A History of the Federal Reserve, Volume 2 (66 page)

Mitchell’s appointment was a modest success for the Council of Economic Advisers. They did not trust Martin or the Federal Reserve and saw Mitchell’s appointment as a way of influencing monetary policy.
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Before Mitchell joined the Board in August, Heller sent him copies of the Council’s memos on monetary policy, urging an expansionary policy. To the Council members this meant “keeping net free reserves plentiful enough to keep the FF [federal funds] rate below the discount rate . . . This criterion should take precedence over a numerical target for free reserves” (letter, Heller to Mitchell, Heller papers, Box 19, July 18, 1961, 1). Heller urged open market purchases of long-term bonds and a reduction in the discount rate. He closed the letter: “We look forward to talking these matters over with you in the coming months and years” (ibid., 2).
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The Council was less successful when the next vacancy opened on the Board of Governors. George Mitchell told them in the spring of 1963 that Governor George King, Jr., was ill and would leave the Board after only 4.5 years. When it happened in September, “Dillon and Martin went directly to the president to tell him about it before we . . . knew . . . that it hadhappened” (Oral History Interview, 1964, Heller, August 2, 354). Treasury’s candidate was Dewey Daane, recently promoted to deputy Treasury undersecretary. President Eisenhower had appointed him to the Treasury, but he remained after the administration changed.
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Daane had been an economist at the Richmond and Minneapolis Federal Reserve banks be
fore joining the Treasury.
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Heller and Ackley did not consider him a likely or reliable ally.

117. The Council proposed to Kennedy that Mitchell could be chairman, but President Kennedy did not mention the possibility to Mitchell when he interviewed him (Oral History Interview, 1964, August 2, 352). The Treasury’s candidate was Joseph Barr, who became Treasury Secretary at the very end of the Johnson administration. The Council and Paul Samuelson thought that Barr would follow conservative Treasury policies (ibid., 349).

118. The letter describes relations with Martin as “cordial and friendly, and at the moment there is little difference between us on current policy” (letter, Heller to Mitchell, Heller papers, Box 19, July 18, 1961, 2).

119. The Council’s candidate was Seymour Harris, a Harvard professor and active liberal Democrat who had been an early Kennedy supporter. “Now there was a bitter battle. . . . [T]here was a great fight for Daane and a great fight against Harris” (Oral History Interview, 1964, Heller, August 2, 357). If Martin had been asked, he would have favored Daane. In the past, the Federal Reserve did not let Harris into their building because he had printed parts of confidential memos when he wrote his book on the Federal Reserve in the
early 1930s (ibid., 357).

Dillon told them he was not against Harvard Professor Seymour Harris. He told the president that appointing Harris to replace King would “be interpreted as a loosening [of policy] and . . . undermining of the soundness of the Federal Reserve Board” (ibid., 359). But if Harris replaced Robertson when his term expired in 1964, that would be “an exchange of one liberal for another” (ibid., 359).

Heller and John Kenneth Galbraith tried to convince the president to appoint Harris to King’s seat, then reappoint Robertson in 1964. They argued that by reappointing Martin and Balderston as chairman and vice chairman, Kennedy had satisfied the conservatives and bankers. But Daane got the appointment, and Lyndon Johnson was president in 1964, when Robertson’s term ended. He reappointed Robertson.
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Harris’s last chance came in 1966, when Balderston’s term as a member expired. Johnson chose Andrew Brimmer, the first African-American to serve on the Board and the FOMC.
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Leading members of the staff left in 1962. The account manager, Robert Rouse, reached retirement age in the fall of 1962 but asked to be relieved in the spring. He had joined the System in 1939. The FOMC’s economist, Woodlief Thomas, resigned in April to accept an appointment to a World
Bank mission to Chile. He had served at the Board in the 1920s. Guy Noyes replaced him as the FOMC economist, and Daniel Brill, Albert Koch, and Robert Holland became FOMC associate economists. Later Brill became head of domestic research and Holland became secretary of the FOMC and still later a Board member.

