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Jerome Powell's four-year term as chair of the Federal Reserve Board will expire in May 2026. Donald Trump has already announced that if he is reelected, he will not appoint Powell to a third four-year term as chair. At that point, Powell could – if he wants – remain on the Board as an ordinary member until his separate 14-year term as a Fed governor runs out in January 2028.
There is an apparent precedent for such a situation. In 1948, Marriner Eccles was not reappointed as Fed chair by President Harry S. Truman. Casual students of Fed history may think of Eccles as a champion for the independence of the Federal Reserve from the President, the executive branch, and politics in general, and the architect of the modern Federal Open Market Committee (FOMC). They may also assume he was not reappointed due to policy disagreements with President Truman and stayed on the Board despite his demotion out of spite and that he demonstrated his personal commitment to policy independence in the Fed-Treasury Accord of 1951 by leaking to the New York Times transcripts demonstrating the disingenuousness of the Truman Administration's claims about its discussions with the FOMC. All of that is inaccurate except for the last point. Eccles did leak the transcript, for reasons that remain obscure.
The purpose of this blog post is to set the record straight. We will show that Eccles proposed to subordinate the Fed to the President. He told Congress in 1935 that he would resign if a new President took office during his tenure as head of the Federal Reserve Board. Thirteen years later, when Harry Truman took office, Eccles acted on this belief by offering to resign, but Truman declined the offer. When Eccles's third term as Chair expired, Truman told him that he would appoint a new Chair. Eccles offered to resign from his position as member of the Board, but Truman asked Eccles to remain on the Board as Vice Chair. Eccles declined to serve as Vice Chair but remained on the Board, evidently at least partly out of concern for his financial security, given restrictions on post-Fed employment.
Eccles's conception of how the Fed should be structured
The true history of Eccles's role is brought to life in the transcripts of the hearings held by the House and Senate concerning the Banking Act of 1935. Eccles led the team that drafted Title II of that bill -- the portion of the bill that redesigned the leadership structure of the Fed.1 He presented the draft to Congress, argued for its provisions, claimed authorship, and by both word and deed, proved that he believed what he said. Contemporary observers took him at his word and attributed Title II of the bill to him. Congressmen and commentators referred to Title II as "the Eccles Bill."
Eccles proposed to reconfigure monetary policymaking by the Federal Reserve System in two fundamental ways. First, he believed that control of monetary policy should be centralized in Washington, D.C. The Fed's leaders would be given tools enabling them to adjust the nationwide supply of money and credit and thus to influence nationwide interest and inflation rates. They would also be given the authority to act as they thought best. Previously, decision-making on these issues had rested with the heads of the regional Fed banks, whose powers were limited and constrained by rules, like the gold standard, that limited their discretion over aggregate money and credit. Second, to subordinate monetary policymaking to the President, the leadership of the Federal Reserve – specifically the members of the Federal Reserve Board – would serve at the pleasure of the President, who could replace them at any time and for any reason. The heads of the twelve Federal Reserve banks would serve one-year terms. They would be appointed by their bank's board of directors, but their initial appointment and all reappointments would have to be approved by the Federal Reserve Board. The President could, therefore, swiftly replace the Fed's leadership (in the case of the Board) or indirectly influence its selection (in the case of the heads of the Reserve Banks).
These provisions were necessary, Eccles argued, to ensure that monetary could be formulated and implemented by the Executive Branch. Eccles asserted that an administration is charged, when it goes into power, with the economic and social problems of the Nation. Politics are nothing more or less than dealing with economic and social problems. It seems to me that it would be extremely difficult for any administration to be able to succeed and intelligently deal with them entirely apart from the money system. There must be a liaison between the administration and the money system—a responsive relationship (House 1935 p. 191).
