It is traditional for there to be tension between the Federal Reserve Board and administrations. But only rarely has this surfaced into an open fight over policy. It is even less common for the president to publicly criticize the keepers of the currency at the Fed as happened this week.
The last conspicuous battle between a Fed chairman and the White House was in 1971 when Authur Burns, then chairman, ran afoul of the Nixon administration.
Surprisingly, that incident was not triggered by White House opposition to the Fed's money policy -- the usual cause of differences between the two -- but by the Fed Chairman's criticism of Nixon's economic policy.
As inflation heated up in 1971, Burns publicly called on the president to take steps to slow down the wage-price spiral. In speeches as well as in testimony to Congress, the Fed chairman came out in favor of an incomes policy as a last-resort weapon against inflation.
The White House responded with a personal attack on Burns as well as the wider threat to emasculate the Fed. The story was put out that while arguing for a general incomes policy, Burns privately was pushing for a raise for himself.
This so outraged the Fed chairman, sources report, that Nixon was forced to disassociate himself from the slur two days later to stop Burns from resigning. The president called a press conference to say that the comment was a "cheap shot."
The administration also had put out a story that it intended to try to double the size of the Fed -- thereby packing the board with members who would be more sympathetic to the White House -- or to bring it under administration control. This also was denied soon afterward by Nixon's press secretary.
Charles Colson, special counsel to Nixon, later admitted that he had given out the stories, although Nixon's role has remained uncertain. Fierce private arguments reportedly took place between Colson and Burns, but White House criticisms in public of the Fed chairman never were made directly by the president.
There were two earlier notable episodes when conflict erupted between the Fed and the White House. In 1951 a long-simmering row broke out between the Treasury and the Fed over prices and yields on government debt. The Treasury wanted the Fed to continue to guarantee the prices of the large quantities of government debt in the market, thus limiting interest rate rises.
President Truman summoned the Fed's policy-making Open Market Committee to the White House in January 1951 to impress on the members the urgency of the Treasury's request to support its bond prices and hold down interest rates. The Fed did not take kindly to this, and after a bitter public fight its independence was asserted in an "accord" which allowed interest rates to rise gradually.
Nearly 15 years later another president attempted to force the Fed, then chaired by William McChesney Martin, to follow a more lax monetary policy. President Johnson was furious when, in December 1965, the Fed raised the discount rate from 4 percent to 4.5 percent and allowed banks to raise their interest rates in a move to tighten credit.
The Fed was worried about the inflationary effects of the budget deficits produced by spending on the Vietnam war and on the Great Society measures. Although some members of the board thought that the Fed should wait to see the president's January budget statement before acting itself, they were overruled. The president publicly lambasted the central bank for its action and reportedly talked about the need to take it over. The row rumbled on for several months as interest rates continued to climb and the economy boomed in 1966.
President Carter was thus not the first in the Oval Office to criticize the Fed nor to threaten its independence. But he is one of only a few presidents who have gone that far.