The Role of a Central Bank and of a Central Banker: Cutting-Edge Economics from 188 Years Ago: Wednesday Focus

On the eve of Janet Yellen’s confirmation hearing for the post of Federal Reserve Chair, a correspondent who, I fear, does not wish me well directs me to George F. Will’s Sunday Washington Post column: The Enigma of Janet Yellen as Fed Chair. There is no “enigma” here. It is now nineteen years since her first senior policymaking job at the Federal Reserve. Her views on monetary policy, financial regulation, and the role of the Federal Reserve are well-known. And, as is also well-known, with Janet Yellen you get what you order.

The middle of Wills’s op-ed contains five paragraphs about how Fed Chair Arthur Burns and Will-supported President Richard Nixon behaved very badly indeed when in office, warping monetary policy away from its proper course in the interest of boosting Nixon’s already-high reelection prospects. It contains a hint that there is something wrong

about what [Janet Yellen] considers appropriate–and inappropriate–relations between a Fed chair and government’s political officers.

And then having dropped that hint, Will pulls back.

He writes:

There is no reason to doubt Yellen’s intellectual integrity…

I was on a panel the month before last with Michael Boskin, Chair of George W. Bush’s Council of Economic Advisors and a perennial (and superior) member of short-lists for Republican Secretaries of the Treasury. Michael said, roughly, apropos of this Federal Reserve nomination:

Let me say, since we are mostly economists in this room, that I found the bickering and back-stabbing and estrogen-versus-testosterone debate in the media, and the reduction of this Federal Reserve nomination to the economic equivalent of a Supreme Court nomination, really hard for me and for everybody being considered. It is a disservice to the president. It is a disservice to the people who will be considered. It is a disservice to the institution.

Let me just start with that.

I believe the two leading candidates [Janet Yellen and Lawrence Summers], whom I know well personally, both have the intelligence and the experience and the knowledge to serve effectively, and I guarantee that. I think neither of them would be inclined to do something that they thought was not in the best interest of the country should they be confirmed…

Let me endorse every word of what Mike Boskin said there. And let me apologize to Mike if my memory and my notes have gotten any of what he said wrong.

Will then goes on to write that Yellen will be dangerous innovative as far as Federal Reserve policymaking is concerned:

The Fed seems to be evolving into a central economic planner with a roving commission to right social wrongs such as unemployment…

The Federal Reserve is not “evolving”. It is, rather, explicitly charged by law to do what Will fears. Viz:

§ 102. Section 2 of the Employment Act of 1946 is amended to read as follows:

§ 2. (a) The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means, consistent with its needs and obligations and other essential national policies, and with the assistance and cooperation of both small and larger businesses, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions which promote useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and promote full employment and production, increased real income, balanced growth, a balanced Federal budget, adequate productivity growth, proper attention to national priorities, achievement of an improved trade balance through increased exports and improvement in the international competitiveness of agriculture, business, and industry, and reasonable price stability as provided in § 5 (b) of this Act.

(b) The Congress further declares and establishes as a national goal the fulfillment of the right to full opportunities for useful paid employment at fair rates of compensation of all individuals able, willing, and seeking to work.

(c) The Congress further declares that inflation is a major national problem requiring improved government policies relating to food, energy, improved and coordinated fiscal and monetary management, the reform of outmoded rules and regulations of the Federal Government, the correction of structural defects in the economy that prevent or seriously impede competition in private markets, and other measures to reduce the rate of inflation…

Backing up, there is a very important point to be made here. The point is that it was in the now-distant past that central banks took on a roving commission to stem depressions. E.M. Forster’s Great-Aunt Marianne describes the crucial meeting on a Sunday morning one December at the Bank of England’s London headquarters on Threadneedle Street:

John Smith began by saying that the failure of [the Pole, Thornton Banking] House would occasion so much ruin that he should really regard it as a national misfortune…. [H]e then turned to Henry [Thornton] and said, ‘I think you give your word the House is solvent?’ Henry said he could…. ‘Well then’, said the Governor and the Deputy Governor of the Bank, ‘you shall have £400,000 by eight tomorrow morning, which will I think float you’. Henry… was off again in the dark on Monday morning to the Bank of England, where he found the Governor and Deputy Governor, who for the sake of secrecy had no clerks there, and they began counting out the Bills for him. ‘I hope this won’t overset you my young man’, said one of them, ‘to see the Governor and Deputy Governor of the Bank [of England] acting as your two clerks’…

That was 188 years ago, during the British Canal-Bust Panic of 1825.

Worries about central banks’ “roving commission” to deal with unemployment in a depressed economy are not of our age. They are, rather, of another age. They are worries of an age that also worried about how it might be unwise to move forward too rapidly on working-class suffrage, or women’s suffrage, or on the ending of slavery.

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