To ensure the monetary system responded to the administration's will, the President had to be able to remove the leaders of the Federal Reserve in short order if he disagreed with their decisions. President Roosevelt had controlled monetary policy since 1933 when the passage of a series of laws gave the President this authority on an emergency basis. Now was the time to make those changes permanent (House 1935 pp. 72, 181-183).2
There were two versions of the Eccles bill. The original version was introduced to Congress as House of Representatives bill 5357 (H.R. 5357) and Senate bill 1715 (S. 1715). The original bill was written by a team consisting of Eccles -- then serving as the Governor of the Federal Reserve Board -- and four Fed staffers: Emanuel Goldenweiser, the director of the Division of Research and Statistics at the Board; Lauchlin Currie, the assistant director of the same division; Mr. Wyatt, the general counsel of the Board; and Mr. Morrill, the secretary of the Board (House 1935 pp. 351-2). Currie's influence was especially noted. The philosophy underlying the reforms reflected ideas he had recently published in his 1934 book, The Supply and Control of Money in the United States (Senate 1935 p. 438-9).
While this small group received feedback from a few members of the Roosevelt Administration, Eccles did not solicit feedback from members of the Federal Reserve Board, Federal Open Market Committee, or Federal Advisory Council; Senators or Congressmen or their staffs; regulatory or policymaking professionals in the federal or state governments; academics; businessmen; or bankers (House 1935 p. 351-3, Senate 1935 pp. 550, 564). Except for Eccles himself, members of the Fed Board did not see the bill until it was "presented [to Congress] and printed" (Senate 1935 pp. 554).
Eccles's original bill proposed placing monetary policymaking under administration control by restructuring the FOMC.3 The FOMC would consist of the head of the Federal Reserve Board (then called the governor) who would serve as chair of the committee, two other members of the Fed Board (theoretically possibly including the Secretary of Treasury and Comptroller of Currency, both of whom at that time sat ex officio on the Fed Board), and the heads (then called governors) of two Federal Reserve banks (Senate 1935 pp.196, 313, 395, 535). This committee would have the authority to devise and execute open-market operations for the entire Fed System. Eccles's bill gave the Board the power to determine reserve requirements (i.e. the fraction of a member banks' deposits that must be redeposited as reserves at a Federal Reserve bank) and the discount rate. These proposals would concentrate decision making on monetary issues which -- until that time -- had been split between the Board and the heads of the Federal Reserve Banks, except for reserve requirements, which were determined by Congress and set in statute.
The House and Senate have their say
The House of Representatives held hearings on the initial Eccles bill from February 21 to April 8. When Eccles testified, he introduced a series of amendments that he wrote himself, which altered many facets of the proposal that he had submitted a few weeks before. The amendments further concentrated monetary policymaking. The Fed Board received authority over all three levers of monetary policy -- open-market operations, discount lending, and reserve requirements. The FOMC would be replaced by an advisory committee consisting of representatives of 5 of the 12 Federal Reserve banks, which could recommend policies to the Board, but which would not vote or have other authority over monetary policymaking (Senate 1935 p. 699, House 1935 p. 181-3).
A majority of the House seemed supportive of Eccles' inclination to further consolidate control in the hands of people directly beholden to the president, and the House of Representatives passed Eccles' plan, mostly in the form he recommended. The issue then passed to the Senate.
The Senate held hearings from April 19 to June 3 on Eccles' original bill and the amended version that passed the House. Rather than referring to the legislation that had been passed over from the House as "the administration bill," Carter Glass was at pains to note "it is Governor Eccles' bill" (Senate 1935 p. 357).
A Senate Subcommittee chaired by Glass – one of the principal sponsors of the original Federal Reserve Act and a contributor to most monetary, banking, and financial legislation that passed Congress between 1913 and 1935 – called a lineup of luminaries to scrutinize Eccles' plan. Witnesses took differing views about the benefits of centralizing decision-making at the FOMC. While most came down in favor of centralization, almost all criticized the politicization of policy making in a body beholden to the President of the United States. Critics included many members of the Federal Reserve Board and Federal Advisory Council, directors of many Federal Reserve Banks, the head of the American Bankers Association, and even the Secretary of Treasury, Henry Morgenthau, who was at that time also Chair of the Federal Reserve Board and a personal confidant of President Franklin Roosevelt.4
Morgenthau argued that he would like to have monetary authority "concentrated in an independent Government agency (Senate 1935 p. 505)." The agency should operate independent of "all outside influence – just as independent as you can make it …. [like] the Supreme Court … independent of the President. … No member of the board could be removed except by impeachment" (Senate 1935 p. 506). Morgenthau recommended forming this agency by nationalizing the Federal Reserve banks.
