Adam Tooze on Trump’s War on the Fed

WALTER ISAACSON: Thank you Christiane. And Adam Tooze, welcome to the show.

 

ADAM TOOZE: Thank you, glad to be here

 

ISAACSON: In a Supreme Court ruling this past May, in which it allowed the president to dismiss a lot of employees from independent agencies, it had a carve out for the Federal Reserve and it said it was a “uniquely structured quasi-private entity with a distinct historic tradition.” Explain that to me.

 

TOOZE: Yeah. This is a, an extraordinary fact that is true. That this central agency of government – I think everyone generally when they follow the news, thinks of the Fed as a bonafide agency of the American state of the, of the government – does indeed have origins in 19th century banking politics. And this makes it like other central banks. Banks, central banks are banks to bankers and bankers are a very powerful lobby group. And from the late 19th century onwards, after years of dispute about this question, it was clear that America, as it entered the 20th century, was going to need a central bank. And this was a hugely controversial issue in Gilded Age America with populists in the agrarian parts of the US protesting and wanting easy money and Wall Street, which at the time was very remote from other parts of the US anchoring itself on the global gold standard that was centered on London at the time.

 

ISAACSON: So that begins in 1913 with the Fed. And it’s a time when William Jennings Bryan, running for president is saying, you know, that we shouldn’t be crucified on the cross of gold. They want easy money, they want you know, they don’t want to –  Is that why the Fed was started so that the bankers could have a more stable currency?

 

TOOZE: It’s a compromise. So de facto, the US after the Civil War was on the gold standard, which was punishingly austere, right? To get back to the gold standard after the US Civil War there is a severe deflation. American federal government at the time is a tiny, tiny fraction of the American economy. So effectively it was tied to the British based gold system. And that’s what provoked the populist backlash of the 1890s. Think of this in terms of negative equity. If you’ve got a mortgage on a property, now if you’re in the suburbs or then if you are a farmer and all of a sudden the price of everything starts falling, including the value of your property, you are in a pickle because you’re basically gonna end up in deeper and deeper negative equity. William Jennings Bryan’s great run for the Democratic Party nomination, and then he’s won for the presidency several times, was all about trying to loosen that cross of gold that was being pressed down. 

That from the point of view of Wall Street, the muddied interest, there is a cause of huge panic. So what do you do? By 1913, under the stewardship of the very cooly progressive southern, you know, quite aristocratic figure of Woodrow Wilson you end up with a compromise. And it has elements of the Wall Street banking interest and it has elements of populism and a struggle then ensues. And in a sense has never stopped over the last 110 years of what the Fed’s priorities are and, and what it should give the centrality to. Should it be monetary stability? Should it be connections to the wider world or should it be the interests of America’s domestic political economy as diverse as those are, right? So that’s the kind of setup. And indeed we’re still living in that, in that, in that argument, that ongoing argument.

 

ISAACSON: Well, the current argument about the Fed really, it seems to begin in 1979 with Paul Volcker, where he really jacks up interest rates to fight inflation. And you have a two-pronged system. You’re trying to fight inflation, but you’re trying to keep unemployment from going too far up. Tell me how that is, defines the Fed today.

 

TOOZE: I think I might roll it back another decade to the late sixties or indeed the sixties, and take people to the civil rights movement because that’s really where the debate about full employment takes center stage. The sixties are thought of, of a period of big government, great society where all Keynesians now we’re doing the manipulation of the US economy. But America being a society of racialized inequality, the really cutting question, the canary and the gold mine is black male unemployment. And no one understood this better than the Martin Luther King wing of the Civil rights movement. The March on Washington was a march for Vote and Jobs. And so from the sixties onwards, there’s an argument going on on the American left about what the priorities of economic policy should be. And those are written in the seventies, while the battle is still going on for the hearts and mind of American politics, the last really great struggle into the Humphrey Hawkins Federal Reserve Act, which in gives it the dual mandate that you refer to. 