120. The struggle over Daane’s appointment suggests that both sides saw him as more conservative than Robertson. Havrilesky and Gildea (1992, 402) suggest that the two were very close together in the proportion of divided votes that they cast for easier policy. However, Daane dissented only 3 times in 132 votes (about 2 percent) whereas Robertson dissented 23 times in 285 votes (8 percent) (ibid., 414). Many of Robertson’s dissents expressed opposition to extensions of the account manager’s discretion.

121. Harris was not a finalist in 1966. President Johnson gave the choice between Robertson over Frederick Deming (Minnesota) to Walter Heller. According to Heller’s statement in the oral history, he recommended both, but Johnson insisted that he choose. He chose Robertson. Johnson said: “All right, call Robertson, . . . tell him the president said, ‘Now I want to be sure that I’m getting a man who, when the president . . . calls the signals, doesn’t run to the opposite goal. Do you think you’d be running for the same goal as the president?’

“So I phoned from Minnesota, I called Robertson, and he thought he could run for the same goal. I called the president back and he announced it that afternoon before he ever told Bill Martin about it” (Oral History Interview, 1964, Walter Heller, August 2, 365–66). Deming later became Treasury undersecretary.

In fact, Heller wrote a memo to President Johnson making the case for Robertson’s appointment. He described Robertson as a highly respected expert on banking. “He has taken a strong position for maintaining monetary ease to facilitate expansion” (Heller papers, Monetary Policy, Box 20, January 15, 1964). Then he added that another appointment like Dewey Daane would swing the Federal Reserve toward tighter money, limiting the success of the tax cut.

122. Brimmer was an economist who had served in the research department of the New York bank, taught at the University of Pennsylvania, and at the time was an Assistant Secretary of Commerce.

The Federal Reserve had not engaged in foreign exchange transactions since the 1930s. To implement its decision to actively purchase and sell currencies and currency swaps (see below), it created the position of Special Manager for Foreign Exchange. Martin used the opportunity to reopen the issue about appointment of the open market account manager that he had raised in the 1952 ad hoc report on FOMC operations and on several later occasions. He now proposed to reverse the extant procedure by letting the FOMC choose the two managers subject to veto by the directors of the New York bank. This was a concession. Originally, he had proposed that the manager would work only for the FOMC.

As expected, Hayes objected that Martin’s proposal would reduce the manager’s responsibility to the New York bank and weaken the directors’ statutory authority to appoint officers. New York argued also that Martin’s proposal would weaken the regional character of the System and reduce New York’s stature.
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Martin responded that the existing arrangement arose because of earlier reliance on an executive committee to carry out transactions. In principle, he claimed, the manager could come from anywhere in the System. Hayes accepted in principle that the manager could come from any bank, but he argued that the operating bank has to create an atmosphere in which the staff sees opportunity for promotion. He saw Martin’s proposal as another in a series of steps to reduce the role of the regional banks and centralize control in Washington. Hayes ended his remarks by offering to have the FOMC and New York share equally in the appointment decision (FOMC Minutes, April 17, 1962, 13).

The FOMC defeated Hayes’s proposal eight to four. All governors voted against, and all presidents expressed some support for Hayes’s proposal, but Bryan (Atlanta) voted with the governors. On the next vote, the FOMC accepted Martin’s proposal eleven to one, with Hayes the only dissent. Once again, the Board succeeded in its continuing effort to centralize control.

Rouse told Martin about his intention to resign in the summer of 1961,
about a year ahead of time. Martin reported to the FOMC in January 1962. Since a new arrangement for choosing managers had not been discussed, he appointed himself, Balderston, and Hayes, not the New York bank, to choose Rouse’s successor. They considered fifteen possible candidates, mainly senior officers of government security dealer banks and non-banks or former officers of the New York bank. The committee recommended, and the FOMC chose, Robert W. Stone, an assistant vice president of the New York bank, as Rouse’s successor. Stone was thirty-nine years old and was the first manager with a Ph.D. degree in economics. He joined the System in 1953 and had worked at the desk since 1958. On his appointment as manager, the New York bank promoted him to vice president, the rank that Rouse held. Rouse became vice president and senior adviser during his remaining months at the bank. All succeeding managers to date have come from the New York bank. New York remains the only place to gain experience in operating the desk, as several members recognized at the time.

