Business: The Martin Era

DURING his unprecedented 19 years as chairman of the Federal Reserve Board, William McChesney Martin left a formidable imprint on the life of the U.S. Now the chief guardian of the nation’s money and regulator of its credit has served as long as the law allows. This week, at 63, the world’s most powerful banker will retire.

The Martin era has included two wars, three recessions, the greatest economic advance in the nation’s history, and—much to Martin’s dismay—what he calls “the worst inflation since the Civil War.” His policies have affected all of them, often in controversial fashion. He was assailed for contributing to recessions by restricting credit too severely and accused of fostering inflation by loosening the reins too much. Politicians berated him for keeping interest rates too high and economists faulted him for not allowing the supply of money to grow in proportion to the nation’s volume of business.

Party Spoiler. A stubborn, honest and puritanically forthright man, Martin liked to explain that the Reserve Board’s unpopular actions arose out of its necessary role of “leaning against the wind.” He said: “I’m the fellow who takes away the punch bowl just when the party is getting good.” (Martin is a teetotaler.) Above all, he defended the integrity of the U.S. dollar at home and abroad, though he and the board lacked the power to do the job effectively alone. Despite today’s inflation, he succeeded well enough so that the dollar has lost less of its purchasing power since 1951 than the currency of any other major industrial country except West Germany.

Among the world’s central bankers, Martin symbolized the nation’s financial conscience. In times of crisis, when balance of payments deficits threatened to start a run on the U.S. stock of gold, foreign moneymen repeatedly said that Martin’s reassuring presence was worth $1 billion to U.S. reserves. Some Washington experts believe that European bankers could have pushed through an increase in the price of gold, which would have amounted to a devaluation of the dollar, if Martin had not skillfully resisted the move for years.

Boy Wonder. The son of a longtime chief executive of the St. Louis Federal Reserve Bank, Martin literally learned the language of central banking as a child. He majored in Latin and English at Yale (’28) but decided to go to work as a stockbroker. Having helped to lead a successful fight for trading reforms at the New York Stock Exchange, he became its president at 31 and won renown as “the boy wonder of Wall Street.” Drafted into the Army in 1941, he rose from buck private to colonel. After World War II, he took the post of chairman of the Export-Import Bank, and three years later was named Assistant Secretary of the Treasury by Fellow Missourian Harry Truman. In 1951 Democrat Martin was handed the job of dissolving the wartime shotgun marriage of the Treasury and the Federal Reserve. Though created as an independent agency, the board was being forced to underwrite the Treasury’s easy-money policies by supporting the price of Government bonds at their face value. The effect was to make the board an engine of inflation. Martin negotiated the famed “accord” by which the Federal Reserve regained its freedom to let Treasury securities find their own price level in the marketplace. Impressed by Martin’s intelligence, Truman named him to the chairmanship of the Reserve Board.

Martin ran the Reserve with a deft mixture of low pressure and high principle. At the outset, the board contained more than its share of political hacks, partly because it is difficult to recruit front-rank experts for a seven-member committee. “There were times when I think Martin felt lonely being one of the few members of the board who really understood what was going on,” says former Treasury Secretary Douglas Dillon. If so, the chairman’s patience never faltered. Board members marveled at his ability, by force of judgment and persuasive personality, to wring a consensus from the often divided committees that shape Reserve policy. A craggy but boyish-looking man before time furrowed his features, imperturbable under pressure, Martin also disarmed his adversaries with a Mona Lisa-like smile. “You can’t get mad at him,” says one of his fellow governors.

Flexible Policies. Though he had a reputation as an inflexible champion of hard money, Martin astutely flexed his policies according to his view of current needs. When John Kennedy and Economist Walter Heller brought the New Economics to Washington, Martin’s board supported maximum growth by allowing a record expansion of credit. When Lyndon Johnson shied away from higher taxes to pay for the Viet Nam War, Martin correctly sensed the inflationary danger. He not only persuaded the board in 1965 to raise the cost and shrink the supply of money, but refused to back down despite L.B.J.’s personal and public protests. Though furious, Johnson reappointed Martin to his fifth term as chairman.

Lately, the board’s clumsiness in fighting inflation has tarnished Martin’s stature. The board constricted the money supply so sharply in 1966 that the move almost caused a financial panic and helped bring on the 1967 minirecession. In 1968, as Martin admits, the board erred by relaxing credit restraint in the mistaken (though widely held) belief that the income-tax surcharge would quickly cool off the economy.

A Place in History. Martin’s successor, Arthur Burns, may well push for less reliance on credit adjustments and more reliance on tax and budget restraint, if only because he feels that the Federal Reserve has been asked to bear too large a burden in fighting inflation. As for Martin’s own future, the retiring chairman has made no decisions yet, beyond planning a long vacation. Whatever he does, his place in history seems assured. His adroit leadership helped to change the Reserve Board from a cloistered temple of orthodoxy to an institution responsive to national and social goals. For all the political tantrums he provoked, Bill Martin has been the pivotal economic figure of two tumultuous decades.