A century of lessons in why monetary independence matters. From the 1907 Panic that created the Fed, through the inflationary disasters of political interference, to the modern threats facing the institution today.
US Economic Indicators (1960–Present)
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1907
The Panic That Created the Fed
The Panic of 1907 exposed the fatal flaw in America's financial system: there was no central authority to respond to crises. When the Knickerbocker Trust Company collapsed, it triggered a chain reaction of bank runs across the country. Markets collapsed, banks failed, and credit evaporated.
The government had to rely on private financiers—most notably J.P. Morgan—to shore up the system. Morgan personally organized a consortium of bankers to inject liquidity and prevent complete financial meltdown. The fact that the nation's economic stability depended on one wealthy individual's willingness to intervene was deeply troubling.
Key Takeaway
The crisis highlighted the dangerous lack of an "elastic currency" and central coordination. It set the stage for the creation of the Federal Reserve—a lender of last resort that could respond to panics without relying on private fortunes.
1913
The Federal Reserve Act
Congress established the Federal Reserve System to provide stability and an "elastic currency" that could expand and contract with the economy's needs. The structure was deliberately designed to insulate monetary policy from short-term political pressures:
→Regional Reserve Banks – 12 banks representing different parts of the country, preventing concentration of power
→14-year terms for Board of Governors members – longer than any presidential term
→Mandate to serve public interest – not any single administration
Key Takeaway
The Fed's design aimed to balance democratic accountability with policy autonomy. This structure recognized that sound money and financial stability require a long-term view that elected officials—focused on the next election—cannot reliably provide.
1951
The Treasury–Federal Reserve Accord
In its early decades, the Fed's independence was limited. During World War II, the Treasury Department pressured the Fed to keep interest rates artificially low to finance war debt—a policy that continued into peacetime and fueled inflation.
The 1951 Accord was a turning point. It reaffirmed the Fed's autonomy in setting interest rates, separate from the government's fiscal financing needs. The Fed was no longer obligated to peg rates to help the Treasury borrow cheaply.
Key Takeaway
The Accord "laid the foundation" for the modern understanding that the Fed should operate free of direct political control. It established the principle that monetary policy serves the public interest, not the government's financing convenience. This hard-won independence would be tested repeatedly in the decades to come.
1965
LBJ vs. William McChesney Martin
President Lyndon B. Johnson was angered by the Fed's decision to raise interest rates in 1965. He feared higher rates would slow the economy at a time when he was financing both the Vietnam War and his Great Society programs.
The Confrontation
Johnson summoned Fed Chairman William McChesney Martin to his Texas ranch and reportedly berated and physically shoved him, demanding that the Fed not undercut his economic agenda. It was an extraordinary display of presidential pressure on the central bank.
Martin stood firm. He told LBJ that the Federal Reserve Act gave the Fed the responsibility to decide interest rates independent of the President's wishes, and that this was one of those times when the Fed "has to be final" in its judgment. Johnson backed down and did not try to remove Martin.
Key Takeaway
This clash became an oft-cited example of the Fed asserting its independence. However, the late 1960s still saw rising inflation as government spending grew—a sign that even partial accommodation of political pressures can have lasting consequences.
1970s
Nixon, Burns, and the Great Inflation
The most damaging episode of political interference came in the early 1970s. President Richard Nixon privately believed in using monetary policy to juice the economy before the 1972 election, and he put intense political pressure on Fed Chair Arthur Burns to keep interest rates low.
Nixon's Demand
"I know there's the myth of the autonomous Fed… [but] I'm counting on you… to keep us out of a recession."
— Richard Nixon to Arthur Burns, signaling that Burns should prioritize Nixon's re-election prospects over inflation risks
Burns largely acquiesced. The Fed stayed looser than it otherwise might have to accommodate the White House. In the short run, the economy boomed in 1972, helping Nixon's campaign.
Longer-term, the results were disastrous: inflation, already brewing, exploded later in the 1970s, peaking well into double digits. The U.S. dollar's credibility eroded. Many observers consider Arthur Burns one of the least successful Fed Chairs in history, precisely because he yielded to political interference and failed to contain inflation.
Key Takeaway
The Great Inflation of the 1970s stands as a stark warning of the perils of a politicized central bank. It severely hurt American households with soaring prices and required the painful Volcker shock therapy to cure. This era became the textbook example of why central bank independence matters.
1979–1987
Volcker's Stand: Independence Vindicated
Facing soaring inflation near 15% and a stagnant economy ("stagflation"), Fed Chair Paul Volcker did what Burns would not: he aggressively hiked interest rates—pushing them to nearly 20%—as the only way to crush entrenched inflation expectations.
The resulting recession was severe. Unemployment peaked above 10%. Volcker faced intense political backlash, including farmers driving tractors to the Fed's headquarters in protest. Members of Congress called for his removal. The political pressure was immense.
The Result
Volcker held firm. Free from political meddling, the Fed persisted with its anti-inflation strategy. By the mid-1980s, inflation was tamed—falling from double digits to around 3%—and the foundation was laid for two decades of stable growth and low inflation.
Key Takeaway
Many economists view Volcker's victory over inflation as a direct product of the Fed's ability to act independently. Without that independence, such decisive action might have been watered down or delayed by political leaders unwilling to tolerate short-term pain—even when it was the only path to long-term stability.
2017–Present
Modern Threats to Independence
Following the Volcker era, subsequent leaders generally respected the Fed's independence—at least publicly. Presidents from the 1980s through 2016 refrained from directly attacking or threatening the Fed, even when they disagreed with its policies. This norm held until recently.
Public Pressure Campaign (2017–2020)
President Trump broke with tradition and repeatedly pressured the Fed. He openly blasted his own appointee, Fed Chair Jerome Powell, for not keeping interest rates ultra-low. Via Twitter and interviews, Trump urged the Fed to cut rates to zero or even adopt negative rates—regardless of economic conditions.
Reports emerged that Trump explored legal maneuvers to remove or demote Powell after the Fed raised rates—an almost unheard-of challenge to the Fed's leadership. Though he did not follow through (likely deterred by legal protections), the public browbeating itself was concerning to economists who warned it could undermine the Fed's credibility.
Escalation (2024–2025)
More recently, pressure has escalated further:
⚠Dismissal threats – Open threats to fire Fed Governor Lisa Cook without clear cause
⚠Board packing – Immediate replacement of a resigned governor with a political ally
⚠DOJ investigation – Unprecedented criminal investigation of Fed Chair Powell over minor technical issues, widely seen as a pressure tactic
Bipartisan Warning
A group of former Fed Chairs and Treasury Secretaries spanning both parties issued a rare joint statement warning that these actions represent an "unprecedented attempt to undermine [the Fed's] independence" and compared them to "tactics seen in countries with weak institutions."
"This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies. This has no place in the United States."
Key Takeaway
These events represent a direct challenge to a century-old principle. If the Fed were subjugated to serve political agendas, the likely results—based on all historical and international evidence—would be higher inflation, volatile markets, and a loss of confidence in the dollar. The very perception of Fed independence is "critical for economic performance."