From March 9, 1966, through Aug. 31, 1974, Dr. Brimmer was
a member of the Board of Governors of the Federal Reserve System.
Editor: William McChesney Martin, former chairman
of the Board of Governors of the Federal Reserve System, died recently,
at age 91. His tenure as Fed chairman spanned five presidenciesTruman
through Nixonand 19 years. His was the longest chairmanship
in the Fed's history, and his impact on the System is still felt today,
as Andrew Brimmer, former governor, explains in the following recollection.
On Constitution Avenue, in the nation's capital, stands the William
McChesney Martin Jr. building. It is the headquarters of the Federal Reserve
System, and it is named for the former chairman who was also this country's
most outstanding central banker.
In the lobby of the Martin Building are two plaques: one honors President
Woodrow Wilson as the "Founder of the Federal Reserve"; the other honors
Sen. Carter Glass as the "Defender of the Federal Reserve." Another could
be added for Chairman Martin as "Savior of the Federal Reserve." Throughout
his 19-year tenure, he fought hard to defend the integrity of the System
against encroachment from the White House. Two examples standout.
The first episode involved the effort by President Harry Truman to control
monetary policy in the spring of 1951. For nearly a decade, prices of
marketable U.S. government bonds had been pegged at or close to par, and
the low yields were maintained (for the benefit of U.S. Treasury) by the
Federal Open Market Committee (FOMC), which bought up the securities which
private investors wished to liquidate. As a consequence, banks, life insurance
companies and other institutional investors, in effect, controlled the
creation of bank reserves and ultimatelythe availability of
money and credit. The growth of the latter gave a strong boost to aggregate
demand (already stimulated by Korean War expenditures) and contributed
to rising inflationary pressures. To check inflation, the Federal Reserve
decided to adopt a much more restrictive monetary policy. However, to
implement such a policy would require terminating the policy of supporting
prices of U.S. government securities.
This plan was vigorously opposed by John Snyder (secretary of the Treasury)
and eventually by President Harry Truman himself. At one point, the president
called the entire FOMC to a meeting in the White House at which he "demanded"
that the committee continue to support U.S. bond prices. During the meeting,
committee members listened to the president but made no commitment. Nevertheless,
following the meeting, the White House announced that the Federal Reserve
agreed with President Truman and would continue market support. This was
a clear challenge to the independence and integrity of the Federal Reserve.
However, Thomas McCabe, who was then chairman of the Federal Reserve,
declined to assert the independence the Federal Reserve by rebutting the
White House statement. Therefore, having lost his ability to lead the
System, he resigned his position.
At this point, Martin stepped in to resolve the crisis. At the time, he
was assistant secretary of the Treasury with responsibility for monetary
affairs. He brought to the task a through understanding of the Federal
Reserve System, of monetary policy, and of the functioning of financial
markets. (For example, at one time, he had worked at the Federal Reserve
Bank of St. Louis, had been a stockbroker and was the first paid president
of the New York Stock Exchange.) Martin devised a plan under which the
low-yielding bonds that were unwanted by investors were replaced by higher-yielding
nonmarketable securities designed to appeal to long-term investors. The
U.S. Treasury also agreed to use the Social Security Trust Funds to buy
up some of the bonds that were being liquidated. Martin also fashioned
other key features of the "Treasury-Federal Reserve Accord" that was signed
in May 1951. The Treasury agreed that the Federal Reserve would no longer
be committed to supporting prices of U.S. government securities. This
agreement restored harmony between the U.S. Treasury and the nation's
central bank. It also led President Truman to appoint Martin as the new
chairman of the Federal Reserve System.
The second episode in which Martin was cast as a defender of the Federal
Reserve was far less dramaticbut equally crucial. It occurred while
I was a member of the Federal Reserve Board, so I witnessed the event
as it unfolded. In December 1968, President-elect Richard Nixon attempted
to remove Martin as chairman of the Federal Reserve System and to replace
him with Arthur Burns. While he was putting together his Cabinet, Mr.
Nixon invited Martin to meet with him in New York City. Upon returning
from the meeting, Martin reported to the Board as follows: Mr. Nixon invited
him to accept the position of secretary of the Treasury in his new government.
He said he had great confidence in Martin's ability to serve as the chief
fiscal officer of the United States. He also said that he wanted to appoint
Dr. Arthur F. Burns to be head of the Federal Reserve System. Martin said
he thanked Mr. Nixon for the honor and expression of confidence in him,
but he said he intended to serve out the balance of his Federal Reserve
Board membership, which ran until the end of January 1970. Martin said
Mr. Nixon expressed disappointment at his decision not to accept the Treasury
appointment. But Martin said Mr. Nixon seemed even more disappointed that
he would not be able to name Arthur Burns chairman of the Federal Reserve
at the outset of his administration. Instead, he said he would bring Burns
into the White House as counselor and then appoint him to be chairman
of the Federal Reserve when Martin's term ended.
That was the course followed. However, in October 1969, Mr. Nixon announced
that Burns would became chairman of the Federal Reserve System in February
1970. This was (and still is) the longest lead time for the appointment
of a Federal Reserve chairman on record.
Although Martin did not say it, I am convinced that Mr. Nixon's desire
to make Burns chairman of the Federal Reserve System can be traced back
to his defeat in the 1960 presidential election. Mr. Nixon has written
that, in March of that year, Burns came to Washington to brief him on
the economic outlook. He told Mr. Nixon that the Federal Reserve's restrictive
monetary policy along with tight fiscal policy would throw the economy
into a recession by the fall. Since he assumed Mr. Nixon would be a candidate
for the presidency at that time, the recession would cause him to lose
the election. Burns advised Mr. Nixon to urge President Dwight D. Eisenhower
to relax fiscal policy promptly and to press Martin to ease the Federal
Reserve's restrictive monetary policy so as to forestall a recession.
Mr. Nixon said he urged President Eisenhower to follow Burns' advice,
but the president refused. As a result, according to Mr. Nixon, the recession
occurred, and he lost the election. Against that background, I believe
Mr. Nixon was more comfortable with Dr. Burns as Federal Reserve chairman
than he was with Martin as head of the nation's monetary authority.
As matters developed, Burns turned out not to be a "safe" Nixon man. On
several occasions, Burns clashed with the White House over the Federal
Reserve's determination to use restrictive monetary policy to fight inflation
while Mr. Nixon wanted a high rate of economic growth for political reasons.
In summary, by deciding to serve out the balance of his Federal Reserve
term, Martin prevented the System from being politicized by a president
for whom that was a major goal.