Fed Res Chairman's Impact on the Economy

7/31/2019 Fed Res Chairman's Impact on the Economy

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National Economic Markets

ECNM 477.41 Summer 2012

Federal Reserve Chairmans Impact on the United States

Economy

September 6, 2012


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National Economic Markets,ECNM 477.41Summer 2012July 8, 2012

Abstract

Macroeconomics research paper analyzing the Federal Reserve Chairmans impact on the

United States economy; covering the terms of the following Federal Reserve Chairmans:

William McChesney Martin, Jr., Arthur F. Burns, Paul A. Volcker, Alan Greenspan, and Ben

Bernanke. This research paper will cover the Federal Reserve structure, history, and overall

purpose. Analyze how each Federal Reserve Chairman has influenced the United States

economy, and discuss the most influential policy makers.


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The Federal Reserve System

On December 23, 1913, President Woodrow Wilson signed the Owen-Glass Act, creating

the Federal Reserve System, an independent agency of the U.S. Government. Before the Federal

Reserve began its operations in November 1914, United States banks did not have standardized

banking practices.

Under the terms of the first major banking reform to follow the Civil War, the Federal

Reserve System was designed to keep the economy healthy through the formulation of U.S.

monetary policy. As the nations money manager and central banking authority, the Federal

Reserve has regulatory and supervisory responsibilities and ensures that sufficient amounts of

currency and coin circulate to meet the publics demand. The Federal Reserve also establishes

interest rates and monitors the availability of money and credit.

The Federal Reserve consists of a board of governors, nominated by the president and

confirmed by the Senate to serve fourteen-year terms of office, twelve regional Federal Reserve

Districts, and branches of Federal Reserve banks in twenty-five other cities. The Federal Open

Market Committee (FOMC) sets the Federal Reserves monetary policy carried out through the

trading desk of the Federal Reserve Bank of New York. The Federal Advisory Council, the


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Consumer Advisory Council, and the Thrift Institutions Advisory Council advise the Federal

Reserve Board directly on its various responsibilities.1

Congress established the Federal Reserve in 1913 to counteract a series of banking crises

that began in the 19th century. The Federal Reserves purpose is to ensure a secure banking

system for both consumers and the government, impact the economy and attempt to keep

inflation under control. The Federal Reserve operates free from political influence.

The Federal Reserve is a decentralized central bank that balances the interests of both the

government and the banking industry. Its structure has both private and public elements.

Congress oversees the Federal Reserve and its officials must testify before Congress each

quarter. The Senate must confirm the presidents appointee for chair. The Federal Reserves

decisions do not need the approval of any branch of the government; the Federal Reserve banks

operate autonomously which is similar to the structure of private-sector banking corporations.

None of the Federal Reserve System is funded by tax dollars or government money.

Instead, it supports itself through interest it earns on investments in government securities, bank

loans, and from charges for the services it provides to financial institutions, like check processing

and clearing. Any net income the Federal Reserve System makes goes to the U.S. Treasury. The

Federal Reserve is the watchdog of the U.S. money flow. The Treasury Department produces

currency, whereas the Federal Reserve issues our currency when levels get too low and

distributes money to banks and financial institutions.

The Federal Reserve banks analyze local economies for economic trends that may affect

the national economy. The Federal Reserve banks supervise commercial banks, distribute cash to

banks and financial institutions, and provide electronic clearing systems to process payments.

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The Board of Governors, also known as the Federal Reserve Board, makes most of the

Federal Reserves monetary policy decisions, oversees the Reserve banks and makes sure the

economy is running smoothly. The seven members of the Federal Reserve Board are appointed

by the president and confirmed by the Senate to serve 14-year terms. This process ensures that

governorship spans presidential administrations and Congressional members to ensure that no

member is aligned to a specific political patron. Each governor is also a member of the FOMC.

The Federal Open Market Committee (FOMC) is comprised of seven governors and five

of the 12 Reserve bank presidents. The FOMC is in charge of the buying and selling of

government and federal agency securities. This encourages or maintains economic growth,

steady employment, and stable prices. The FOMC sets the federal funds rate, which is the rate

that commercial banks charge each other for overnight loans, which affects the interest rate that

banks charge borrowers. The FOMC can raise or lower the rate, or keep it unchanged when this

activity occurs Wall Street reacts by speculating about the interest rates.

The Federal Reserve is probably the most influential institution on the United States

economy. The FOMC uses interest rates to control what the Federal Reserve wants to

accomplish. If the FOMC raises interest rates, its probably because it thinks inflation is or will

be a problem.

Rate increases have a negative effect on the prices of existing bonds. Stock prices have a

tendency to struggle as higher interest rates impede consumer and business spending. The

general population is less likely to take out loans, mortgages, and restrain from credit card

purchases. Businesses have a hard time getting loans for capital expansion, and they may cut

back expenses by laying off workers. The FOMC lowers interest rates when inflation is in check

and the economy is slow.


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When interest rates go up it is usually a positive sign that the economy is doing well.

Interest rate increases are necessary to avoid inflation. When interest rates are declining, this is a

sign that our economy is not doing so well and needs some help. Finding the ideal median with

interest rates is nearly an impossible task, considering the dynamics of our economy.

