The evolution of the Federal Reserve Chairmanship

Over the past four decades redistributive fiscal policies have led to the increasing politicization of monetary policy. This has impelled a weakening of formal institutional defenses against monetary excesses, namely, the elimination of the gold reserve ratio and the reduction of Federal Reserve Bank and private sector authority within the Federal Reserve System. At the same time power has devolved to the Federal Reserve Board, particularly its Chairman. This has placed the Chairman in the public eye. Symbiotic arrangements between politicians, the Federal Reserve and the financial services sector require that, if politicians are to have more influence over monetary policy, they and the Chairman must pay more lip service to Federal Reserve autonomy. Since central bank autonomy and anti-inflationary resolve are highly correlated, this realignment leads to the prediction that over the past four decades successive Federal Reserve Chairmen will have become greater devotees of central bank autonomy and anti-inflationary militance. From William McChesney Martin, to Arthur Burns, to Paul Volcker, to Alan Greenspan the behavior of Federal Reserve Chairmen appears to support this prediction. Increased anti-inflationary stridency at once conflicts with heightened political pressure and its inflationary consequences. Chronic imbalance between the ideals of central bank autonomy and low inflation, on the one hand, and actual political influence and high inflation, on the other hand, have led Federal Reserve leaders to employ the classical psychological defenses of denial, projection, and obfuscation. This defensiveness and the pathological behaviors it engenders weakens Federal Reserve credibility and leaves it vulnerable to criticism and reform. Scholars and researchers should incorporate these institutional changes into their models. The most fruitful means of accomplishing this would appear to be principal-agent modeling.