Frank Vanderlip, former Assistant Secretary of Treasury, former President of National City Bank of New York (today's Citibank), and a contributor to the original Federal Reserve Act in 1913, similarly supported centralization of monetary authority, although he doubted the constitutionality of Eccles's proposal and stated that it "should be fundamentally rewritten" (Senate 1935 p. 916). Vanderlip argued that Congress should ensure the Fed's leadership "should not be removable by the President, and should not be subject to political pressure, and certainly not subject to business pressure" (Senate 1935 p. 917). The Secretary of Treasury and Comptroller of the Currency should be removed from the monetary authority's board of directors, which should consist of men of integrity and experience.5
Adolph Miller, a member of the Federal Reserve Board since its founding in 1914, also supported the shift toward centralization of monetary authority (Senate 1935 pp. 750-1). The Fed's original structure divided authority and responsibility among the Federal Reserve Banks, making it difficult to discern who was the "responsible agent," and leaving policymaking susceptible to being influenced by special interests (Senate 1935 p. 687). Miller criticized subordination of monetary policy to the President. Miller feared "political control" as well as "banker control" (Senate 1935 p. 687). He believed the Federal Reserve Board needed to be "independent" with members who regard service "as a great public responsibility which runs to the public rather than to an official of the administration of the day" (Senate 1935 p. 729-30). Miller suggested many of the institutional features adopted in 1935 that underly the Fed's independence today. These include removing the Secretary of Treasury and Comptroller of the Currency from the Federal Reserve Board, changing that organization's name to The Board of Governors of the Federal Reserve System (Senate 1935 p. 754), setting membership of the Board at seven (Senate 1935 p. 758), and writing into law the provision that members of the Board of Governors could be dismissed only "for cause."
During the hearing, the Senate called 60 witnesses. Almost all criticized Eccles' proposal to place the President in control of monetary policy and advocated political independence for the central bank. Witnesses suggested ways to prevent politicians from influencing monetary policy. Senators picked up ideas they liked and asked later witnesses what they thought of them. An example was Miller's idea for changing the Federal Reserve Board's name to the Board of Governors of the Federal Reserve System. "Governor" was the traditional term for the chief executive officer of a national or central bank. The Bank of England had a governor. So did the other central banks in Europe. From 1914 to 1935, The Federal Reserve System had 13 governors: the head of each of the 12 Fed banks and the head of the Fed Board in Washington. Miller thought that to highlight the shift in authority to the Board from the Reserve Banks, all members of the Board should have the title "governor" and the name of the board itself should include the word "governors." McAdoo then suggested relabeling the heads of the regional banks -- who had been called governors – as something else. Later discussions led to the idea of giving them the title of president, which was the traditional title for the head of a commercial bank.
A particular focus: President's power to dismiss Fed Board members
Senators and witnesses discussed in detail how to prevent the President from dismissing members of the Board for mere policy disputes. Winthrop Aldrich, chair of Chase National Bank and son of Nelson Aldrich who had spearheaded the initial drive a quarter-century earlier to create what became the Fed, suggested limiting dismissal to cases where a Board member had "become permanently incapacitated or has been inefficient, or guilty of neglect of duty, or of malfeasance in office, or of any felony or conduct involving moral turpitude, and for no other cause and no other manner except by impeachment (Senate 1935 pp. 396-7)." Vanderlip argued that members of the Fed board "should not be removable by the President" (Senate 1935 p. 917). Morgenthau argued that no member of the Fed board should be removed except by Congress via impeachment, just like members of the Supreme Court (Senate 1935 p. 506). William McAdoo, a Senator from California who had been Secretary of Treasury when the Fed was founded 22 years before, concurred on this point, although his analogy was to Congressional removal of federal judges (Senate 1935 p. 755). Miller favored the phrase "no member of the Board shall be removable from office during the term for which he was appointed … except for malfeasance" (Senate 1935 p. 754).
