The White House and the Fed
THE FEDERAL RESERVE SYSTEM, over the past generation, has had three strong chairmenÛÓ Marriner S. Eccles, William M. Martin and Arthur F. Burns. Mr. EcclesÛªs death last week recalls the long struggles between the Fed and the White House in the years just before and after World War H. The issues of that time are still alive today, especially with Dr. BurnsÛªs term as chairman now about to expire.</br></br>The Fed is almost a fourth branch of government, exercising its great power under a board of governors serving 14-year terms. An appointment to the Fed is a bit like an appointment to the Supreme Court: Once the nominee takes his seat, a President can no longer give him orders; he can only argue with him. By his choice of candidates, the President transmits a signalÛÓand an important oneÛÓindicating his purposes in economic policy.</br></br>Mr. Eccles was a Utah banker who came to the administrationÛªs attention in 1933 with a speech endorsing deficit financing. He had begun to work out for himself the central ideas of modern fiscal managementÛÓa remarkable intellectual featÛÓat a time when they were hardly known, let alone accepted, in this country. President Roosevelt advanced the influence of those ideas when, the following year, he put Mr. Eccles on the Federal Reserve Board. But very shortly Mr. Eccles was publicly at odds with the administration over the independence of the Fed.</br></br>The issue returned, sharper than ever, after World War II when President Truman wanted the Fed to continue the wartime practice of holding up the prices of federal securities. Holding up prices meant holding down interest rates, and it also meant turning the Fed into a subsidiary of the U.S. Treasury. In 1948 the President refused to reappoint Mr. Eccles chairman of the board. Why? Robert J. Donovan, in his recent history of the period, suggests that the reasons went beyond pure policy and Mr. EcclesÛªs increasingly cautious views. As a Truman aide told Mr. Donovan, the White House felt that ÛÏin general, the Fed had too much power, that it should be cut down</br></br>that he had wanted Mr. Eccles to know ÛÏwhoÛªs boss.Û That was in character. But was the President right? The country had just been through a great surge of postwar inflation, and Mr. Eccles was a strong advocate of anti-inflationary credit restraints..But 1948 was an election year, and economic growth was far from assured; as it turned out, the economy tipped into a recession a year later. The country needed more thin an anti-inflation program.