The Fed has a dual mandate, http://federalreserve.gov defined on its website as

conducting the nations monetary policy by influencing money and credit conditions in the

economy in pursuit of full employment and stable prices. The central bank is also the

governments most important financial regulatory agency.

Through its power to change interest rates and purchase large amounts of financial assets,

the Federal Reserve has exercised more influence over economic growth and the level of

employment in recent decades than any other government entity. It has used all its traditional

tools and many new ones to stimulate the financial system after the Wall Street meltdown of

2008 and gave the economy various forms of support during the recession and weak recovery

that followed.

Since 2007, the Fed has been engaged in an effort to stimulate growth. The central bank

has held short-term interest rates near zero since December 2008. In an effort to further reduce

long-term rates, it has accumulated more than $2 trillion in government debt and mortgage-

backed securities.

While the Feds quantitative easing helped prevent a second Great Depression, the

recovery in the United States and other developed countries has been minimal.

Internal divisions appeared to limit the Feds ability to pursue more aggressive measures, and

Congress appeared to ignore appeals from the Fed chairman, Ben S. Bernanke, for fiscal action

to support the economy.
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Instead, the Fed turned to a mix of smaller steps meant to shape investor expectations and

to help head off the possibility of a financial crisis in Europe. In August 2011, it announced that

it would hold short-term interest rates near zero through mid-2013 to support the economy. In

September 2011, it announced plans to try to push long-term interest rates down through what

was called Operation Twist,' purchasing $400 billion in long-term Treasury securities with

proceeds from the sale of short-term government debt.

In January 2012, the Fed board adopted a plan to publish a forecast of its own actions,

inaugurating a policy that is intended to magnify the power of those actions by shaping market

expectations. In its first forecast, the Fed said it is likely to raise interest rates at the end of 2014,

but not until then.

In April 2012, Mr. Bernanke said that he was concerned about the high level of

unemployment but that the Feds ability to encourage job creation was constrained by its

responsibility to keep inflation low and stable. In June 2012, faced with additional signs of slow

economic growth and the threat of a European financial meltdown, the Fed announced that it

would extend Operation Twist' for another six months, buying about $267 billion in longer-

term Treasury securities over the next six months, with money raised by selling some of its

current holdings of short-term Treasuries.2

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William McChesney Martin, Jr. - Chairman, Federal Reserve Board(date of term April 2, 1951January 31, 1970, 19 years)

Born:December 17, 1906, New York CityDied:July 28, 1998, Washington, D.C.Education:Yale UniversityParty:Democratic Party

William McChesney Martin, Jr. (Dec. 17, 1906July 28, 1998) was the ninth and

longest-serving chairman of the Federal Reserve, serving from April 2, 1951, to Jan. 31, 1970,

under five presidents. A Yale graduate, served as head of the Export-Import Bank for three years

before becoming the U.S. Treasury's assistant secretary for monetary affairs and soon after, its

head negotiator.

In 1951, William McChesney Martin, Jr. negotiated the Accord, an agreement between

the U.S. Department of the Treasury and the Federal Reserve restoring independence to the Fed.

President Harry S. Truman selected Martin to be the next Fed chairman, and the Senate approved

his appointment on March 21, 1951.

Over nearly two decades, William McChesney Martin, Jr. would achieve global

recognition as a central banker. His most famous quote about his central banking philosophy

was, "The job of the Federal Reserve is to take away the punch bowl just when the party starts
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getting interesting," referring to the need to raise interest rates when the economy is at its most

active.3

His father, William McChesney Martin , was a St. Louis banker who was asked by

President Woodrow Wilson to help draft legislation that eventually created the Federal Reserve

System. William McChesney Martin served as the first Federal Agent for the Federal Reserve

Bank of St. Louis in 1914. Martin served as the first Chairman of the Board of Directors and

Federal Reserve Agent for the Bank, from 1914-1929. He began his term as Governor of the

Federal Reserve Bank of St. Louis on January 16, 1929, staying until February 28, 1941. In

1935, as a result of the Banking Act of 1935, the position of Governor of the Federal Reserve

Bank of St. Louis was changed to President.

William McChesney Martin Jr. was born in St. Louis, Missouri, on 17 December 1906,

and died on 27 July 1998 in Washington, D.C. He was educated in St. Louis Public Schools and

graduated from Yale University in 1928. He worked in the bank examination department of the

Federal Reserve Bank of St. Louis, and then joined a St. Louis stock brokerage firm, A.G.

Edwards & Sons, as the youngest partner in the firm. In 1931, the brokerage firm sent him to the

New York Stock Exchange (NYSE) representing the firm on Wall Street. He became a member

of the NYSE and in 1938, at the age of thirty-one, became the first paid president of the

exchange.

In 1941, President of the NYSE William McChesney Martin Jr. was drafted into the

United States Army as a private. He served in Washington, D.C., on assignments to the

Munitions Board and the Joint Chiefs of Staff and was involved in the Lend-Lease program with

the Soviet Union. In April 1942, as a lieutenant, William McChesney Martin Jr. married Cynthia

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Davis, daughter of St. Louis' Dwight F. Davis, former Secretary of War, Governor-General of

the Philippines, and American tennis champion.