The extended discussion during the Senate hearing occurred, in part, due to uncertainty about the law. In 1926, the Supreme Court held in Myers v. United States, (272 U. S. 52) that the President had the sole power to dismiss executive branch officials and that restrictions on the President's power to dismiss were unconstitutional. On May 1, 1935, while the Senate debated the Eccles Bill, the Supreme Court heard arguments in Humphrey's Executor v. United States, which concerned the question of whether the President could remove leaders of independent federal agencies for reasons other than those allowed by Congress. The circumstance that differed between the two cases was that Humphrey was a member of the Federal Trade Commission (FTC) – an independent agency, not unlike the Fed – whereas Myers concerned the President's powers over employees within the executive branch itself. Senators and witnesses discussed these cases, whether they thought Myers or Humphrey's Executor applied, and whether the Supreme Court would find for Humphrey's executor.6 Most thought (a) Humphrey's Executor applied to the Fed; (b) the Supreme Court would find for Humphrey's executor, meaning that Congress could limit the President's ability to dismiss personnel from agencies like the FTC or the Fed; and (c) the Senate should wait for the court to hand down its decision in the Humprey's Executor case before finalizing the language in the legislation. The Supreme Court announced its decision in the case on May 27, near the end of the Senate hearings, and witnesses soon noted its relevance for the independence of the Federal Reserve (Senate 1935 p. 998).
These discussions raised a related, surprising issue. From the founding of the Fed in 1913 until 1933, members of the Fed Board who were appointed and confirmed by the Senate served for fixed terms "unless sooner removed for cause by the President." The Banking Act of 1933, however, removed the phrase "for cause" from the law (Senate 1935 p. 396). Aldrich raised this issue during his testimony. Eccles had told Aldrich he was unaware the provision had been removed, and Aldrich said he believed other members of the Board were likewise unaware. Glass said he "I must have been asleep when that was eliminated from the act. I have no recollection of it." Aldrich replied that the unnoticed change illustrated the dangers of "hasty legislation." Glass retorted, "I do not know that it was due to hasty action. It might have been due to covert action" (Senate 1935 p. 398). The transcripts demonstrate Glass was unaware of the change, because earlier in the hearings he told two witnesses that according to current law the President could remove a member of the Fed Board only "for cause" (Senate 1935 pp. 92, 206).
Eccles digs in
Eccles defended his proposal in testimony before the Senate. He noted that "there has been a great deal of discussion about the fact that this makes the Board a more political board" (Senate 1935 p. 282).7 He insisted, however, that this was not the case. The Board was and would always be political. Even if the President lacked legal authority to remove Board members, no man would stay on the Board if the President of the United States wished to appoint someone else in his place. … It seems to me to be immaterial whether a Governor has or has not a technical right to stay on the Board, if the President prefers to have someone else as Governor, because no person who is qualified for that position would choose to remain in these circumstances (Senate 1935 p. 282). This hardly marks Eccles as the patron saint of Fed independence.
In earlier testimony before the House, Eccles discussed the question of whether the employment possibilities of the head of the Fed Board should be restricted (House 1935 pp. 190-2). This issue turned out to be related to the question of presidential control.
Eccles noted that, under then-current law, the Board's head had a specified term as the governor of the Board and a separate term as a member of the Board. Their term as a member typically ended years after their term as governor. This complicated a governor's return to private life, because a provision in the Federal Reserve Act prohibited former members of the Fed Board from working for financial institutions for two years unless they had completed a full term. The intent of this provision was to prevent a revolving door, where individuals rapidly moved from the Fed Board to the banking industry, which might reward them financially for policy decisions they had made while in office. Eccles proposed that if an individual resigned from their term as a Board member immediately after they ceased to be governor of the Board, the two-year ban be waived, so that they could immediately work in the financial services industry. Otherwise, Eccles said, governors without large private incomes could be compelled for financial reasons to remain on the Board, limiting the President's ability to place the levers of monetary policy in the hands of his own people. Congress ultimately rejected these proposals from Eccles, and the two-year ban remains in place to this day for all members of the Board of Governors.
Other key structural changes
The Banking Act of 1935 added many provisions that shield leaders of the Federal Reserve from political pressure. Members of the Board of Governors serve 14-year terms, staggered so that one term expires on January 31 of every even-numbered year. A member may continue to serve after the expiration of their term until their successor has been confirmed by the Senate. The President nominates a Chair of the Board from among the members of the Board, and that person receives a 4-year term that starts on the date of their confirmation. Members of the Board of Governors can be removed only "for cause." The heads of the Federal Reserve Banks, now labelled presidents, serve 5-year terms. The boards of directors of each Fed bank appoints them, subject to approval of the Board of Governors.8 The FOMC makes the principal decisions concerning monetary policy. The committee elects its own chair and vice-chair.9 Its twelve voting members consist of the Board chair, the six other members of the Board of Governors, the President of the New York Fed, and Presidents of four other Fed banks on a rotating basis. The other Fed bank presidents serve as non-voting participants (but technically are not "members" in years when they do not vote). The structure is set that way so that a single President of the United States cannot appoint a majority of the FOMC if the members of the Board of Governors serve their full terms.
