When the President wants a “low-cost man”

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Trump loves low interest rates. And he really really wants a low-cost guy in the Federal Reserve system. As Claire Jones reported on Mainft over the weekend.

Donald Trump said he would only choose the new Federal Reserve Chairman, who will cut interest rates.

Have you ever seen this movie?

No, it’s not that movie.

Certainly there may be lessons from the decade-long collapse of President Erdogan’s attempt to drop strong Turkey’s interest rates. And whether this was causal to the rising inflation rate of the country, the collapse of the currency, and the tearing banking system.

But our mind first went to drama in 1951 about the birth of the modern federal government. The story was told in Gusto by Robert Hetzel and Ralph Leach, with a fascinating narrative description over 20 years ago. And while readers will be helpful enough to read everything, we have drawn some highlights from what became known as the Treasury Agreement.

As the United States entered World War II, inflation concerns were placed on one side in support of national security. The short-term interest rate was fixed at 0.375% and yield curve control was implemented.

However, although the short fee could have been lifted in 1947, the US Treasury argued that the Fed would maintain a long-term bond yield cap. For President Truman, it was a moral issue of protecting the market value of war debt purchased by patriots (he himself rinsed when he had to sell a World War I freedom loan for $80 on his return from France).

The Federal Reserve Committee was not satisfied. Because after the first postwar bust, inflation had once again turned yippy.

The Fed wanted to raise the short fee, but the long bond yield cap of 2.5% had seriously undermined its ability to do so. The higher the shorter the price, the market became selling long-term bonds, effectively forced by more and more QEs to protect the CAP. All this – they considered – was driving inflation.

But at the time, monetary policy was still in the hands of the President and the US Treasury. As Hetzel and Leach pointed out, this became an attractive tool to use when the Korean War broke out in 1950.

Truman had a compelling reason to freeze interest rates. On January 25, 1951, he frozen wages and prices apart from farm prices. It was toxic to raise borrowing costs, especially on mortgages, while freezing wages. More importantly, in January 1951, Truman faced the possibility of World War I. . . Truman and (Treasury Secretary) Snyder wanted to keep the costs of raising funds for the deficit coming from the wider war.

As the Korean war escalated, consumers rushed to buy goods, commodity prices skyrocketed, and CPI inflation was running at a rate of 21% per year for the three months ended in February 1951. Yikes.

Therefore, Truman has impressed not only Chair McCabe, but the entire federal open market committee, summoned to the White House, impressing their patriotic obligation to maintain confidence in government securities in times of national crisis. The White House followed up at a press conference declaring it.

The Federal Reserve has pledged its support to President Truman to maintain stability in government securities as long as the emergency continues.

Unfortunately, FOMC did not do that. Maintaining public ambiguity about their commitment to continuing the Treasury bid was one of the few cards they had. And Gov. Marriner Eccles confirmed that the New York Times and the Washington Post knew that.

Perhaps unsurprisingly, it made it even more clear that members of the FOMC would increase, and at an increasing volume, it forced the increase inflation to be a direct result of the yield cap forced by the Ministry of Finance.

As Treasury Secretary John Wesley Snyder headed to hospital on February 11 for a cataract operation, negotiations with the Fed were officially handed over to Deputy Treasury Commander William McShesney Martin. The assumption (and perhaps even the instructions) was to suspend the escalating crisis for weeks before Snyder returned.

But Martin – the financial wonder that became president of the NYSE over a decade ago at just 31 years old – quickly moved.

Martin has signed an agreement between the Fed and the Treasury Department. It was accompanied by a grand debt exchange in which bondholders stripped their money put options (which is what forces the active unwilling Fed to force QE into effect) in exchange for their ability to exchange higher coupons for the Ministry of Fed under the new financial system. For some reason, he sold the plan to a boss still tied to the hospital.

If this sounds like a Fed victory, it should be weighed against what might be seen as a price: McCabe’s resignation as Fed Chairman.

Truman managed to put his man in the Fed, a loyal trove-based man. Someone who understood his big picture. A low rate guy. Who did he choose? Why, of course, William McSchesney Martin.

According to Leach, the then-US Central Bank economist, the initial response from the Fed’s board and staff was that “the Fed won the battle but lost the war.” The Fed may have been released from the Treasury, but the Treasury “recaptured it by setting up its own man.”

The low-priced Martin was confirmed by the Senate on March 21. And in his first statement as chairman, he:

. . . (u)Nless Inflation is controlled, but could prove to be even more serious to our country’s vitality than the grander attacks of enemies outside our country. I pledge to support all reasonable measures to maintain the purchasing power of the dollar.

Wait, what? Martin became a fierce advocate for central bank independence rather than a supine low-cost man, making the Fed’s job clear as “a chaperone that removed the punch bowl when the party really warmed up.”

He hiked the rates and inflation fell (I believe autumn is totally doing by Martin, given the long and variable delays in monetary policy). Today, the agreement designed by Martin is considered the birth of a modern, independent US central bank.

How did Truman get this?

A few years later, Martin happened to meet Harry Truman on the streets of New York City. Truman stared at him and said, “Traitor,” then continued.

What are Trump’s lessons? If you really want a lower fee, make sure you appoint a real, awful stooge, not a new Martin.