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The politics of money: Presidential power and the Federal Reserve System

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This paper’s subject is the Presidential politics of monetary policy in the United States; the problem addressed is how two Presidents (Johnson and Nixon) sought to use their authority and power to influence that policy. The topic’s significance is that the United States’ central bank, the Federal Reserve System (the ‘Fed’), has nominally complete authority over the setting of short-term interest rates. Yet the US Treasury’s central concern with the pricing of US Treasury securities, every President’s compelling political interest in Fed decisions, and the Fed’s formal accountability to the US Congress, obliges all four institutions to engage with each other about monetary policy on terms that vary with changing political context and the contingencies of personality and ideology. The cases of Johnson and Nixon suggest that, despite having no formal authority over the central bank beyond nominating its Governors and the Board Chairman, Presidents can have substantial success by confronting the Fed to enforce their preferences upon it provided that the Treasury is supportive, and Congressional leaders disinclined to resist. Both in Johnson’s and in Nixon’s cases, however, their successes had damaging consequences for inflation control, for the dollar and, in the long run, for their own political reputations.

This talk is part of the Financial History Seminar series.

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