The end of the story
So, the commonplace view of Eccles as a tribune of Fed independence is wrong. But what of his decision to continue serving as an ordinary member of the Board of Governors from 1948 to 1951? Was this a case of Eccles "burrowing in" out of spite for Truman having failed to renominate him as chair?
Hardly so.
Eccles served as the last Governor of the Federal Reserve Board and first Chair of the Board of Governors, even though he disagreed with its structure. He served as chair for the rest of the Roosevelt Administration, remained a faithful executor of the President's monetary program, and believed that was the proper role for a person in his position. Roosevelt reappointed Eccles as Chair in 1940 and 1944.
When Roosevelt died in 1945, the Vice President, Harry Truman, became President. True to his word, Eccles offered to resign and told Truman that it was his "feeling that the Chairman, who is designated by the President, should serve at the pleasure of the President." Truman rejected Eccles's offer, told him that "there was no one I [Truman] desired to appoint in your place," and asked Eccles to complete his term as Chair (Truman 1948).
In 1948, when his third term as chair expired, Eccles wrote to Truman that "I have not altered my conviction that the Chairman of this Board should serve at the pleasure of the President, and I sought to have such a provision included in the Banking Act of 1935." (Eccles 1948). This time, Truman agreed. He told Eccles that he now desired to appoint to the Board of Governors a new member who would be designated as Chair.10 This decision, Truman wrote, reflects no lack of complete confidence in you, or dissatisfaction in any respect with your public service, or disagreement on monetary or debt-management policies, or with official actions taken by the Board under your chairmanship. All who are familiar with your record recognize your devotion to the public welfare and the constructiveness that has characterized your leadership in the Federal Reserve System (Truman 1948).
Truman urged Eccles to "remain as a member of the Board and accept the Vice Chairmanship so that the benefit of your long experience and judgment will continue to be available and so that you may carry forward legislative proposals now pending in Congress (Truman 1948)." Eccles remained on the Board, initially accepting but later declining the position of Vice Chair.
Despite all that, there may be a be some truth to the myth of Eccles as the founder of the modern, independent Fed. Ironically, Eccles' proposals that the Fed should serve as a monetary apparatus controlled by the President may help, in the end, to preserve the independence of the institution. The Congressional debate over Eccles' proposals leaves a voluminous record of Congress's intent when it crafted the modern Fed. The record clearly reveals that Congress wanted the President's hands far from the levers of monetary policy. This record may become a vital piece of evidence should disputes arise about the intent of Congress and the meaning of the Federal Reserve Act.
References
Eccles, Marriner. Letter to Harry Truman, January 27, 1948. https://fraser.stlouisfed.org/archival-collection/marriner-s-eccles-papers-1343/letter-mr-eccles-461505. Also available at https://fraser.stlouisfed.org/archival-collection/marriner-s-eccles-papers-1343/letter-president-truman-464934.
House of Representatives, Committee on Banking and Currency, United States, Congress. Banking Act of 1935: Hearings Before the Committee on Banking and Currency, House of Representatives, Seventy-Fourth Congress, First Session, on H.R. 5357, February 21, 22, 26, 27, 28, March 1, 4, 5, 6, 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 25, 26, 27, 28, April 2, 8, 1935. Government Printing Office: Washington, DC. 1935. https://fraser.stlouisfed.org/title/5309. Cited as House 1935.
Senate, Subcommittee of the Committee on Banking and Currency, United States, Congress. Banking Act of 1935: Hearings Before a Subcommittee of the Committee on Banking and Currency, United States Senate, Seventy-Fourth Congress, First Session, on S. 1715 and H.R. 7617, April 19 to June 3, 1935. Government Printing Office: Washington, DC. 1935. https://fraser.stlouisfed.org/title/banking-act-1935-778. Cited as Senate 1935.
