U.S. Economic Performance Under Different Fed Chairmen

August 27, 2009

There have been only six chairmen of the Federal Reserve System since April 1951.

William McChesney Martin was appointed by Truman and served from April 2, 1951 until January 31, 1970 while at starting age of 44 and an ending age of 63.  His father had been a central banker, but Martin’s prior experience had been mostly on Wall Street with a spell at the Treasury.  He defended the Fed’s independence and had an eclectic approach to policy-making.

Arthur Burns was appointed by Nixon, served for eight years until January 31, 1978 while he aged from 65 to 73.  Burns was a professor at Columbia University specializing in business cycle theory and also spent three years chairing the Council of Economic Advisors.  He served in the era when Phillip’s Curve theory held much influence, a view that unemployment could be reduced by accepting a little more inflation.  Fed independence weakened under him.

G. William Miller was appointed by Carter, served just 17 months from March 8, 1978 to August 6, 1979 while age 54 and 55, and arrived with a corporate background at Textron, where he climbed to the rank of CEO.  During his stint, a vicious cycle of accelerating inflation and a depreciating dollar developed.  What’s not remembered is that growth in jobs and real GDP was faster than when the other men chaired the Fed.

Paul Volcker tends to be the favorite Fed Chairman among economists, the slayer of inflation who refused to cave in to political pressure and restored Fed independence.  He served for eight years until August 11, 1987 after being appointed by Carter.  Volcker was schooled at Princeton and Harvard and had a varied career as an economic analyst, a commercial banker, a Treasury under-secretary and the New York Fed’s president.  Volcker was 51 when first appointed by Carter and 59 when he stepped down.  As Fed chairman, he beat inflation by undertaking quantitative tightening and abandoning an interest rate target.  As the central bank reabsorbed liquidity, market-set rates soared above 20% on the shortest maturities.  There were two recessions in rapid succession in the early 1980s, and the Fed maintained its monetarist experiment well into the second one.  The post-war record-high jobless rate of 10.8% was reached late in 1982, and the Latin American debt crisis constituted further collateral damage.  The performance of the dollar and of equity prices under Volcker topped the record of the other chairmen.

Alan Greenspan was appointed by Reagan and served nearly as long as Martin from August 8, 1987 to January 31, 2006.  He also took an eclectic approach to policymaking, earning the affectionate title of maestro for his instinctual knack for taking actions that were at odds with conventional thinking yet seemed to work out.  Like Burns, Greenspan chaired the Council of Economic Advisors for a few years, but his main background was as an economic consultant and businessman.  Despite a willingness to look at many different things for policy guidance, Greenspan was an ideological free marketeer and a believer in limited government.  He defended not responding to asset price bubbles.  During his years running the Fed, Greenspan aged from 61 to 79.  He is actually two years older than Volcker. In retirement from the Fed, Greenspan’s reputation has suffered because of the severe subsequent economic problems and his perceived responsibility in pursing pro-growth policies that let them develop.

Ben Bernanke, like Arthur Burns, had an academic background and a stint on the Council of Economic Advisors.  He also played a lead and controversial role in promoting the ultra-easy monetary policy in an earlier spell as one of the Fed Board governors.  Bernanke was schooled at Harvard and MIT and a professor at Stanford and Princeton.  He was appointed by Bush 43 and age 52 when he began his first term as Fed chairman on February 1, 2006.  He came to the job with a reputation as one of the country’s top monetary economists and perhaps the preeminent expert on the Great Depression.  President Obama appointed him to a second time earlier this week, and senate confirmation will be required.

The table below compares the annualized percentage changes of five vital economic signs during the chairmanship of each of the above six men.  Bernanke’s results are of course an unfinished body of work comprising only his first 3-1/2 years at the task.  The five criteria examined are Dow Jones Industrial Average, the dollar’s value against the mark before 1999 and euro after 1998, non-farm payroll employment, consumer prices, and real GDP.  The length of each person’s term is also noted in number of months served.  Bernanke and the country have been through a tough patch, not all of his making.  Not surprisingly, his years so far scored last in equities, jobs, and GDP growth.

% p.a. DJIA US$ Jobs CPI GDP # mos
Martin +5.9% -0.7% +2.2% +2.1% +3.8% 225
Burns +0.4% -6.6% +2.2% +6.5% +3.1% 96
Miller +9.0% -9.6% +4.0% +10.0% +5.0% 17
Volcker +15.4% +0.4% +1.6% +5.6% +2.8% 96
Greenspan +7.9% -0.8% +1.5% +3.1% +3.1% 221
Bernanke -3.6% -4.5% -0.8% +2.1% +0.3% 43


The best all-around numbers above are those of William McChestney Martin.  Compared to Greenspan, he had faster growth in real GDP and jobs, lower inflation, a similarly slow erosio
n of the dollar, and only a somewhat smaller appreciation of equities.  Volcker’s numbers suffer because he inherited  a bad position.  Miller also took over when price stability was already very problematic, but he failed to fix it and thus exposed the dollar to a crisis of confidence.  His high GDP and jobs growth scores were borrowed from the future.

The table casts doubt on the premium placed on low inflation.  Price stability is desirable for essentially two reasons.  One is that high inflation discriminates against lenders and rewards borrowers.  The more widely mentioned benefit of stable and low inflation is that such will promote sustainable and faster growth in the long term.  That claim is not supported by the above results.  Inflation deteriorates progressively after Martin, jumping to 6.5% per annum under Burns and 10.0% per annum with Miller before receding under the three subsequent Fed chairmanships.  The problem is the secular restoration of low and stable inflation does not correlate with faster real economic growth.  Note that Miller achieved the fastest growth in GDP and jobs and that the rates of rise during the Volcker and Greenspan eras were not above the pace when Martin and Burns had been in charge.  Although inflation has never been lower than under Bernanke, real GDP barely has a heartbeat, and jobs have contracted 2.7% since he took over.

Price stability is an intermediate objective, the desirability of which depends critically upon achievement of the ultimate social goal here which is growth in jobs and production.  Central banks concentrate on price stability because that is the vital economic sign that they can best control with the tools they have and because of the premise that growth is more likely to be stronger and steadier with stable prices than without that element.  It can still be argued that the appropriate comparison is not what the table shows but rather against what the subsequent U.S.economic performance would have been if Volcker had let inflation fester.  In countries that have done this, the experience has been for inflation to keep accelerating and to  bring economic activity to a halt eventually.  There is little doubt that Volcker did the right thing, but contemporary fears over future inflation seem overdone.  Present conditions remain far from what Volcker, Miller, or even Burns inherited from the standpoint of fertilizing future inflation.  There needs to be some prioritizing, and right now the main threat is the risk of an L-shaped or W-shaped business cycle.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



One Response to “U.S. Economic Performance Under Different Fed Chairmen”

  1. Yohay says:

    A fascinating piece! I believe that Bernanke will finish with better results.
    I’ve linked to it from my site.