The Personalities behind Historic Policies

April 18, 2018

This 18-minute podcast was released April 18, 2018.

Heather Hennerich, Katrina Stierholz, David Wheelock | St. Louis Fed

Arguments over what to do during troubled economic times can be fierce and lasting. Differences over how to handle the Great Inflation of the 1970s, for example, led to a years-long rift between influential economist Milton Friedman and then-Fed chair Arthur Burns. Hear the voices of Friedman and others who have helped shape the U.S. economy. David Wheelock (at right in photo), St. Louis Fed group vice president and deputy director of research, provides historical and policy background. Katrina Stierholz (middle), talks about oral history interviews and other resources available to the public in the online digital library FRASER (Federal Reserve Archival System for Economic Research). Stierholz is a vice president and director of library and research information services at the St. Louis Fed.


Heather Hennerich: Welcome to Timely Topics. I'm Heather Hennerich, your host for this podcast. With me today are the St. Louis Fed’s Katrina Stierholz and David Wheelock. Katrina is director of library and research information services. Welcome.

Katrina Stierholz: Thanks for having me.

Heather Hennerich: And Dave is an economic historian and deputy director of research. Thanks for taking the time to talk with us.

Dave Wheelock: Hi, Heather. Good to be here.

Heather Hennerich: We'll be listening to the voices of a few of the influential people who helped shaped the U.S. economy in the last hundred years or so. Milton Friedman and William McChesney Martin Jr., are two of them, but we'll be talking about several others. But before we get to that, Katrina, could you give us a little background on FRASER, which is where we got these audio clips we’ll be hearing? And what does FRASER stand for?

Katrina Stierholz: So, it stands for Federal Reserve Archival System for Economic Research. We started in 2004, and it really is a digital library, very focused on economic banking and financial history, and even more focused on the Federal Reserve System. So, we have documents, data publications, speeches, all sorts of material.

Heather Hennerich: And, I understand you have another more unusual resource. You have a newsreel?

Katrina Stierholz: We do have one single newsreel, yes.

Heather Hennerich: And what is that of?

Katrina Stierholz: So, the newsreel we have is of William McChesney Martin, Jr.

Dave Wheelock: Yes. William McChesney Martin, Jr., was a very important historical figure for the Federal Reserve. His father was the first president and chief executive officer of the St. Louis Fed.

Dave Wheelock: And so, Bill Martin Jr. worked for a time at the St. Louis Fed. And then, later, in the 1930s, he became president of the New York Stock Exchange, which is the newsreel we'll be hearing from in just a minute. And then, after World War II, Martin was the assistant secretary of the Treasury under President Truman. During the war, the Fed was directly involved in helping the Treasury finance the war effort, and that continued for a time after the war had ended. But by 1951, inflation was heating up, and there was a move in Congress and elsewhere that we needed to re-establish an independent monetary policy that's separate from the Treasury department. And so, Martin was very instrumental in helping negotiate the terms of that accord, if you will, on behalf of the Treasury. And then, partly as a reward for that effort, President Truman appointed him as the new chair of the Federal Reserve Board in 1951, and Martin went on to hold that position for 20 years, eventually becoming the longest serving chair of the Board of Governors of the Federal Reserve System.

Katrina Stierholz: Obviously, William McChesney Martin Jr., is incredibly important, and it turns out that his papers were held at a local institution, the Missouri History Museum. So, this is one of the collections that we have in FRASER.

Heather Hennerich: Including the newsreel. And so, we'll hear a little bit of that newsreel right now.


Narrator: New York Stock Exchange starts an experiment in modernization. Rules are simplified, and a new smaller Board of Governors welcomes the youngest chief the exchange has had: William McChesney Martin Jr.

William McChesney Martin Jr.: The most pressing need today is to start the flow of capital, which turns the wheels of industry. The New York Stock Exchange plays a vital part in this process.

Narrator: Under its new 31-year-old chief, the exchange looks forward to greater simplicity and efficiency. These motion pictures are the first ever made in the stock exchange. They take you to the very floor of the financial center of America.

Heather Hennerich: You can see all the activity on the stock exchange in that newsreel, and details like the hats of traders hung in a row on pegs, which is something you don’t see much anymore.

So, the next person we're going to be hearing from is Darryl Francis. Dave, would you let us know who he was?