Only shortly thereafter for the Carter appointed Hard Money Board of the Fed coming outta Wall Street with Paul Volcker at the helm.  We now think of him as a lovely centrist, cuddly grandpa. But in fact, he was a hard man of, of money to yank up interest rates, as you say, and fundamentally tilt America’s political economy away from the American working class. Unemployment shoots up. There’s an argument about how far Volker himself intended this, but there were key moments in his various speeches where he makes pretty clear that he understands the breaking trade union power is key to shifting America’s political economy. And just from a technocratic point of view, once you’ve done that, it’s much easier to manage the inflation rate. Because you don’t have the flywheels in American society that take a cost of living increase and say, right, I want a wage adjustment for that reason. Right. The big trade unions in the seventies are all about indexing. That’s broken in the seventies by the Volcker shock. And so then we emerge in this new world of independent central banking with technocratic leadership by the, by the nineties and the two thousands. Right? PhD in economics is the minimum qualification for this incredibly political job.

 

ISAACSON: In the New York Times opinion piece that you wrote recently, you said, when you’re talking about President Trump trying to influence or overwhelm the Fed, you said, we should start by thinking, what type of central bank do we want to have? Tell me what, what you mean by that.

 

TOOZE: Well, I take this as a particular instance of a more general dilemma of progressive people in the US right now in the face of the Trump onslaught, which is, is our first and primary reflex, and indeed, in some senses, duty and responsibility to just simply defend the status quo against this onslaught? Or does that condemn you to passivity and a lack of imagination and ultimately also a lack of ability to mobilize against Trump? Because one of the things that’s energizing MAGA right now is they’ve unleashed the political imagination of their people. Like there’s nothing they don’t think they can do. 

And the problem with the, the defensive position that’s been adopted, I think by many people in, in, in, not just in this area of central banking, but across the board, is that it robs you of that opportunity to keep thinking. And that’s what I’m appealing for us to do, but also simply, I mean, not just on kind of meta grounds, but tactically, I mean, think it through. Say Trump actually does manage to seize control of the Fed when, you know the moment comes where the Democrats take back control of Congress and maybe the White House, what’s the agenda going to be?  Are we going to simply restore the old Fed, say we managed to stop him, say the courts actually block his effort. The concrete issue here is whether he can fire Lisa Cook, say they don’t manage to fire her, is the next move going to be to make it even harder to fire governors of the Federal Reserve? 

 

ISAACSON: Well, wait, so, what’s your answer there? I mean, what should we be trying to do with the Fed?

 

TOOZE: What I think we should be trying to do is think about what we think a democratic fed would look like, a properly democratic fed –

 

ISAACSON: Democratic meaning responsive to the people, not to the Democratic party

 

TOOZE: Responsive to the people, responsive and to their representatives. I think the real issue here is Congress. Is – and right now the Fed budget does not have any serious congressional oversight. There’s a kind of ad hoc system which runs by the politicization of the appointment of Fed Governors, but it’s not actually a routine matter. And I think that Fed mandate that you alluded to that was set in the 1970s is something that could be periodically reviewed. So as to discuss the question of whether we are, for instance, measuring unemployment right, whether we are capturing the right things. And we know that Jerome Powell, for instance, his, his chairmanship and the board has been quite imaginative in doing this, but they’ve been doing it essentially on their own, say so, right? So they’ve been looking increasingly at racial inequality in the American labor market as a highly sensitive indicator of macroeconomic change. That’s great. But it doesn’t necessarily have any political backing. And that I think is a weakness. 

You could say, you could say, we just can’t trust American democracy right now in a heaven forbid that we allow Congress to intrude more. But that’s really a, a logic of defeatism. And, and that defeatism is what animated the technocrats in the eighties and nineties to say, you know, we shouldn’t really trust politicians. You can see that right now in the arguments being made, you know, they’re always just after the next election. That’s the only thing on their mind. So really we should take all the important things away from them. And that’s a condescension really, that I actually don’t think American politics for the much of the last decades has really merited and deserved. The current moment is no doubt a bad one, but a bad moment is not necessarily the right place to think strategically about our options going forward.

