Page 53 - Bloomberg Businessweek-October 29, 2018

◼ ECONOMICS Bloomberg Businessweek October 29, 2018

delay. Privately, I was sympathetic to Martin’s no other reason than to reinforce the effectiveness
argument and hoped to persuade the secretary into of the action. But that needs to take place in the
a compromise: perhaps a quarter-percentage-point context of the Federal Reserve’s independence to
increase instead of the planned half-point. set monetary policy.
The unfortunate result for me was the cre- That was challenged only once in my direct
ation of a four-man ad hoc committee to exam- experience, in the summer of 1984. I was sum-
ine the issue. The composition was odd. Although moned to a meeting with President Reagan at the
I was the Treasury’s representative, I was eager to White House. Strangely, it didn’t take place in the
compromise. Dan Brill, the Fed’s research chief, Oval Office, but in the more informal library. As I
was strongly opposed to any rate hike despite his arrived, the president, sitting there with Chief of
boss’s view. So were, in varying degrees, represen- Staff Jim Baker, seemed a bit uncomfortable. He
tatives from the CEA and the Bureau of the Budget didn’t say a word. Instead, Baker delivered a mes-
(now the Office of Management and Budget). sage: “The president is ordering you not to raise
Predictably, we concluded that the decision could interest rates before the election.”
wait until January so it could be coordinated with I was stunned. Not only was the president clearly
the new budget. overstepping his authority by giving an order to the
Martin persisted. A Quadriad1 meeting of “prin- Fed, but also it was disconcerting because I wasn’t
cipals only” with President Lyndon Johnson was planning tighter monetary policy at the time. In the
scheduled for Oct. 6. Secretary Fowler brought me aftermath of Continental Illinois’s collapse,3 market
along. He laid out the issue. The president recoiled interest rates had risen and I thought the Federal
at the idea of raising interest rates. It would, he said Open Market Committee might need to calm the
with an arm outstretched and fingers clenched, market by easing a bit.
“amount to squeezing blood from the American What to say? What to do?
working man in the interest of Wall Street.” I walked out without saying a word.
Chairman Martin was unyielding. As he saw it, I later surmised that the library location had
the restraint was needed and it was his responsibil- been chosen because, unlike the Oval Office, it 39
ity. “Bill,” the president finally said, “I have to have probably lacked a taping system. The meeting
my gall bladder taken out tomorrow. You won’t do would go unrecorded. If I repeated the incident to
this while I’m in the hospital, will you?” the other members of the Federal Reserve Board
“No, Mr. President, we’ll wait until you get out.” or to the FOMC—or to [Wisconsin] Senator William
And so it was done. In early December 1965, Proxmire, as I had promised to do if such a situa-
soon after I left the Treasury, the Fed did act, voting tion arose—the story would have inevitably leaked,
to raise the discount rate to 4.5 percent from 4 per- to nobody’s benefit. How could I explain that I was
cent. Johnson, down in Texas, released a disap- ordered not to do something that at the time I had
pointed statement. Martin was called down to the no intention of doing?
“Ranch” to be given a mental, and by some reports As I considered the incident later, I thought that
a physical, trip to the proverbial woodshed.2 it was not precisely the right time for a short lec-
I don’t know the full story, but it was a lesson ture on the constitutional authority of the Congress
for me. Over time two things did become clear. The to oversee the Federal Reserve and the deliberate
Fed was slow to take further restrictive actions as insulation of the Fed from direction by the execu-
Vietnam expenditures and the economy heated tive branch.
up. The president overruled his economic advisers’ The president’s silence, his apparent discom-
private pleas for a tax increase. My guess is that he fort, and the meeting locale made me quite sure
understood that a tax vote in Congress would simply the White House would keep quiet. It was a mat-
become a referendum on the unpopular Vietnam ter to be kept between me and Catherine Mallardi,
War—a referendum he would be bound to lose. the longtime faithful assistant to Federal Reserve
chairmen. But it was a striking reminder about the
An Awkward Meeting pressure that politics can exert on the Fed as elec-
As this memoir makes clear, the Federal Reserve tions approach.
must have and always will have contacts with the
administration in power. Some coordination in 1. The Quadriad had been established in the Kennedy years as
an informal but influential grouping of the four top economics
international affairs is imperative given the over- agency heads: Treasury, Budget, the CEA, and the Fed.
lapping responsibilities with respect to exchange 2. By some accounts the encounter got physical, with the 6-foot-4
president backing up the shorter Fed chief against a wall.
rates and regulation. Sweeping use of “emergency” 3. The failure of Continental Illinois National Bank & Trust Co. in
1984, the largest in U.S. history at the time, gave birth to the term
and “implied” authority requires consultation if for “too big to fail.”