Sep 3, 2019

Pressuring the Fed Is No Surefire Electoral Solution, Says Economic Historian

Frank Fuhrig Staff writer

President Donald Trump’s unabashed lobbying for the Federal Reserve to loosen monetary policy is unprecedented only in his use of social media to demand rate cuts and label his handpicked chairman as an “enemy.”

Many presidents have yearned for a warmer financial climate, and some have exerted real pressure on the Fed, albeit through less public channels than Twitter. Founded in 1914, the central bank’s role in the economy was still developing when the Great Crash hit in 1929, and then-president Herbert Hoover was keen for a more active, accommodating Fed, according to economic historian Judge Glock.

As the Depression deepened, Hoover embraced the theory that the Fed should orchestrate a decline in long-term interest rates to spur growth, but then-Federal Reserve chief Roy Young was focused on the banking system over monetary policy.

“[Hoover] gave numerous speeches over the next year and a half about the real goal was to get short-term money to move into the long-term market and eventually help construction and fixed investment,” Glock says in Monday’s edition of the “Macro Musings” podcast.

“He eventually, too, helped change the Federal Reserve Board in Washington, DC, because of this. He basically put Eugene Meyer, who is a believer in the [long-term bonds] doctrine, and said in numerous fashions before and afterwards that these ideas were sound, to replace Roy Young and one other Federal Reserve Board governor, kind of a coup at the board.”

In 1930, Young left the Fed to become head of the Federal Reserve Bank of Boston, because the regional banks were considered more consequential at the time, according to Glock, a scholar at the Cicero Institute in San Francisco.

“There's been speculation ever since September 1930 that Hoover might have had something to do with this. I found some letters in the Hoover Library and the Charles Hamlin diaries [founding Fed chief and board member until 1936] that this was probably so … that Hoover probably engineered the then-current head of the Federal Reserve Board to leave and move into the Federal Reserve Bank of Boston, and kicked out one other board member in order so he can place his own members on the board. Later on, people like Charles Hamlin complained about what he called the board's ‘Hooverizing.’”

Under Meyer, who later became publisher of the Washington Post, the Fed treated Hoover’s monetary policy preferences with “increasing obsequiousness.” After the president pushed through a change in the Federal Reserve Act, the central bank started vacuuming up short-term Treasury debt in early 1932, and within a few months started switching into long-term instruments.

But bending the Fed to his will did little to help Hoover, who lost reelection in a landslide in 1932.

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