William McChesney Martin Jr. was discharged from the Army in 1945 as a colonel and

served three years as president of the Board of Directors of the U.S. Export-Import Bank, where

he made contributions to foreign trade and the Marshall Plan's post-war reconstruction. He

served as assistant secretary of the Treasury, where he oversaw both domestic and international

financial policy, and as the U.S. representative on the board of the World Bank. He was

instrumental in forging the Treasury Accord with the Federal Reserve System in 1951.

In April 1951, while at the Treasury, William McChesney Martin Jr. was nominated by

President Harry Truman for the chairmanship of the Federal Reserve System. During his 19-

year term, under the administrations of presidents Truman, Eisenhower, Kennedy, Johnson, and

Nixon, he achieved changes in economic management and international financial coordination in

the United States that encouraged economic stability and prosperity.4

He held the longest chairmanship in the Federal Reserve's history, and his impact on the

Federal Reserve System was substantial. 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 has been deemed this country's most

influential central banker. During his 19-year tenure, he fought hard defending the integrity of

the Federal Reserve System against encroachment from the White House.

One scenario involved an effort by President Harry Truman to control monetary policy in

1951. For close to ten years, prices of U.S. government bonds had been set at or close to par, and

low yields were pegged by the Federal Open Market Committee (FOMC). As a result, banks, life

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insurance companies and other institutional investors controlled the creation of bank reserves and

the availability of money and credit. This caused a growth in aggregate demand and contributed

to rising inflationary pressures. To keep inflation in check, the Federal Reserve needed to

implement a restrictive monetary policy. In order to implement this monetary policy would

require terminating the existing policy supporting prices of U.S. government securities.

This plan was opposed by John Snyder, Secretary of the Treasury, and eventually by

President Harry Truman. The president called the FOMC to a meeting in the White House and

demanded that the committee continue to support U.S. bond prices. During the meeting,

committee members listened to the president but made no commitment. On the outcome of the

meeting, the White House announced that the Federal Reserve agreed with President Truman and

would continue market support. This caused a conflict between the power enforced by the White

House on the independence of the Federal Reserve. Thomas McCabe, who was the chairman of

the Federal Reserve, was unable to uphold the independence the Federal Reserve, and lost his

ability to lead the Federal Reserve System; he resigned his position.

After Thomas McCabe resignation, William McChesney Martin Jr. provided assistance

in order to help resolve the situation. During this time period, William McChesney Martin Jr .

was the Assistant Secretary of the Treasury with the responsibility for monetary affairs. He

brought to this position extreme value, knowledge, and understanding of the Federal Reserve

System (e.g. monetary policy, functioning of financial markets). William McChesney Martin Jr.

devised a plan in 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. William McChesney Martin Jr. at the time determined key features of the


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Treasury-Federal Reserve Accord that was signed in May 1951. The Treasury-Federal Reserve

Accord eliminated the obligation of the Federal Reserve to monetize the debt of the Treasury at a

fixed rate. This agreement became essential to the independence of central banking and laid the

foundations for the monetary policy pursued by the Federal Reserve today.

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 William

McChesney Martin Jr. as the new chairman of the Federal Reserve System.

A second scenario, William McChesney Martin Jr. was a defender of the Federal

Reserve. In December 1968, President-elect Richard Nixon attempted to remove William

McChesney Martin Jr. as chairman of the Federal Reserve System and replace him with Arthur

F. Burns. While he was putting together his Cabinet, Mr. Nixon invited William McChesney

Martin Jr. to meet with him in New York City. Upon returning from the meeting, William

McChesney Martin Jr. reported to the board, Mr. Nixon invited him to accept the position of

secretary of the Treasury in his new government. He said he had great confidence in William

McChesney Martin Jr. ability to serve as the chief fiscal officer of the United States. He also said

that he wanted to appoint Arthur F. Burns to be head of the Federal Reserve System. William

McChesney Martin Jr. 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. William McChesney Martin Jr. said Mr. Nixon

expressed disappointment at his decision not to accept the Treasury appointment. But William

McChesney Martin Jr. 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.


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Instead, he said he would bring Arthur F. Burns into the White House as counselor and then

appoint him to be chairman of the Federal Reserve when William McChesney Martin Jr. term

ended.

In October 1969, Mr. Nixon announced that Arthur F. Burns would become chairman of

the Federal Reserve System in February 1970. Although William McChesney Martin Jr. did

not mention it, he was convinced that Mr. Nixon's had a desire to make Arthur F. Burns

chairman of the Federal Reserve System which can be traced back to his defeat in the 1960

presidential election. Mr. Nixon has written that, in March of that year, Arthur F. 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. Arthur F. Burns advised Mr. Nixon

to urge President Dwight D. Eisenhower to relax fiscal policy promptly and to press William

McChesney Martin Jr. to ease the Federal Reserve's restrictive monetary policy in order to

forestall a recession. Mr. Nixon said he urged President Eisenhower to follow Arthur F. Burns'

advice, but the president refused.

As a result, according to Mr. Nixon, the recession occurred, and he lost the election. Mr.

