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Trump’s Coming War with the Fed

Like Andrew Jackson before him, Trump is preparing to go to war with America's central bank.
April 12, 2019
Trump’s Coming War with the Fed
(Illustration by Hannah Yoest / photo: GettyImages)

Consider this: Donald Trump installed a portrait of Andrew Jackson on the Oval Office.

Add this: Andrew Jackson fought a bitter battle with his cabinet, fired two Treasury secretaries, and mounted a campaign against the Bank of the United States. Nicholas Biddle—president of the Bank of the United States resisted Jackson—and the Bank War followed.

Biddle was allied with Henry Clay and when Jackson beat Clay in the 1832 election, he took it as a mandate to get rid of the Bank. Which he eventually succeeded in doing. The nation remained without a central bank from 1836 until Woodrow Wilson established the Federal Reserve System on December 22, 1913.

Flash forward to 2021. A re-elected President Trump, having seen off the socialists who thought they could manage the commanding heights of the economy better than he, faces a slow-growing economy. Or perhaps a recession. The president goes to war with the Fed when the Board of Governors refuses to drop interest rates below zero, something it has long resisted, and decides that QE Model 2 would not work to revive the economy. It also keeps a tight rein on bank credit to avoid a repeat of the improvident lending and eventual financial collapse in 2008—which makes it difficult for Donald Trump Jr. to keep the family property empire afloat and Donald Trump Sr. to boast of an economy that runs along at a 3 percent to 4 percent growth rate.

Trump has made his peace, of sorts, with North Korea, and struck a deal, of sorts, with China on trade. Never mind that Kim Jong-un has kept his nukes and Xi Jinping continues to steal intellectual property from American firms eager to be allowed to operate in China’s market: a win is a win if I say it is, proclaims Trump.

At a mass rally, which always gets the president’s adrenaline flowing, he decides that he needs a new enemy, and escalates his attack on the Fed and its chairman, Jay Powell, because Trump has decided he cannot fire Powell and, is reported to have told Powell during a phone call, “I’m stuck with you.” The president will instead, he announces, get rid of his secretary of the Treasury, Steve Mnuchin, who recommended Powell for the job. In his place he appoints Stony Brook University professor Stephanie Kelton, the face of MMT—Modern Monetary Theory—which holds that a country with its own currency can print as much money as it needs until inflation takes off, at which point Congress can raise taxes or cut spending. (HA!) Professor Kelton does not mind paying Treasury Department printers overtime in order to get the currency she needs, a task made easier by the fact that starting in 2017 the number of $100 bills in circulation exceeded the number of $1 bills, enabling her to meet the demand for the C-notes that are familiar to consumers because they are used commonly for every-day shopping, and not only in Whole Foods.

Getting up his usual rally-induced head of steam, Trump demands that Congress repeal the statute setting up the Fed. He had tried a hostile takeover by nominating two allies to the board, both of whom had been hard-money advocates of the gold standard—until they weren’t—and then became advocates for interest-rate cuts. All irrelevant when a few Republican senators joined Democrats in rejecting Steve Moore, who had called for “incompetent” Powell’s firing, and claimed not to be a Trump “sycophant” even though he had been a campaign adviser in 2016 and, like the president, came to demand that the Fed cut interest rates by one-half of one percent, immediately. The matter of a few hundred thousand in missed childcare and alimony payments returned Moore to the Heritage Foundation.

The Senate then treated Herman Cain, the second nominee, in similar fashion because years earlier several women had accused him of unwanted sexual attentions. It did Cain no good to deny the charges, and as an added inducement for senators to approve his appointment point out that he was joined at the hip with Trump, favoring a lethal electrified fence on the Mexican border and insisting that claims that the globe was warming as “poppycock.”

The takeover having failed, Trump decides to rid himself of the meddlesome Fed by pointing out that back in 2018 he was right and the Fed was wrong about where interest rates should be set (as Powell tacitly admitted by cancelling some interest rate increases planned for 2019 in favor of “patience”). Why rely on his ability to jawbone the Fed, Trump reasoned, when it would be possible to give him the power to set rates, no central bank needed? Besides, the whole idea of a central bank is to turn the economy over to elitists, a coup that disenfranchises the populist masses. Yes, the government does business through the Bank, but it could do such banking business as it has with state banks, located in states that went Republican in 2020.

Given that power, Trump promises that he would lower interest rates, to applause from small businesses, students knee-deep in debt, homeowners with variable rate mortgages, the Treasury burdened with interest payments on the massive national debt that resulted from the Trump tax cuts, and Donald Trump, Jr.

Congress does as told—oops, as asked. At a signing ceremony held in the Oval Office under the portrait of Andrew Jackson, Trump adds control of monetary policy to his control of fiscal policy. He then replaces the Jackson portrait with one of Franklin Delano Roosevelt and begins planning for a rally at which he can mount an attack on the Twenty-Second Amendment to the Constitution.

Speculative you say. Fanciful, even. That’s what we said about his campaign for the Republican nomination. And his run for the White House. And his plan to impose tariffs. And . . .

Serious observers and policy makers believe that Trump’s war on the Fed is designed to set the tone for a full assault after the 2020 election. They believe he knows that neither Moore nor Cain can be confirmed, but wants to set up a battle that will arouse his base against the Fed. Until now Trump has nominated professionals with expertise in various areas of concern to the Fed board. If confirmed, Moore and Cain would bring to six the number of Trump appointees on the Board of Governors. Given his previous qualified appointments, this would still not be enough to politicize the majority.

But it would be enough to change the tone of the debates and set the stage for a drive to get rid of the Fed.

Axios’ Jonathan Swan sees it this way, “People close to the President say Trump is pissed at Powell and views the Powell-led Fed as the biggest threat to [stock] markets and the economy. So he’s throwing some bombs into the building.” Easier to remove the wreckage than a well-functioning institution.

Irwin M. Stelzer

Irwin M. Stelzer is a senior fellow and director of Hudson Institute’s Economic Policy Studies Group and economic columnist for the Sunday Times (London).