The First Fed Chair Fought for Independence, but Failed


The independence of the central banks has increased over the last decade. In the face of adverse events, central banks can be seen as a panacea. Donald Trump threatened Janet Yellen with firing, while Jay Powell was believed to have been under pressure from political leaders to withdraw liquidity too early. This led to the current high level of inflation. The President would be motivated to stimulate the economy by telling the Federal Reserve (where fiscal policy must go through congress) to shut down the printer. Their short-term vision is ill advised and can have serious consequences.

The Fed was never granted independence from birth. Before 1934, it was chaired effectively by the Federal Reserve Bank of New York. The power of Fed became centralized in Washington after the Great Depression. A chairman was assigned to the Federal Reserve System — Marriner Stoddard Ecles was the assigned chairman. When he became the chairman in November 1934, the U.S. economy had been hit hard and was in a very bad shape: Although real GDP rebounded strongly from an exceptionally low base, unemployment rate was at 21.5 percent, the century’s historical record.

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When Franklin Roosevelt assumed office in March 1933, the president himself was already involved actively in many credit and monetary rescuing actions which are now regarded as the Fed’s functions. At that time John Maynard Keynes was already famous in the UK, just before his famous classic General Theory published in 1936, his theory of using fiscal deficits to boost the economy had effectively influenced Roosevelt. As the chart below shows, the interest rates did not change much during the golden standard era. However, deficits were already considered easing.

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Eccles had to keep the Fed’s interest rates low during his time as Fed chair. This was because of World War II, which saw huge spending by governments and the resulting deficits. The White House and parliaments believed that bondholders who are patriotic should not be allowed to lose their money because interest rates rose (implying that bond prices fell). Under such pressure Eccles also followed. Accordingly, unemployment rate came down drastically to 1 percent by 1944, as the economy was overheated.

We now know that overheating has consequences. Inflation surged to 13 percent in 1940-42 as the first round, and to almost 20 percent in 1946-47, as the second round. Between these, real GDP year-over-year growth fell from the overheated stage at 22 percent in 1943 (war means massive production especially in the military sector) to minus 15 percent in 1946. However, there were more restrictions on Fed Chair: A rate hike needed approval by Department of Treasury. Eccles repeatedly demanded rate increases, but they were rejected by the Treasury until after war ended.

Ironically and coincidentally, the past of this century somehow project our future. Eccles, however, was more conservative than today’s Fed chairmen. Eccles fought for the Fed’s independence for a decade, but this was not enough. Finally, when Harry Truman succeeded, Eccles was demoted to a normal committee member, ending his 13-year Fed chair career.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Law Ka-chung


Law Kachung is a global macroeconomics commentator. He has been writing numerous newspaper and magazine columns and talking about markets on various TV, radio, and online channels in Hong Kong since 2005. His coverage covers all aspects of finance and economics in America, Europe and Asia. He has been the chief economist and strategist at a Hong Kong branch of the fifth-largest Chinese bank for more than 12 years. A Ph.D., MSc. Mathematics and MSc. Astrophysics are his qualifications. Email: [email protected]

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