Dave Wheelock: Sure. Darryl Francis was president of the Federal Reserve Bank of St. Louis from January of 1966, to February of 1976, so his term overlapped the Board of Governors chairmanship terms of McChesney Martin and Arthur Burns. So, Francis served the last five years of Martin's term and the first five years of Arthur Burns' term. And under Francis's leadership, and that of his research director, a man named Homer Jones, the St. Louis Fed really made its mark and developed a reputation as something of a maverick in the system. That was a period in which the inflation rate in the U.S. was rising pretty rapidly, and there were a number of views about what was causing the "Great Inflation," as it was known at the time. And the Board of Governors, particularly under Arthur Burns, would argue that government budget deficits and excessive wage increases by labor unions, the Arab oil embargos, those were, in their view, the cause of inflation. Darryl Francis, however, was out giving speeches and supported by the research staff here, arguing it was the Fed’s fault that we were allowing the money supply to grow too rapidly and that was what was causing inflation. So, Francis rubbed the board of governors the wrong way by being so outspoken in his criticism of the Fed’s policies. And the clip we're about to hear is interesting because it's Francis's reflections on serving under Martin and Burns, and how different their leadership styles were.

Heather Hennerich: Could you give us a little background on where this particular audio clip came from?

Katrina Stierholz: Sure. There is an economic historian at the Richmond Fed named Robert Hetzel, and he, as part of his research for some books he was writing, he interviewed over 80 economists and recorded them on cassette tapes, as you did at the time. So, he had been collecting them from, I think, since the '80s and '90s, interviewing them about their experience as policymakers in the '70s, '80s, and '90s. So, he's collected them for quite a while and had them in his office and wanted to do something with them, so he asked if we would be interested in putting them on FRASER. And, of course, when you hear about them and you see the names on the list, they're really important and influential policymakers, so we were delighted to be able to put them on. So, we digitized the cassette tapes, and then we also transcribed the audio because it makes it searchable for users.

Heather Hennerich: OK. Let's hear what Darryl Francis had to say.

Francis clip:

Darryl Francis: And Bill Martin was quite a fellow. And I remember when he conducted an FOMC meeting, he listened to what everybody else had to say before he put himself on the line. And my memory is that after he’d heard everybody else, he would draw from that what he thought was a consensus of those who had spoken. And then if he didn’t agree with it, he would tell us so.

Robert Hetzel: So you don’t feel like he came into the meetings having his mind made up basically and that...

Darryl Francis: Well, he may have, but he didn’t try to influence the committee before they started. Burns, on the other hand, wanted the committee to damn well know where he stood before he listened to anybody else.

Robert Hetzel: So Burns would speak first?

Darryl Francis: He let you know where in the hell he stood, yes.

Heather Hennerich: We're going to hear next from somebody else who was also instrumental in that period, Milton Friedman, and he also knew Arthur Burns. Dave, could you tell us a little bit about how he knew Arthur Burns?

Dave Wheelock: Milton Friedman was a very important 20th century monetary economist who had a great deal of influence, both in the academia, as well as in policy circles, particularly the Fed. And he had a long association with Arthur Burns, going back to the 1930s, when Milton Friedman was an undergraduate student at Rutgers University, and Arthur Burns was one of his professors. Interestingly, another one of Friedman's professors was Homer Jones, who, as I mentioned, later became director of research at the St. Louis Fed. And Friedman had fondness for both men and credited both men for inspiring him to go on and to study economics and eventually get a Ph.D. and become such a prominent figure in economics. So, Friedman became very disillusioned with Arthur Burns when Arthur Burns was appointed by President Nixon to be chair of the Federal Reserve Board, and one of his initial acts was to support the use of wage and price controls to control inflation. This was very much against Milton Friedman's training and views. Milton was very much a free-market oriented economist who did not believe in interfering with the power of markets to set prices and to allocate goods and services, and so he was very, very disappointed with Burns and his support of wage and price controls.

Heather Hennerich: And what exactly are wage and price controls? It's not something you hear a lot about these days.

Dave Wheelock: It's not, because they're so discredited as a tool for controlling inflation. They have been used, and were used, for example, in World War II. So, you're prohibiting firms from raising their prices. You're prohibiting workers from getting raises. And so, it was sort of eliminating inflation by fiat rather than by doing the economic policies that are really necessary to control inflation.

Heather Hennerich: And now let’s hear from Milton Friedman. And he’s going to talk about how upset he was with former Fed chair Arthur Burns, and that’s because Arthur Burns supported wage and price controls.  

Friedman clip:

Milton Friedman: What I do remember is that I was enormously upset about it, and that I wrote him a letter, which terminated our relationship for a time. In that letter, I said that I felt quote “betrayed” unquote. At any rate, that was the first time I had been aware that he was in favor of any kind of wage and price controls, in view of his earlier strong opposition to them, as per my earlier quotes. We were not really reconciled until years later when his son, Joe, who was then a student of mine, went out of his way to try to reconcile us. But this was years later, after Reagan was in the White House.

On one point there are no doubts. Arthur disappointed very much the expectations I had when he was appointed chairman of the Federal Reserve Board. I believe it can be said that the period of his chairmanship displayed the worst monetary policy since the early 1930s. The mistakes in the early 1930s led to a major depression. The mistakes in the 1970s led to substantial inflation. The inflation did less harm, by far, than the depression did. However, from the point of view of monetary policy, the errors in the 1970s were as egregious as the errors in the 1930s.

