Allan H. Meltzer, Economist, professor, author
As a kid, I moved a lot around Boston, where I was born. My mother died when I was 5, after which I lived with my grandmother. When I was 9, my father remarried and we became suburbanites, moving to Westwood, Mass. Practically no Jews lived there other than me, my dad and my sisters. One day, a fire started in our backyard and my next-door neighbor came running with his hose and stood on the property line. He didn’t feel any responsibility to help us, but he wasn’t going to let the fire damage his own property. So it was in the little town of Westwood that I first experienced anti-Semitism.
I’m talking about the 1930s in New England. Winters were very, very cold, and my sisters and I had to walk two miles to school every day with kids from our neighborhood. But while locals would often stop to give the other kids a lift, no one ever picked us up. That’s why, even though I was from New England, I didn’t want to go to college there. I wanted to get away, so I went south to Duke University in North Carolina. My father must have felt as I did because, at about that same time, he moved with my stepsister to California.
I suspect that, because of these negative experiences in my youth, I became active in civil rights while at Duke and worked with the Southern Conference for Human Welfare. Certain members of that organization were later accused of being communists. (I wasn’t one of them.) But I was involved in getting Henry A. Wallace on the ballot in the U.S. presidential election of 1948. Wallace had been vice president under FDR (1941–45), and both secretary of agriculture and secretary of commerce before and after, respectively. His platform advocated universal government health insurance, an end to the Cold War, full voting rights for African Americans, and an end to segregation. I took time off and traveled around the state trying to get the several hundred thousand signatures Wallace needed to get on the ballot, and we succeeded. Henry Wallace was the Progressive Party’s nominee for president in 1948, and I was selected to be a delegate to the convention in Philadelphia.
I went to college thinking I was going to become a lawyer, but I took a course in economics and liked it. Then I took more. When I graduated from Duke with a bachelor’s in economics and moved to California in the summer of 1948, I started to work with the Progressive Party there. That proved eye-opening. The membership wasn’t the least bit interested in civil rights, as I was. They seemed interested primarily in defeating the Marshall Plan and promoting a pro-Russian foreign policy. That changed me. I slowly became a Libertarian, and I remain so today. The question for me always was, “Are we, as a people, better off having others direct us or are we better off directing ourselves?” And I came to believe strongly that, while we would make errors either way, we’d make smaller errors if we directed ourselves. I became convinced also that Libertarians are more inclined to regard people as individuals, where liberals or progressives see them as members of a group—blacks, Hispanics, women, etc. With that thought in my head, I went to work for my father.
In California, my dad had become a partner in a company that manufactured stainless steel spoons and forks for restaurants and hotels. For a few years, I traveled around the country selling these products. Then came the Korean War and we weren’t allowed to buy stainless steel anymore, so my dad sold the business to his partner, and I went on to manage a shoe-polish company. But I had always thought that academic life was an alternative career path. So I decided to become an academic.
I lived in Los Angeles, so I did graduate work in economics at UCLA. I didn’t know what kind of academic I would be or whether or not I’d be successful at it, but it seemed like an interesting career. In grad school, I had two fine teachers: a man named Armen Alchian and another named Karl Brunner. They influenced me a lot, helping me to distinguish between what was important to me and what wasn’t. This helped me to determine what kinds of problems I would address in my work.
During my grad school days, I made a little money as a teaching assistant. To help support my family, I also worked at the May Company in the credit department and, for a while, was the night supervisor there when the branch stores were open and the downtown store was closed. My wife was working all of this time, too, in an office for a company that made garbage disposals. She was always very supportive. I completed UCLA’s economics program in what must have been record time and won a fellowship from the Social Science Research Council and a Fulbright Scholarship that allowed me to go to France in 1955 and 1956 to write my thesis on French inflation during World War II. That work fueled my interest in macroeconomics, economic growth, inflation and employment—issues that have remained of interest to me throughout my career.
I was married at 22, but made a great choice. My wife and I have been together now for 64 years, and it’s not easy being married to a workaholic. I’ve written about 400 papers and 10 books, and my wife has always been protective and caring. But make no mistake: although I was an academic, I was also ambitious. Nonetheless, after finishing my thesis, I had to get a job, so I wrote to a number of schools and was hired at The University of Pennsylvania. I didn’t like the atmosphere there, for a number of reasons, so I spent the second half of the year looking elsewhere. I got a couple of offers, and elected to move to Carnegie Tech, as Carnegie Mellon was called then. It was like coming out of the night and into the day. It’s a great place to work. And can you believe it? I’ve been here for 57 years, with occasional time off for good behavior.
When people learn that you’re an economist, after they get over their initial speechlessness, they either probe you for tips about where the economy is headed, or pepper you with questions about the Market Crash of ’29, the Great Depression, or what happened in 2008. Let’s talk about that last one. It’s an interesting story because the banks got blamed—and they certainly weren’t above blame—but they didn’t cause the crisis. The government did.
