Easing by Appointment: Part 2

The Story of the Sortid Origins of the Great Inflation

Part One of this series covered the modern Fed’s first brush with political interference, during the presidency of Harry Truman.  In this note we pick up the story in the year 1964, with Lyndon Johnson’s political approach to monetary policy.  This note follows the story through the end of the Nixon Administration to show the increasing political capture of the Fed taking place as the stakes were rising along with inflation.

Origins of the Inflation: Kennedy and Johnson’s Activism

Attempts at politically inspired monetary policy activism were an early hallmark of the Kennedy Administration that continued with renewed vigor as Johnson entered office.  Whenever a new administration enters with different monetary objectives the Fed initiates an anticipatory shift in policy.  During the initial “honeymoon” period any signaling is superfluous.  And so it was with Johnson, who had a very genial year-end call with Fed Chairman Martin in December 1964.  Johnson - a longtime veteran of down-and-dirty politics – already had a sense that his relationship with the Fed would shift and was preparing via the appointment of Secretaries. 

Johnson made clear his views on the Fed’s role outside of Martin’s presence.  Johnson placed a call to fellow Texan Wright Patman –arch enemy of the Fed for more than two decades – to announce the naming of a new Treasury Secretary.  Johnson’s private conversations made clear that he saw “the bankers” as people to be controlled for larger political purposes.