The Fed, The Financial Crisis And Monetary History
By Paul Hoffmeister
HOFFMEISTER: Dr. Meltzer, you are of course one of the leading economists of the world and the expert on the history of the Federal Reserve. When did you first become interested in monetary policy?
DR. MELTZER: I wrote my thesis on French inflation so that was the beginning, but I didn’t have any career plan to pursue either that or financial inflation. One day, I was at work, and then I got a call. There had been a study of something called Employment, Growth and Price Levels in 1959. Professor Otto Eckstein from Harvard was the head of that study and they did…put out a lot of pamphlets. Among the things that they collected was a bunch of balance sheets, income statements, transactions from the dealer market for government securities. The caller asked me whether I’d like to work on a study of marketing government securities and write a report for Congress. I didn’t have the slightest idea what the dealer market in government securities was. The next man that came into my office is one of my colleagues a guy named, Gert Von Der Linde. And I said to him, “Do you know what the dealer market in government securities is?” He said, “Yes. That’s where they do all the market operations.” “Oh,” I said, “that’s interesting. Do you want to do this thing?” So we wrote a report for I believe the Joint Economic Committee for Congressman Patman, who was at that time the vice chairman or the chairman of the Joint Economic Committee and that was my beginning, but that was only a small beginning.
A couple of years later, I got a call from Congressman Patman’s office and he said he’d like me to do a followup study on the dealer market for government securities. I told the guy, “I’ll be glad to come and talk to him, but I don’t think that’s the problem.” So he said, “Fine.” So when I talked to Congressman Patman, he said, “Well,” you know when I told him what I did, what I believe, he said, “What do you think the problem is?” And I said the problem is at the Fed. By that time, I knew a good deal more about it. So he said, “Why don’t you look into them?” That’s how I got started.
HOFFMEISTER: And what year was that sir?
DR. MELTZER: That was 1963. Our report came out in 1964.
So that’s how I got started on the Fed and I interviewed Chairman Martin, Vice Chairman Balderston, the head of the New York Fed at that time because I was a congressional staffer, so we had access to them. They wouldn’t say no to Congress. And we wrote three reports on what was wrong with the Fed and what would be better, and they held hearings on that. The result was, it actually made some difference. A whole bunch of economist testified at those hearings and they agreed that there were a lot of things going on with the Fed, but they all didn’t agree with each other about what should be changed. The Fed then became much more concerned about its relations with the academic community. Therefore it started something called the Federal Reserve consulting operation. They hired my old dean to organize those meetings, and I went to many of them. Milton Friedman went to some of them. Only once did they have us both at the same time. That was as much as they could take. But they also had a lot of people who were much more activist than we were like Paul Samuelson, Jim Tobin, so on. And they would discuss various issues. I mean they opened up to a broader audience.
The second thing they did was they greatly increased the research staff because one of the things we criticized was the fact that they didn’t have any clear idea about what they were doing. I mean they had been on the gold standard when they started and that was a guideline for them, and when they were off the gold standard, they really had not adjusted. When interviewing Chairman Martin, I asked him, “How do you run the monetary policy?” And he told me, “Well monetary policy is like a river. And you have to keep the river within the banks. You don’t want to get over the banks, but you don’t want to get too low either because…” And that was all pictorial. There was nothing analytic about that and I was really, I must say, surprised at how little they had thought about what do we do and how do we do it. Then we went to the vice chairman, a man named Canby Balderston, who had been dean at Wharton School, and I asked him, “Well, how do you think about monetary policies?” He says, “Well, monetary policy is like a river, but you got to keep it out of the banks just so it irrigates the fields on the sides and so on. Again, pictorial. I went to New York and talked to the vice chairman of the open market committee, the head of New York Fed, and he had the head of the open market trading desk, a guy named Bob Rouse with him. We asked him the same question, and he told us, “Well, we try to control credit.” So I said, well is credit a stock or a flow, and there was, well, puzzlement. I said if I lend money to the man who was with me, I said is that probably what you want to do? He said, we’d better get an economist here. It was clear they had never thought through the most basic issues.
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