Nixon favored Dr. Arthur F. Burns as Federal Reserve chairman versus William McChesney

Martin Jr. as head of the nation's monetary authority. By deciding to serve out the balance of his

Federal Reserve term, William McChesney Martin Jr. prevented the Federal Reserve System

from being politicized by a president for whom that was a major goal. 5

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Major Federal Reserve policies during William McChesney Martin Jr. term

(1) Bills Only. The development of open market operations as the main instrument of

monetary policy meant that the Fed had to be concerned with the performance of the government

securities market. Standards had been set for securities dealers during World War II but the

stability and liquidity of the market were unthreatened under the peg. One of William

McChesney Martin Jr. first actions at the Fed was to chair an Ad Hoc Subcommittee to study

and report on the operations and functioning of the Open Market Committee in relation to the

Government securities market under the new free-market regime of fluctuating yields. The

subcommittees objective was effective open market operations, which requires an efficiently

functioning Government securities market characterized by depth, breadth, and resiliency. This

was similar to the goals of the New York Stock Exchange, which regularly publishes indicators

of market performance consisting of price continuity, market depth, and quotation spreads.

William McChesney Martin Jr. objectives were to achieve flexibility in the

determination of bank reserves without interfering with efficient transfers of saving to

investment. When intervention by the Federal Open Market Committee is necessary to carry out

the Systems monetary policies, the market is less likely to be disturbed if the intervention takes

the form of purchases or sales of very short-term Government securities. The subcommittees

report pointed out that bills only was in the best central banking traditions; it was received with

hostility by economists for whom monetary policy meant the readiness to force sudden and

substantial changes in interest rates, especially long-term rates.

(2) Operation Twist.The bills only policy was terminated in 1961 under pressure from

President Kennedys New Frontier program, which demanded no restrictions on policy

instruments. The last nine years of William McChesney Martin Jr. term was a battle with


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inflationary administrations. Kennedys advisers were inclined toward fiscal policy but came up

with a challenging program for the Fed that aimed at the triple objectives of growth, balance of

payments surplus, and price stability by twisting the yield curve. The Fed would stimulate long-

term investment by buying long-term securities. At the same time, it would help the balance of

payments by attracting short-term investments through the higher short-term yields that would

result from sales of short-term securities. The program would not be inflationary because the

added reserves from purchases of long-terms would be offset by the sales of short-terms.

The administration persuaded William McChesney Martin Jr. to nudge short-term rates

upward while keeping long-term rates low. Operation Nudge turned into Operation Twist, which

would involve aggressive actions to reduce long rates.

Several members of the FOMC were opposed to the end ofbills only as a step back

toward political interference in monetary policy and a pegged bond market. Kennedys advisers

initially opposed the Fed Chairmans reappointment in 1963, but backed away from that position

when they discovered the level of support for William McChesney Martin Jr. in the business

community, at home, and abroad.

Average annual inflation in William McChesney Martin Jr. first decade as the Federal

Chairman was 2.2 percent compared with 7.1 percent and 2.5 percent in the 1970s and 1990s.

The first period was the least volatile, with a 0.87 percent standard deviation of inflation

compared with 1.60 percent and 0.93 percent in the later periods.


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Arthur F. Burns - Chairman, Federal Reserve Board(date of term February 1, 1970January 31, 1978)

Arthur Frank BurnsApril 27, 1904 Born in Stanislau, Austria1914 Family immigrated to Bayonne, NJ1925 Received A.B. and A.M. degrees in Economics, Columbia University1926-1927 Lecturer in Economics at Columbia

1927-1944 Taught Economics at Rutgers University, became Full Professor in 19431930-1968 Research Associate, National Bureau of Economics. Served as Director of Research, 1945-1953;President, 1957-1967; and Chairman, 1967-1968.1934 Received Ph.D., Economics, Rutgers1941-1942 Visiting Professor, Columbia1944-1969 Professor of Economics, Columbia. Named John Bates Clark Professor, 1959.1953-1956 Eisenhower Administration Chairman of Council of Economic Advisors and Chairman, Advisory Boardon Economic Growth and Stability1956 Chairman, Cabinet Committee on Small Business1957-1958 Member, U.S. Advisory Council on Social Security Financing1961-1966 Member, President's Advisory Committee on Labor-Management Policy.1969-1970 Counsellor to the President1970-1978 Chairman, Federal Reserve Board1978-1981 Scholar in Residence, American Enterprise Institute

1981-1985 Ambassador to Federal Republic of GermanyJune 26, 1987 Died

Arthur Frank Burns (19041987) was an American economist who served as chairman of

the Federal Reserve from Feb. 1, 1970, to Jan. 31, 1978. He was born in the city of Stanislau,

Austria and immigrated to the United States in 1914. Burns earned his PhD from Columbia

University in 1934. His career alternated between academia and government.

He taught at Columbia and studied business cycles while president of the National Bureau of

Economic Research and served as chairman of the U.S. Council of Economic Advisors from

1953 to 1956 under Dwight D. Eisenhower's presidency. He served as chairman of the Federal

Reserve from 1970 to 1978 and as ambassador to West Germany from 1981 to 1985.


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As chairman of the Federal Reserve, Arthur F. Burns presided over the economy when the

inflation rate was increasing. The consumer price index also rose over 72 percent; negative

economic events such as multiple oil shocks and heavy government deficits arising from the

Vietnam War and Great Society government programs.