Truman, Harry. Letter to Marriner Eccles, January 27, 1948. https://fraser.stlouisfed.org/archival-collection/marriner-s-eccles-papers-1343/letter-mr-eccles-461505. Also available at https://www.presidency.ucsb.edu/documents/letter-marriner-eccles-asking-him-remain-with-the-federal-reserve-board-vice-chairman.
Notes
1. Title I focused on updating and making permanent the Federal Deposit Insurance Corporation (FDIC), which had been established in 1933. The Roosevelt Administration tasked Leo Crowley, Chairman of the Board of the FDIC, with drafting Title I and presenting it to Congress. Title III focused on technical amendments to bank regulations. The Roosevelt Administration tasked J. F. T. O'Conner, the Comptroller of Currency, with drafting this legislation and presenting it to Congress.
2. During his testimony, Charles Warburg, Vice Chair of the Manhattan Company and son of Paul Warburg, a famous investment banker and financial intellectual who played a pivotal rule in creating the Federal Reserve System and served as a founding member of the Federal Reserve Board, deconstructed Eccles' arguments for Title II (Senate 1935 pp. 71-93). Warburg identified the ideas underlying Title II as a blend of the theories of John Maynard Keynes and Lauchlin Currie (Senate 1935 pp. 74-5). The testimony of Warburg and other witnesses along with comments by various senators indicate that they believed Title II was a plan to codify and cement the President's control over monetary policy that had been based on a series of laws passed in 1933 and 1934 that allowed the President to directly use the tools of monetary policy on a temporary, emergency basis during the ongoing Depression but which would soon expire.
3. The Banking Act of 1933 created the FOMC, which then consisted of the 12 CEOs of the Federal Reserve Banks, then called governors. The original FOMC set open-market policies for the entire Fed System, although the Federal Reserve Board could veto their decisions and individual Federal Reserve Banks could decline to participate in FOMC-dictated policies, although the dissenting banks could not initiate countervailing policies on their own accord. The Banking Act of 1935 gave the FOMC something close to its current form. The FOMC's structure was further amended in 1942, which introduced the current voting structure. https://www.minneapolisfed.org/article/1999/the-federal-reserves-beige-…
4. At that time, the Chair of the Federal Reserve Board (who was also the Secretary of Treasury) was a distinct position from the Governor of the Board. Four of the seven chairs that served between 1913 and 1935 played leading roles directing the Fed's banking and monetary policies. These influential chairs included William McAdoo, Carter Glass, William Woodin, and Henry Morgenthau. Glass asserted that as Chair he had too much influence on the Fed (Senate 1935 p. 90). Morgenthau indicated that during his tenure, when the Treasury and President directly controlled the levers of monetary policy, the FOMC "played a very unimportant role" (Senate 1935 pp. 503-5). In contrast, Andrew Mellon, who served as Secretary of Treasury from 1921 through 1932, played much less of a role in the Fed, possibly due to his strong laissez-faire economic beliefs. During Mellon's tenure, the governor of the Federal Reserve Bank of New York, Benjamin Strong, took a leading role directing open-market policies.
5. Unfortunately, both Glass and Vanderlip used gendered language during this exchange. Nancy Teeters, the first woman to serve on the Federal Reserve Board, would not be appointed for another 43 years.
6. Sadly, Humphrey had died by the time of the Supreme Court argument. The issue at stake in the case was whether his executor should be allowed to recover the salary that would have been paid to him had he remained on the FTC between the time of his dismissal and his death.
7. The discussion to which Eccles alluded may have been the testimony of witnesses that preceded him or articles and editorials published in newspapers around the nation in the weeks preceding his testimony.
8. Since 2010, only a subset of the Reserve Bank directors – the six out of nine who are not officers, directors, or employees of a regulated entity – may participate in the appointment of a Reserve Bank president
9. By tradition, the FOMC elects the chair of the Federal Reserve Board as the chair of the committee, and the president of the Federal Reserve Bank of New York as its vice chair, but this arrangement is not written in law.
10. A slot was available for Truman to make this appointment due to the death of Vice Chair Ransom. Truman nominated Thomas McCabe to be chair. McCabe is hardly a household name in Fed history but played a critically important role in negotiating the Fed-Treasury Accord in 1951.
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