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Kempen's Commentary: Lessons from Jackson and Biddle

21 February 2020

 

Lessons from Jackson and Biddle

A central bank should make its own decisions and nobody should interfere, certainly not politics. President Donald Trump calling Federal Reserve Chairman Jerome Powell “clueless” and the Fed “the problem” is unprecedented, right?

A good reason to delve deeper into the history of American central banks. Did you know, for example, that the Fed as we know it now has had only 16 central bank presidents so far? And Trump is the 45th president of the United States. Since the founding of the country in 1776, now 244 years ago, the US has worn out several central banks, as a result of which there was no central bank for 97 years (40% of the time)! The current Fed is number 3 and established in 1913, a few months before the start of World War I. Why is this relevant? Because number 2 came to an end after a fight between the then president of the country, Andrew Jackson, and the then president of the central bank, Nicholas Biddle. Biddle was a technocrat, trained by the best universities in the country. Meanwhile, Jackson had little interest in the ruling power, did not trust the banks and pursued a policy that was considered to be populist. Does this sound familiar?

What can a central bank do against criticism? Not much. A central bank ultimately depends on political goodwill. But there are some means that can be used, the first being more transparency. Powell holds more press conferences and emphasizes the bank’s data independence. A second means is political maintenance. In his first year, Powell has spoken no less than 98 times with government officials. That’s 4 times as much as his predecessor Yellen did. From that point of view, the Fed is indeed defending itself against Trump’s criticism.

Almost 200 years ago, the central bank lost a long and dirty struggle in which Jackson eventually removed all government reserves from the central bank. The bank saw its statute not being renewed and it went bankrupt. After that, it took 80 years before the Fed was established.

We are not that far yet. Compared to then, the current situation seems pretty much in order. A reassuring thought, don’t you think?

The author

Ivo Kuiper

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