The Federal Reserve Board was set up to be free from political interference so that it could engage in the uncertain art of steering the economy without regard to the needs and desires of elected officials. Board members are appointed by the president to staggered 14-year terms and confirmed by the Senate.
But now Donald Trump has threatened to end all that by claiming he has fired Fed Governor (as board members are known) Lisa Cook. Trump is paying lip service to the rule that says he can’t fire governors except for cause by accusing her of mortgage fraud. But not only has Cook not been formally charged with misconduct, there isn’t even an investigation under way.
Trump has also suggested that he might fire Fed board chair Jerome Powell, which he also lacks the authority to do. Even this Supreme Court said recently that the president’s authority does not extend to breeching the Fed’s independence.
The Fed regulates interest rates with an eye toward keeping inflation in check and unemployment low, two goals that are sometimes at odds with each other, which means the agency must aim for a delicate balance. Trump wants lower interest rates, in part to finance the massive increase in the federal debt that he’s presided over with tax cuts for the rich. As The Wall Street Journal puts it:
Both the central bank and the economy at large are entering unknown territory. Presidents have periodically criticized the Fed since its founding in 1913 and attempted to sway its decisions. But especially in recent decades, politicians have broadly recognized that an independent central bank is important because it has a free hand to make unpopular moves that preserve the economy’s long-run health.
There’s a historical analogy that’s worth keeping in mind. I’m currently reading Jill Lepore’s massive history of the United States, “These Truths.” As with Trump, Andrew Jackson didn’t like bankers telling him what to do, and in 1832 he refused to renew the charter of the Bank of the United States. Congress vetoed his action, and Jackson overrode its veto. Lepore describes what happened next:
Jackson’s bank veto unmoored the American economy. With the dissolution of the Bank of the United States, the stability it had provided, ballast in a ship’s hull, floated away. Proponents of the national bank had insisted on the need for federal regulation of paper currency. Jackson and his supporters, known as “gold-bugs,” would have rather had no paper money at all. In 1832, $59 million in paper bills was in circulation, in 1836, $140 million. Without the national bank’s regulatory force, very little metal backed up this blizzard of paper, American banks holding only $10.5 million in gold.
Moreover, Jackson’s irresponsible action led to a financial panic in 1837, just in time for the inauguration of his vice president and chosen successor, Martin Van Buren, who earned the nickname “Martin Van Ruin.” The panic set off a seven-year depression; it also led to the abolition of debtors’ prison and to bankruptcy reform. Van Buren was easily defeated for re-election in 1840 by the Whig candidate, William Henry Harrison.
If Trump follows through on turning the Fed into just another arm of MAGA, will similar economic calamities follow? As I write this, the market indexes are flat, which suggests that Wall Street isn’t too worried about Trump’s threat against Cook. But Jackson’s war on the national bank shows what can happen when economic expertise is thrown aside in favor of political expediency.
The economist Paul Krugman’s latest newsletter post is about 