Born in Stanislau, Austria, Arthur Burns immigrated with his Austro-Hungarian Jewish

parents to New Jersey. He grew up in Bayonne, where he showed an interest in debates and

languages. He attended Columbia University on a scholarship, and worked as a painter, sailor,

writer, and clerk. He also had the opportunity to publish articles in New York Herald Tribune.

Arthur F. Burns studied under Wesley Clair Mitchell, one of the nation's leading

economists who pioneered in the development of statistics. Wesley Clair Mitchell had organized

the National Bureau of Economic Research at Columbia and, after receiving his Ph.D. in

economics, Arthur F. Burns joined him there. His first publication, Production Trends in the

United States Since 1870, was released by the National Bureau in 1934.

During the 1930s economic debate in America centered on the concepts of John Maynard

Keynes, who supported a strong governmental role was required in order to economy.

During his term the United States was in a deep depression, this meant large-scale government

spending programs sponsored by President Franklin D. Roosevelt's called the New Deal.

While accepting some of Keynes' ideas, Arthur F. Burns believed the American Keynesians were

far too simplistic in their approaches. Arthur F. Burns believed economic action must be

preceded by gatherings facts and data rather than being based upon some abstract idea. Each

industry has its own cycle and when several head downward at the same time the economy will

have a recession or depression. What is needed at that time is some intervention on a highly

selective basis.


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In the late 1940s, Arthur F. Burns he determined that the maintenance of employment

was a prime goal of government, but that inflation was another serious problem which had to be

addressed. This would be accomplished by "leaning" against the economy whenever one or the

other threatened. Gentle stimulus pressures would be applied when recession threatened, and

restrictive ones when inflation seemed about to rise or accelerate. With this type of perspective

on the economy aligned Arthur F. Burns with moderate Republicans who were supporting

General Dwight D. Eisenhower for the presidency.

When Eisenhower became president in 1953 he selected Arthur F. Burns to head the

Council of Economic Advisors. A recession developed, and President Eisenhower was willing to

take steps on a major economic recovery program. Arthur F. Burns urged President Eisenhower

to restrain due to the fact that economic indicators seemed to point to a milder correction than

most other economists expected. Arthur F. Burns observations were correct and without major

intervention the economy turned upward in 1954.

Arthur F. Burns resigned from the administration after the 1956 election and returned to

the National Bureau of Economic Research and Columbia. He worked as an advisor to President

Eisenhower and later took on temporary assignments from John F. Kennedy and Lyndon B.

Johnson. At the time he also kept in close contact with Richard Nixon, formerly Eisenhower's

vice president and then a New York attorney.

Richard M. Nixon won the 1968 Presidential election and asked Arthur F. Burns to take

on a position of counselor to the president; this position would carry cabinet rank and give him

wide responsibilities in domestic affairs. At the time the nation was in the midst of a crisis of

confidence due to anti-Vietnam War sentiment, high inflation, and the largest budget deficit of

the post-World War II period. Arthur F. Burns recommended a slowdown in the growth of the


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money supply through Federal Reserve Board policies and cutbacks in spending, which he hoped

would curtail the inflation rate without causing a recession. President Nixon accepted the

outlines of the program and it appeared to be working. Then the Federal Reserve money supply

was constrained which caused interest rates to rise and leading to an economic downturn while

inflation was still an issue. The term stagflation, inflation accompanied by stagnation in the rate

of growth of output and an increase in unemployment in the economy; simultaneous increases in

the inflation rate and the unemployment rate. With the coming of stagflation Arthur F. Burns

position in the Nixon White House declined, and his views started to change. Now he supported

wage and price guidelines as a means of controlling inflation.

In 1969 President Nixon appointed Arthur F. Burns to become chairman of the Federal

Reserve. Arthur F. Burns expanded the currency supply, which gave the economy a boost.

When the Penn Central Railroad collapsed in 1970, Arthur F. Burns proclaimed that the Federal

Reserve would provide sufficient funds to prevent a panic, and due to the way he dealt with the

crisis, his demeanor increased his reputation and gathered supporters.

Arthur F. Burns continued to support wage and price guidelines and was credited with

having helped President Nixon impose them in 1971. During 1971 he expanded the money

supply, so that by Election Day 1972, the economy was growing while prices were being

contained, making the economy appear quite healthy and helping Nixon win a second term.

Burns served as chairman of the Federal Reserve until the conclusion of his term in 1978,

at which time he was not reappointed by Democratic President Jimmy Carter. This caused the

dollar to fall and impacted the new administration. Arthur F. Burns left government to take a

position at the American Enterprise Institute where he lectured and wrote,Reflections of an

Economic Policy Maker(1978).


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In 1981 President Ronald Reagan named Arthur F. Burns ambassador to the Federal

Republic of Germany. He took the position during a time of strong anti-American sentiment in

Europe, because of U.S. deployment of cruise and Pershing missiles. Arthur F. Burns was able

to ease the tensions within NATO and was able to arrive at an agreement with the West German

foreign minister. Arthur F. Burns served as Ambassador to Germany for four years, then

returned to the American Economic Institute to pursue writing and teaching.