 

ISAACSON: Well, you seem to be arguing then for a more democratic fed, in other words, more responsive to politics. Well then why isn’t Trump right? He got elected. Why can’t he do what he wants with the Fed?

 

TOOZE: Because of the way he’s doing it. Right. And the, and the the clear intentionality here to just cynically blow this up. The, the mechanisms that are being used, the assault essentially on the private finances of board members that are selected because they’re vulnerable. This isn’t an orderly, coherent, serious politics of money. This is the same old, same old MAGA no holds barred assault. Precisely I think so as to channel this actually very valuable and serious conversation into appropriate paths, there should be mechanisms for doing this in a more orderly fashion –

 

ISAACSON: But suppose there were a democratic push by the people, through Trump to say, Hey, lower interest rates. Is that something the Fed should resist or should it bow to Democrat–, to the will of the people?

 

TOOZE: I mean, I don’t see there’s any problem with a politics of low interest rates being pushed. I, one of the effects of the sort of structural change that I am inviting that we think about inviting us to think about is that it would force political parties to actually offer agendas on these kind of issues, right? The point is not, Do I approve of Trump’s particular politics or not. The point I’m trying to make is that, you know, reflex against Trump’s toxic politics, we end up ruling out the possibility of a more serious argument about this issue. And I don’t disagree with you. Yes, the politics of money and interest rate is native to American democracy. It goes all the way back to the 19th century. Read William Jennings Bryan’s speech and weep for the degenerate state of American political discourse in the 21st century. Because the range of sophisticated arguments he offers is extraordinary by modern standards. We’ve lost a lot of that, and I don’t see how entrenching technocratic exclusivity on this issue is gonna make things any better. I think in principle, what it probably does as in so many other areas, is to breed a kind of irrational populism in the, in the swamp that emerges beyond the bounds of the, you know, respectable discourse in the Fed.

 

ISAACSON: All this is happening to the Fed, perhaps undermining its independence. And yet the bond market doesn’t seem to have done much. Why is that?

 

TOOZE: Well, I mean, it’s, it’s two sided. It hasn’t, there’s been no panic. I think that’s very important. And we should give treasury, we should give credit to the treasury people. I mean, Bessent may appear like a total sycophant, but he appears to really know his business in doing the technical management of the treasury market. That’s important. ’cause It’s a life support type system, right? It’s a thing with trillions of dollars going in every day and you just have to keep the monitors in the emergency room ticking over. And they’re doing a good job at that. If you look at interest rates over the long run, it’s a slightly different story because Germany with a low debt environment and a very independent central bank in the ECB borrows at much lower interest rates than the United States does now. So you can see it in the yields now, even France, which some of the listeners may have seen was a crisis case a couple of weeks ago, borrows at lower interest rates than the United States.

So the United States is moving into the zone of a country with a heavy debt burden with some questions about, its, the political management of its monetary policy. And the crucial thing to say is, it’s not a disaster. The sky doesn’t fall. Does it shift over time the parameters of economic policy making? Sure it does, because it makes debt more expensive. And then that will cause somebody like Trump to say, well, if only we could have lower interest rates, and who sets the rates? Well, the Fed does. So you get caught in this questioning then of how artificial or how natural those interest rates are. But it doesn’t produce an immediate disaster. So if you have other priorities like the 2008 financial crisis or the COVID shock, then you do big monetary and fiscal policy. And the US did. And I don’t think there’s any serious argument that both of those were major and highly successful policy interventions.