Heather Hennerich: Dave, as I said, this is a very passionate reaction, the rupture of a relationship for somewhere around a decade over policy concerns. Is there an upside to being this fierce in arguing over policy?

Dave Wheelock: Well, there's certainly an upside to having a system in which different views can be heard. So, we have a committee, the Federal Open Market Committee, that determines monetary policy, and then that's comprised of the Board of Governors, plus the Reserve Bank presidents. So, we hear different economic views, such as in the 1970s again, when St. Louis was expressing the importance of controlling the money supply. Eventually, that view took hold and became the dominant view in the system, and eventually, under Paul Volcker, who was appointed chair in 1979, the Fed clamped down on the growth of the money supply, and we got inflation under control. So, it allows for that healthy debate, which ultimately leads to better policymaking.

Heather Hennerich: Paul Volcker did something that McChesney Martin had used a metaphor for.

Katrina Stierholz: So, I think it is probably the most famous metaphor in the Federal Reserve. It is the punch bowl, and it's typically referred to as "taking the punch bowl away as the party gets going," and that's the job of the Federal Reserve. The phrase was first used in 1955 by William McChesney Martin Jr., so, clearly, very influential, and he used it in a speech in New York to the Investment Bankers Association. So, obviously, sort of powerful people he gave this speech to, and I'd really like to go ahead and read the quote. "In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects…Those who have the task of making such policy don't expect you to applaud. The Federal Reserve…is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up." I think, you know, that whole bit about the punch bowl, I think that's great. I find it interesting the phrase right before that, which is, "Those who have the task of making such policy don't expect you to applaud. I understand that this is not something that makes people happy. It's difficult, but it is the job of the Federal Reserve when the economy heats up to take action."

Dave Wheelock: And, Heather, that gets back to the idea of central bank independence and the importance of having an independent central bank that doesn't necessarily adopt a policy that is politically popular at the time but is important for the health of the economy long run.

Heather Hennerich: So, moving on to a little more modern history, FRASER also has some resources there. What is available for a little more recent history, Katrina?

Katrina Stierholz: So, we have speeches all the way up to the present from presidents and governors and chairs of the Federal Reserve, but we also have a really large collection of materials from the financial crisis and around the Great Recession. That's really the most compelling thing that's happened in terms of the economy in the last 10 years.

Heather Hennerich: Very dramatic time.

Katrina Stierholz: Yes. So, we have the materials from the Financial Crisis Inquiry Commission, which they're both audio tapes and interviews and reports and all sorts of documents and studies that were done.

Heather Hennerich: You mentioned the Financial Crisis Inquiry Commission audio interviews. And we've got one here, and it's from former Treasury Secretary Tim Geithner. Here's how he described what caused the Great Recession and the crisis.

Geithner clip:

Timothy Geithner: This was a classic financial panic. A crisis that involved, like, the failure of a couple firms because of just mismanagement are not hard to deal with. But broad-based financial panics, hundred-year floods are very hard to deal with. We learned this lesson, you know, with deep scars in the late 19th century, early 20th century. Put in place a lot of protections around that at that time, around the banking system.

But because we allowed this enormous banking to grow up outside the banking system itself with no tools to contain panics there, there was much more damage than there should have been. I think Keith will remember this. A remarkable thing: The only executive powers of the President of the United States in financial emergencies, coming into this crisis, were to declare a national bank holiday and close markets. Not a credible way to run a country, particularly with the United States of America, the reserve currency of the world.

Heather Hennerich: So, Dave, is what Treasury Secretary Geithner says about banking growing up outside the banking system a common view? What do people who disagree with that say?

Dave Wheelock: Well, it's certainly a widely held view that the financial crisis was started and really got going outside of the traditional regulated commercial banking sector, what some people referred to euphemistically as the "shadow banking system," because it's a less regulated area of the financial system. It's not the only cause of the financial crisis. Some people point to other policy actions by the federal government, even possibly mistakes by the Federal Reserve. So, you know, it's like any major event, the financial crisis or the Great Inflation, or the Great Depression. There are multiple views, and, perhaps not a single explanation for the event itself. And one of the beauties of FRASER, is by having such a comprehensive amount of documents and information you can get the different perspectives that different people had at the time. For example, in the Financial Inquiry Commission, you hear different points of view and different perspectives from others besides Treasury Secretary Geithner at the time.

Heather Hennerich: OK. Well, to see and hear more from FRASER, visit the website at, and if you want to see some of Dave Wheelock's writing on the St. Louis Fed as a maverick, that can be found in our annual report from 2013. Go to, click on the publications tab, and select or search for annual report, and there's lots of other things you can look at while you're there. Thank you very much for taking the time. I appreciate your talking with us.

Economists and experts talk about their research, topics in the news and issues related to the Fed. Views expressed are not necessarily those of the St. Louis Fed or the Federal Reserve System.

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