Arthur Burns died in Baltimore, Maryland on June 26, 1987. His economic policies

influenced United States and global economies. He was considered a very inspirational man

who mentored Milton Friedman (Milton Friedman was an American economist, statistician, and

author who taught at the University of Chicago for more than three decades).

Arthur F. Burns did not consider monetary policy to be the driving force behind inflation.

He believed that inflation began from an inflationary psychology produced by a lack of

discipline in government fiscal policy and from private monopoly power, especially of labor

unions. It followed that if government would intervene directly in private markets to restrain

price increases, the Federal Reserve could pursue a simulative monetary policy without

increasing the severity of inflation. From the beginning of his tenure as Federal Chairman,

Arthur F. Burns lobbied for government intervention in private wage and price setting. When

such measures were enacted into wage and price controls on August 15, 1971, he became willing

to continue the expansionary monetary policy that had begun early in 1971. The fundamental

divide in monetary economics is whether the price level is a monetary or a nonmonetary

phenomenon. If the price level is a monetary phenomenon, it varies to endow the nominal

quantity of money with the real purchasing power desired by the public. The central bank is the

cause of inflation. If the price level is a nonmonetary or real phenomenon, its behavior possesses


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multiple, changing causes. Direct intervention by government in the price setting practices of the

public can lower inflation. Such intervention permits a more expansionary monetary policy

designed to lower unemployment and stimulate real growth. Arthur F. Burns conducted

monetary policy on the assumption that the price level is a nonmonetary phenomenon.

The Congress and the administration, public opinion, and most of the economics profession

supported that policy. The result was inflation. That inflation eventually led to the present

consensus that the control of inflation is the paramount responsibility of the central bank.


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Paul A. Volcker - Chairman, Federal Reserve Board(date of term August 6, 1979August 11, 1987)\

Paul A. Volcker was born to Alma Louise and Paul Adolph Volcker Sr. on September 5th,

1927 in Cape May, NJ. Paul Volcker Jr. graduated Teaneck High School (Treaser), and earned

his BA at Princeton University in 1949. Later in 1951, Volcker graduated with a M.A. in

political economy and government from the Harvard University Graduate School of Public

Administration. From 1951 to 1952 he attended the London School of Economics (ncafp.org). In

addition, Volcker earned honorary degrees from multiple institutions such as: Hamilton College,

University of Notre Dame, Princeton University, Dartmouth College, New York University,

University of Delaware, Farleigh Dickson University, Bryant College, Adelphi University,

Lamar University, Bates College, Fairfield University, Northwestern University, Syracuse

University, Queens University at Kingston in Canada, and Amherst College (enotes.com).

While still in school, Volcker worked at the Federal Reserve Bank of New York which in

1952 led to a full time staff position as an economist. In 1957, Volcker left the Federal Reserve

Bank of New York and went to Chase Manhattan Bank to become a financial economist. Later in

1962, Volcker became a director of financial analysis for the U.S. Treasury Department. In 1963,

he became a deputy under secretary for monetary affairs. In 1965 Volcker left the U.S. Treasury

Department and went back to Chase Manhattan Bank to become a vice-president and director of


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planning. From 1969-1974 he was appointed under the U.S. Treasury for monetary affairs. In

1975 Volcker became a senior fellow at Princeton University. In that same year, Volcker became

president of the Federal Reserve Bank of New York one of the most important banks in the

Federal Reserve System (encyclopedia.com). Known as Tall Paul, the 6-foot-7, Mr. Volcker

was named chairman of the Board of Governors of the Federal Reserve System by President

Carters and was sworn in on August 6 th, 1979 and served until August 11, 1987 (ny.frb.org).

When Volcker took over as chairman of the Federal Reserve Board, the U.S. economy

was less than perfect. Inflation was running over 13 percent a year and the value of the dollar

was falling. Volcker was the answer to calming many fears, not only for President Carter but also

in financial markets where concern had risen over renewed inflation. In a Time magazine

interview, Volcker recalled: "The [Carter] Administration had got deeply concerned. They said

to me they were scared of this exploding inflation and were willing to stand still for stronger

measures than would ordinarily be the case. And that is a great advantage. If you can walk into a

situation that is felt to be so severely out of kilter, you have greater freedom of action."

Paul Volcker is credited for ending a period of high and rising inflation rates as well as

restoring substantial growth rates. In 1979, With Volckers leadership in partnership with the

Federal Open Market Committee, they sought out to oppose past high money supply growth rate

policies to regain control over the double digit inflation by implementing more strict monetary

supply growth rates. The result of the attempt to gain control over inflation was disappointing as

the prime rate in December of 1980, peaked at 21.5 percent. With interest rates so high, the

economy fell in to the worse recession in 40 years. By 1982, unemployment reached 10.7

percent. Consequently, this failed attempt resulted in criticism towards Volcker. This also put


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many small businesses out of operation. In 1982 the crisis led FOMC to drop the strict monetary

policy. The crisis also brought concern to Congress and questioned whether the independence

of the Fed should be rescinded. the attempt to gain control over inflation was disappointing as

the prime rate in December of 1980, peaked at 21.5 percent. With interest rates so high, the

economy fell in to the worse recession in 40 years. By 1982, unemployment reached 10.7

percent. (encyclopedia.com).

