Hating the Fed Is as American as Apple Pie

The tone of Trump’s attacks is new even if the sentiment isn’t. But try living without a central bank.

By Justin Lahart

The tension between Fed Chairman Jerome Powell and President Trump has ample precedents, starting with differences between Treasury Secretary Alexander Hamilton, who proposed the first U.S. central bank, and then-Congressman James Madison, who disliked the concept. Photo: Photo Illustration by Emil Lendof/The Wall Street Journal; Photos: Getty Images

When President Trump complains about the Federal Reserve, he’s taking part in a tradition of central-bank bashing that stretches back to America’s founding. But for all the missteps the Fed has made over the years, the country is better off with it than it would be without it.

Mr. Trump has made no secret of his disdain for its policies. During his election campaign he said the central bank’s stance was too easy, fueling “a big, fat, ugly bubble.” Now he argues the Fed raised rates by too much last year, and has repeatedly called for it to cut them. On Tuesday he suggested he could consider demoting Fed Chairman Jerome Powell.

Mr. Trump is publicly criticizing the Fed in a way no U.S. president has before. But he is also tapping into a longstanding animus toward central banking in the U.S., the power of which shouldn’t be discounted. Investors who take the Fed and the independence it has achieved for granted may need to brush up on their history.

That history begins in 1790, when Treasury Secretary Alexander Hamilton submitted his proposal for the Bank of the United States. Modeled after the Bank of England, it would provide loans to the public and private sectors, and the notes it issued would provide a uniform paper money for business transactions.

Virginia Rep. James Madison and Secretary of State Thomas Jefferson tried to block Mr. Hamilton’s plan, saying it was unconstitutional for the government to set up a bank. Their opposition also arose in part from the prevailing attitude of the agricultural South and of farmers, who tend to be debtors and often detest banks. It was a populist theme that would be repeated.

President George Washington sided with Mr. Hamilton, and the bank was chartered in 1791. But antibank forces continued to pound away, and its charter was allowed to expire in 1811. After five rocky years for the economy, the Second Bank of the United States was chartered with then-President Madison’s support. But two decades later, that charter wasn’t renewed, squelched by President Andrew Jackson.

Starting in 1836, the U.S. stood out as a major country without a central bank. “And then we had a period characterized by financial instability and a much worse track record than any of the European economies,” explains Michael Bordo, an economic historian at Rutgers University. Booms and busts came rapidly, and a series of crippling financial crises culminated in the panic of 1907, the severity of which was a powerful argument for a central bank. Against stiff opposition, the Federal Reserve was set up in 1913.

The years since have, with some notable exceptions, been better. The economy swung far less erratically than before, experiencing far fewer financial crises. And as the Fed has gained more independence, insulating it from politicians’ desire to juice the economy ahead of elections, it has become a more credible steward of the economy.

But when the Fed slips up, or when times get rough, America’s old animus for central banks isn’t far away. The worst it got in recent memory was probably in the early 1980s, when the Fed under Chairman Paul Volcker tightened policy massively to crush inflation, buckling the economy in the process. Now he is widely hailed, but at the time he was getting attacked by both the right and the left. Unhappy home builders sent him two-by-fours pleading for lower rates, even as President Ronald Reagan largely held his tongue.

A board mailed to Fed Chairman Paul Volcker as part of a protest by builders over high interest rates, on display in the 2013 exhibition "The Fed at 100" at the Museum of American Finance in New York. Photo: STAN HONDA/AFP/Getty Images

The 2008 financial crisis also did heavy and justified damage to the Fed’s credibility, since it horribly misjudged the risks that built up during the housing bubble. The unconventional policies it subsequently adopted to combat the recession were also viewed as a massive overreach by critics who were convinced the Fed put the economy at risk of currency debasement and inflation.

Other countries celebrate their central banks: For its 300th anniversary in 1968, Sweden’s Riksbank established the Nobel Prize in economics, and the Bank of England’s tricentennial in 1994 culminated with a service of thanksgiving attended by the Queen. The Fed initially wanted to make an event of its centenary in 2013 but wisely opted for a quiet affair.

Mr. Trump can find sympathy beyond his populist base for threatening the Fed’s independence—after all, it expresses a sentiment that has spanned the political spectrum. Even some financially sophisticated people who should know better wouldn’t mind. They should know better.

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