The question about the Trump administration is what are they doing it for? Right? You know, all of this institutional jiggery pokery and what is their positive project? It seems basically to give huge, you know, tax giveaways to billionaires. That’s not a good use of the kind of political free space that you could have. But if you wanted to do a Green New Deal, if you wanted to do a truly transformative social and economic policy, if you wanted to actually alleviate child poverty in the US, you know, we know how to do it. It’s a matter of money. And this is a mechanism through which you –

 

ISAACSON: Wait, wait. But those are political judgments and this country has made the other political judgment from the one you just pushed.

 

TOOZE: Yes, it absolutely has. Yeah, there’s no question about that. I don’t – I mean, that that’s the, I don’t think anyone disputes that it’s a rigged system, of course, with a heavily conservative Senate, but absolutely, within that existing structure it expresses those priorities are, are there. With a lot of, you know, I mean, there’s a lot of leverage being exercised. And so I don’t think one wants to normalize what’s happened with the Big Beautiful Bill. You’re right. They had a majority, they got it through. But, but I, you know, that’s yeah, the history –

 

ISAACSON: I mean if you could argue for democracy, you have to be in favor of democracy, right?

 

TOOZE: I I’m not, I’m not, not for second disputing that, rather the country. Yeah. 

 

ISAACSON: Okay. The proximate cause of this is the president’s attempt to push Lisa Cook off the board. You’ve served on a committee with her. Tell me about her.

 

TOOZE: She’s a very, very, very sensible dedicated economist, policy maker. I was on a, on a committee that was involved with issues, sort of with green finance actually. One of the, you know, one of the zones of creative thinking about central banking that had a moment of opportunity between the, you know, the Green New Deal in 2018 and the Biden administration running out of steam in 2023 amongst the inflation panic. 

So that’s the context in which I got to know her, and I was very gratified to see that she ultimately went through a grueling, a grueling, grueling, grueling confirmation process in the Senate, which she already suffered slanderous assaults on her professional record. This is the first black woman to be appointed to the board, it’s worth saying. And as such, just rare, as rare as it can possibly be, the number of black women that choose to and are awarded economics PhDs in the United States is scandalously low. So she is, she’s a, a precious person to have found her way, or to be promoted onto the Fed Board to ensure that diversity of standpoint and that expertise that’s laser focused on issues of structural inequality and just bringing macroeconomic chops to that job. And so it’s, you know, it’s scandalous to see her attacked in this way.

 

ISAACSON: Do you think this country, the US, is in a moment when it really could have a sensible debate about monetary policy?

 

TOOZE: I, I honestly don’t know. But I also feel that we need to weigh the cost of not posing the question. And what I see right now an awful lot of folks saying, you know, now’s not the moment. Please don’t bring them up. Don’t, now’s not the moment. Now’s not the moment. Don’t you understand how dangerous this is? And as I say, that forces us into a defensive position, which, you know, coming from New York with the prospect of Mamdani being elected as mayor, I think there is a part of American society which is answering in different terms. And I frankly couldn’t have forgiven myself if I hadn’t at this moment written a, a piece, something like this. It’s not because I’m necessarily the person appointed to do it, but I’ve been part of a decade long conversation about the politics of money. The question has been opened up by people I would recognize as my enemies. Do I at that moment say, oh, no, no, no. We rally around a standard of technocratic independence? That, that, that’s not a, that’s not a policy that we can responsibly advocate. 

It’s a, and this is a blackmail that we are going to be continuously subject to, and it’s not exclusive to the United States. It happens in large parts in Europe as well, where we are also seeing the rise of the far right, which is that argument. zip it, now is not the moment. That’s a difficult question. Are you sure wanna bring that up? I find that actually quite unsettling even now coming from the left. I, I don’t I don’t personally subscribe to that as a, as a viable politics. It’s a self-mutilation, essentially, right? For fear of, for fear of, for fear of the struggle and the fight over these issues.

 

ISAACSON: Adam Tooze, thank you so much for joining us.

 

TOOZE: Thank you for having me.