In the 1980s, due to deregulation, the financial industry forewent an era where the

control over the money supply was significantly obscured. The results were large-scale shifts in

deposits between different accounts and consequently ended in unpredictable growth rates of

money. Volcker in turn avoided taking strict and ideological positions in regard to monetary

policy. Additionally, Volcker inexorably preserved the Feds oversight powers in banking

regulation where the proposals of streamline regulatoryprocesses were a threat. Volckers

ideology was that if the banks used the Fed as the lender of last resort, those financially

troubled banks needed to be monitored and regulated daily along with the U.S. comptroller of the

currency.

According to Encylopedia.com, Lawrence Malkin from Time (January 23, 1989) noted,

"For eight years, as chairman of the Federal Reserve Board, Paul Volcker was perhaps the

second most powerful man in WashingtonThere were no doubt times, as he squeezed the

money supply and cost people jobs in his battle against double-digit inflation, when he was also

one of the most unpopular." It was notable that Volckers moves had much impact on the

nations economy to a point where Volckers moves were watched worldwide.


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In terms of personal life post the Fed, according to encyclopedia.com, Lawrence Makin

from Time (January 23, 1989), noted, He had profound impact on a $4.3 trillion economy but

lived in a tiny $500-a-month apartment furnished with castoffs. He ran his agency in a notably

serene and straightforward style, and still his mystique grew so potent that his every move sent

global financial markets into spasmodic guessing games about what he was thinking." After he

had tamed the inflation rate and turned the economy around in the mid-1980s, he became a sort

of folk hero.

Volcker took a job after leaving government in 1987 as unpaid chairman of the National

Commission on the Public Service, a private group working on behalf of the nation's civil

servants. He soon became chairman of the New York investment banking firm James D.

Wolfensohn, earning a large salary for the first time in his life, and continued to be a respected

commentator on the nation's financial affairs in the 1990s (encyclopedia.com).

In 2009, under President Obama, Volcker led a new White House committeethe

Economic Recovery Advisory Board. Volcker met periodically with President Obama whom he

had a luke warm relationship with. It was no secret that Volckers at times was frustrated being

an outside advisor to the President. In 2011, Volcker was replaced by Jeffrey R. Immelt, the

CEO of General Electric, the corporate giant (nytimes.com).


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Alan Greenspan - Chairman, Federal Reserve Board(date of term August 11, 1987January 31, 2006)

Alan Greenspan was born on March 6th, 1926 in the Washington Heights area of New

York City, New York. Alan Greenspan was the only child of Herbert Greenspan and Rose

Goldsmith who soon divorced (Leonhardt). Astoundingly, at the early age of five, Greenspan

demonstrated his talent in numbers by reciting baseball batting averages and performed

mathematical calculations in his head (Britannica.com). Greenspan graduated from George

Washington High school in Washington Heights in 1943. At the age of 18, Greenspan was

rejected by a draft board to serve in the military due to a spot in his lung which looked like

tuberculosis. Without a plan for his future, Greenspan turned to music and later attended Julliard

School of music. Greenspan was good with the saxophone and clarinet and played in a band

called Henry Jerome. Greenspan was not known as a musical star. Rather, he was known more of

a sideline musician (Leonhardt).

With minor success in music, Greenspan attended New York University in 1948 where

he earned his Bachelor of Arts and then his Masters of Arts in economics. Greenspan worked on

his doctoral degree at Columbia University under the future Federal Reserve Board chairman

Arthur F. Burns. From 1948 to 1953, Greenspan worked at the National Industrial Conference

Board as an economic analyst. Also, by 1953, Greenspan dropped out of Columbia University to


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form the Townsend-Greenspan & Co., Inc. The firm was an economic consulting firm in New

York. William Townsend, Greenspans partner, died in 1958, making Greenspan the president

and owner of Townsend-Greenspan, Inc.

Between 1974 and 1977 Greenspan was Chairman of the Council of Economic Advisers

under President Gerald Ford. As chairman of the Council of Economic Advisers, Greenspan

promoted policies that caused the rate of inflation to drop from 11 to 6.5 percent. In 1977

Greenspan returned to his firm in New York and became an adjunct professor at New York

University, where he was awarded a Ph.D. in economics (Britannica.com).

Alan Greenspan was appointed by President Ronald Reagan as chairman of the Federal

Reserve on August 11, 1987 to fill Paul Volckers term. During Greenspans term, he was known

for steering the economy between the hazards of inflation and recession utilizing monetary

policy. On October 19th, 1987, shortly after taking command of the Federal Reserve, the Dow

Jones Industrial Average fell to a record of 508 points. Greenspan acted quickly to ensure

market liquidity. Also in 1997 when Asian countries underwent financial crisis and economic

downturns, Greenspan lowered U.S. interest rates to help soften the economy. In June of 1999 as

the Asian economies made progress, Greenspan initiated a series of interest rate hikes. He also

drew the publics attention to what he called unsustainable rates of growth in the U.S.

economy and overextended stock prices toward the end of the 20th century. Greenspan has

been granted credit for the longest official economic expansion in U.S. history within March of

1991 and February 2000 (Britannica.com).