123. The chairman of New York’s Board of Directors made a special plea to retain the long-standing arrangement. He responded to the unspoken argument that the New York directors had the informational advantage of learning about policy actions from direct contact with the manager. The directors only ratified operations after the fact. He said that there had never been a known breach of confidentiality.

The FOMC appointed Charles A. Coombs, also from the New York bank, as Special Manager, Foreign Currency, Open Market Account. Coombs had executed the Treasury’s decisions in the year since these operations started. Also, soon afterward, the Board created a Banking Markets Unit to recognize the changing banking structure and the Board’s need for better analysis (Stockwell, 1989, 40).

GOLD AND THE DOLLAR, 1961–62

During the presidential campaign, Senator Kennedy committed his administration, if elected, to maintain the $35 gold price. After the election, he learned that the commitment was a costly constraint. United States’ reserves declined 10 percent in 1960 to less than $20 billion, the lowest level in more than twenty years.
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He believed the administration had to act to honor the commitment.

Kennedy renewed his commitment on February 6, 1961, within three weeks of taking office.
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The speech came in the month that the recession ended. A temporary end to the gold outflow followed for a few months, but
the outflow resumed in July. In the two years 1961–62, the gold stock declined an additional 10 percent to $16 billion, two-thirds of its peak value.

124. Includes reserve position in the International Monetary Fund. Excluding the reserve, the decline was 8.7 percent in 1960.

125. The new administration began planning for the speech before the inauguration. Heller asked Tobin to meet with Roosa, the new Undersecretary for Monetary Affairs. “It soon became clear that as far as he was concerned, this was going to be the most nominal and trivial cooperation” (Oral History Interview, 1964, Tobin, August 2, 169). Paul Samuelson suggested that Roosa may have believed that Tobin held Robert Triffin’s view of the problem. Tobin wanted to discuss gold guarantees of official dollar holdings (ibid., 169). This subject returned in 1962.

The first two years of the 1960s put into place two of the patterns that characterized the rest of the decade. First, the United States introduced a number of expedient measures, but with rare exceptions domestic policy, and later war, dominated international economic policy. Second, European governments, led by France, converted dollars into gold, draining the United States gold stock, threatening and, in 1971, ending the Bretton Woods system.

From the beginning of European convertibility to the end of 1962, the United States’ gold holdings declined by $5.32 billion, and the holdings of the countries shown in Table 3.6 increased $5.47 billion. From 1958 to 1970, the United States’ gold stock fell by 50 percent, to $11.07 billion, and the countries listed in the table acquired $7.88 billion, 69 percent of United States’ sales.
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Countries responded in very different ways. Japan had large trade surpluses, held most of its balances in dollars, and bought only $400 million of gold. Germany, another country with sustained trade surpluses, took less gold than Italy. Repeating the pattern of the late 1920s, France took the most gold absolutely and relative to its initial holding. Under the 1920s gold exchange standard, the French government complained that the United States held its reserves in gold while other countries held a mix of gold, dollars, and British pounds. Under Bretton Woods, they had to again accept this distinction, and again France disliked it and converted its dollar holdings to gold. Unlike the 1920s, France did not deflate. During the 1958–70 period, it inflated and devalued the franc several times, cumulatively by 32 percent. This time it did not force deflation on other countries by sterilizing its gold purchases.

126. The linkage is, of course, less direct than the text suggests. World monetary gold increased 4.5 percent in the same period, and gold stocks fell in countries other than the United States, e.g., Canada and the United Kingdom.