably have an answer to that. One interesting point is that fed cannot continually fool the economy into expanding, especially as it tries to bail out the economy with the same tool it used to inflate it. We see this now, and this happened in the early thirties, where the fed can flush the banking system with cash but cannot force banks to lend or loosen, or force people to expand their debt(is the commodities sector able and willing though?); encouraging the "needed deflation."

  2. Gary Rogan on May 6, 2008 9:36 pm

    The idea that one man and a bunch of helpers can effectively set interest rates for a multi-trillion dollar economy is patently ridiculous. Of course, if the “we will cure the last bubble with the next bubble” approach hasn’t convinced enough people of that, nothing will.

  3. Arman Agdaian on May 7, 2008 3:24 am

    Where is Greenspan when you need him (ha ha ha)? They are all the same, just look different. This one has a beard. Where is the next bubble being created by the Federal Reserve (gold, euro,oil)? The U.S. hegemon is unwinding, just like a bad trade.

  4. George Parkanyi on May 7, 2008 5:18 pm

    Hey, It's not all bad. If we didn't have bubbles, we wouldn't have champagne, Coca Cola, zit cream, or Don Ho. Silver linings, chaps, silver linings… Cheers, GP

  5. Curmudgeon 3417 on May 7, 2008 6:14 pm

    G. William Miller (a very smart man, by the way) was a terrible Fed Chairman, partly because he had the wrong background for the job. Arthur Burns had the right background but he was too close to Mr. N!xon and his decisions were not independent and not forceful enough. So far, I am with you. However, Bern&nke has not been in the job long enough to appraise him; it seems to me you are rushing to judgment (just like people rushed to declare Greesp&n a genius after a couple of years of positive market returns). Give The Bearded One some time before you declare him a failure. Yes, he cut interest rate very rapidly… maybe he will raise them rapidly also when called for. Let's wait to see a full cycle of loosening and tightening.


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