Greenspans avid economic decision making abilities became admired internationally.

His influence on global finance was considered so extensive that in September 1999 The Sunday

Times of London named him one of the three most powerful people in the British Isles.


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was Chairman of the Presidents Council of Economic Advisors from mid 2005 and early 2006.

From 1987 thru 1979 Bernanke was a visiting scholar at the Federal Reserve Banks of

Philadelphia, Boston, and New York. He was also in the Academic Advisory Panel at the Federal

Reserve Bank of New York from 1990 to 2002 (Ben White).

Dr. Bernanke has published many articles on a wide variety of economic issues,

including monetary policy and macroeconomics, and he is the author of several scholarly books

and two textbooks. He has held a Guggenheim Fellowship and a Sloan Fellowship, and he is a

Fellow of the Econometric Society and of the American Academy of Arts and Sciences. Dr.

Bernanke served as the Director of the Monetary Economics Program of the National Bureau of

Economic Research (NBER) and as a member of the NBER's Business Cycle Dating Committee.

In July 2001, he was appointed Editor of the American Economic Review. Dr. Bernanke's work

with civic and professional groups includes having served two terms as a member of the

Montgomery Township (N.J.) Board of Education.

In February of 2004, while being a member of the Board of Governors of the Federal Reserve

System, Bernanke delivered a speech where he hypothesized about a new era which he called

the Great Moderation. He described the era as having nonvolatile business cycles due to the

impact of macroeconomic policy.

The following year, in June of 2005, Bernanke was appointed by George W. Bush as

Chairman of the Presidents Council of Economic Advisers. Bernankes appointment to

Chairman was widely thought out to be a test to determine if Bernanke was able to succeed

Greenspan as chairman of the Federal Reserve. On February of 2006, President Bush appointed

Ben Bernanke as the 14th Chairman of the Federal Reserve (federalreserve.gov) .


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Due to the Greenspans ability to generalize policies when presenting to the media,

Bernanke had trouble communicating more clear statements regarding Fed policies and

consequently had to take a step back since his statements tended to affect the stock market.

CNBCs Maria Bartiromo disclosed comments from a private conversation between her and

Bernanke and reported that he said investors misrepresented his comments saw him as dovish

on inflation (Lowenstein).

Ben Bernanke was nominated for a second term on August 25, 2009 by President Obama

who supported Bernanke due to his background, temperament, courage and creativity that helped

prevent another depression in 2008. Bernanke was confirmed by the senate on January 28th, 2010

by a 70/30 vote, historically the lowest ratio in history (Robb).

It is probably not easy to take over a hemorrhaging economy and impress the media with

decisions based on desperate measures. Bernanke was sharply criticized for the financial crisis of

the late 2000s, for the government bail outs and most recently due to Operation Twists

extension to further stimulate the slow economic recovery. Critics such as Greg Robb of

MarketWatch confronted Bernanke in an interview as he commented, You havent had a very

good time in all the Republican presidential [2012] debatesreferring to the results of critics in

the media. Bernanke smilingly replied, Im not going to get involved in political rhetoric; I have

a job to do. Regardless of what the media decides to publicize, the Fed had reported earlier in

the year that inflation would remain between 1.4 and 1.8 percent and 2 percent through 2014.

Such low inflation results prove that Bernankes allegations are invalid (Milbank).

Despite the already aggressive media criticism, other politicians have attacked

Bernankes attempts to stimulate the economysome to earn personal advantage over voters


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such as Texas Governor Rick Perry. Perry may have been the worse of critics calling Bernankes

behavior almost treasonous (Milbank). Perry argued that Bernanke had injected excessive

monetary stimulus to the economy and if he continued to do so, that Bernanke would not be

welcome to the State of Texas. Perry appealed to emotion when he stated its a travesty that

young people in America are seeing their dollar devaluated due to Bernankes economic

stimulus. The criticism didnt stop at Rick Perrys complaints. Newt Gingrich said that

Bernanke is, the most inflationary, dangerous and power-centered chairman of the Fed in the

history of the Fed. Ron Paul joined in accusing Bernanke of inflating twice as fast as

Greenspan (Milbank).

Although there hasnt been much rebuttal from Bernanke to his critics, he responded

earlier this year in 2012. The low level of inflation is validationThere are some who were

very concerned that our balance-sheet policies and the like would lead to high inflation. Theres

certainly no sign of that yet (Milbank). Since Bernanke was appointed, the economy has seen

positive changes in consumption, job growth, and industrial production. Forecasts from early

2012 included a growing rate of 2.8 to 3.2 percent for 2013 and unemployment dropping to

between 6.7 and 7.6 percent by 2014 (Milbank).

Most recently in June of 2012 Bernanke testified before U.S. Congress where he outlined

the latest economic results. Bernanke started by reporting that the real domestic product (GDP)

rose at an annual rate of 2 percent in the first quarter, 3 percent in the fourth quarter of 2011.

Further he noted the increases in labor and decrease in unemployment. Bernanke said that

Economic growth appears poised to continue at a moderate pace over the coming quarters.

Further he added that the housing market has influenced a drag in the economy despite the


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Documents

Fed Res Chairman's Impact on the Economy