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Remembering William McChesney Martin Jr.

September 1, 1998


Andrew F. Brimmer President, Brimmer & Co. Inc., Washington, D.C
Remembering William McChesney Martin Jr.

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 presidencies—Truman through Nixon—and 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— ultimately—the 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 dramatic—but 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.