ARI SHAPIRO, HOST:
President Donald Trump has not been shy about publicly criticizing the actions of the Federal Reserve. In the last two months, he's floated two controversial candidates for the Fed board, each with political ties to Trump. All this has raised concerns about the independence of the Fed. Here's Kenny Malone from the Planet Money podcast.
KENNY MALONE, BYLINE: There is a fundamental tension between presidents and the Fed. A president wants lower interest rates because it heats up the economy. It's good for re-election. The Fed may want to raise interest rates because if the economy gets too hot, inflation can spiral out of control. To deal with this conflict, back in 1951, the Truman administration agreed to free the Fed from political influence. The Fed needed the freedom to make unpopular decisions today to save us from massive problems in the long run. But this was basically a handshake deal until that deal was tested in 1963.
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LYNDON B JOHNSON: Bill, I just want to thank you for...
MALONE: This is one of the first phone calls between President Lyndon B. Johnson and his Fed chair, William McChesney Martin. And you can hear Johnson saying, look, Bill; you're the expert.
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JOHNSON: Well, you just assume that you're starting with someone that didn't know much about your shop. And then you start telling me what I ought to know about it.
WILLIAM MCCHESNEY MARTIN: Well, I certainly will help in every way that I can, Mr. President.
MALONE: Author Bob Bremner knew McChesney Martin personally, wrote a book about him.
ROBERT BREMNER: I have kind of the corner on William McChesney Martin. It's the only book out there.
MALONE: Bremner says Bill Martin loved explaining to people what the Fed does.
BREMNER: Probably the most famous was his comment that the Federal Reserve's role was really to take the punchbowl away just as the party got going.
MALONE: In the mid-1960s, Martin started to tell Johnson, we need to slow the party down; the Fed is going to raise rates. Johnson was against this.
BREMNER: The stage was set for problems.
MALONE: Johnson kept trying to convince Martin, but when it failed, he asked his attorney general if he could fire Bill Martin.
BREMNER: And the attorney general disappointed him by saying, there's no way you can unseat him except for cause. And unfortunately policy differences do not constitute cause.
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JOHNSON: Hello.
UNIDENTIFIED PERSON: Good morning.
MALONE: You can hear Johnson in phone calls like this one saying, I can't control Bill Martin; I've met with him half a dozen times; there's nothing I can do.
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JOHNSON: I haven't got control of that board. He's got control of it.
MALONE: The Fed went ahead and voted to raise the interest rate by one half of a percent. Johnson summoned Martin to his Texas ranch, called him into his office. And we don't know exactly what Johnson said. But here is Bob Bremner's description.
BREMNER: And Johnson is just fit to be tied, starts right off. You and the Federal Reserve have put yourself above my presidency. And you totally disregard my wishes and my policy goals. And then there is a reference to the fact that Johnson was so angry that he pushed Martin against the wall.
MALONE: Physically pushed him against the wall.
BREMNER: Physically pushed him against the wall.
MALONE: And what does Martin do?
BREMNER: Well, Martin says, Mr. President, we have not put ourselves over your presidency. This is one of those few occasions where the Federal Reserve decision has to be final.
MALONE: This was a huge moment because Fed independence is not a law or a rule. It's just this handshake deal from the '50s. And so these kinds of moments tell the world, you can trust the U.S. dollar. The Fed is running its own independent monetary policy free from political influence - in this case, literally, when push came to shove. Kenny Malone, NPR News. Transcript provided by NPR, Copyright NPR.