For years, the Federal Reserve had been authorizing mortgage companies to do business through banks that operated with very little capital. I testified four times about the crisis of 2008 at the Dodd-Frank hearings on Capitol Hill—twice in the House and twice in the Senate —stating that the best way to make banks prudent is to require them to hold more equity capital. They must invest in their institutions so that if they choose to do things that involve lots of risk, their principal stockholders will say, “What in God’s name are you doing?” And if they make the wrong calls, they must be made to pay the price themselves. So why do banks object to holding more equity capital? Because they benefit from the system we have now, which is known as “Too-Big-to-Fail.” Large banks can borrow at lower rates than smaller ones because investors know that they aren’t going to be allowed to collapse. Over time, these institutions have been able to buy up many smaller banks that couldn’t compete with them. After all, they had to pay more to borrow because they were not protected by Too-Big-to-Fail. So essentially, we’ve gone from a banking system that was very competitive in the 1950s and ’60s to one in which at least 50 percent of the nation’s loans are being written by no more than seven or eight institutions. Unfortunately, the Dodd-Frank Bill, which Congress passed, didn’t remedy this. It was heavy with regulations and placed the onus on government regulators when it should have been on the bankers.
After the crisis hit in September of 2008 and Henry Paulson and his team at Treasury went to work to try to save the economy, I was on “PBS NewsHour” and was asked, “Do you support the request for bail-out funds from Secretary Paulson?” whose plan was laid out in only a handful of pages. I said, “Absolutely not. I want to know what is going to happen to the money they plan to appropriate and spread around.” Until I was satisfied, my answer had to be “no.” The next day, I opened my computer and had more than 100 emails from people all over the country who had watched that program and said, “Good for you, Allan.”
Way back in graduate school, I started to ask questions about how macroeconomic policy works, how monetary policy works, and also how fiscal policies work. Karl Brunner, my thesis supervisor (who became my friend), and I wrote quite a few papers together on those issues. Later, I invited Karl to join me in writing a three-part study for Congress about how the Federal Reserve operated and what could be done to improve its operations. It was hastily done, so I spent the next year thinking about and working on a book about Federal Reserve policy and how it might better be conducted, but I could never get Karl off the dime. He always expressed interest, but never quite seemed to have the time to work on it, and this went on for years. After Karl died, I wrote what is now considered the definitive history of the Federal Reserve in two volumes, one of which was broken into two parts. I did other things, too, during that period. I ran a Congressional committee on the International Monetary Fund and the World Bank, and I wrote other papers. But as it evolved, I worked almost exclusively on that book. It took me 14 years to complete.
The Federal Reserve Act of 1913 established two major principles: one was that the U.S. monetary system would be based on the gold standard; the other was an absolute prohibition on the Fed buying government securities directly from the Treasury. By the mid-1920s, the gold standard had wisely been abandoned and the second principle had been completely subverted because central bankers discovered that, if they couldn’t lend directly to the U.S. Treasury, they could go into the market and buy the Treasury’s securities when they were issued. By the end of the ’20s, the stock market had crashed and the nation sank into the Great Depression, blamed by many on the gold standard and other policies that prevented the Fed from expanding, when necessary, the nation’s money supply to stimulate the economy. At that point, the Fed was more or less an independent agency. In writing the history of the Federal Reserve, I was interested in what being “independent” meant. In the 1950s, Fed Chairman William McChesney Martin Jr. said, “We are independent within the government, but not independent of the government.” What did that mean? “If the government runs a big budget deficit,” he said, “we have to help finance it.” To me, that is the polar opposite of being independent.
Historically, the discussion has always been about how the Federal Reserve Board in Washington was representing political interests and the interests of the reserve banks rather than the interests of the American people. When it came to independence, President Woodrow Wilson made the original compromise. He said, “We’ll have a board in Washington and semi-autonomous reserve banks around the country.” This gave the banks a great deal of authority and, in the 1920s, they really set the Fed’s policy. The board could veto what they proposed, but the banks made the decisions about what would be done. With every crisis, however, the board’s influence strengthened and the banks became more restricted by politics. In the ’50s, Chairman Martin made sure that this became permanent.
Unfortunately, over time, political pressure on the Federal Reserve Board has steadily increased, and our current Fed policy is probably more politicized than at any time in its history. The Fed had never done anything like what it’s done in the period since 2008. They’ve added $4 trillion in reserves to the banks. Of that $4 trillion, $2.7 trillion sits idle on the banks’ balance sheets. The Fed urged the banks to make loans, but they didn’t. Yet the Fed kept providing more reserves. What do they expect the banks to do that they can’t do now with the funds they’re already holding? I can’t get an answer. Now, I’ve been in Washington enough to know that it is a place where political pressure just seeps out of the woodwork, but the Fed is supposed to be an independent agency that can withstand these pressures.
I praise the Fed for what they did in 2008. They weren’t perfect, but they did prevent a catastrophe. My criticism is that they have continued pumping money into the system long after it made any sense. They are making an elementary but outrageous mistake. We do not have a monetary problem. We have a real problem. The reason we have a slow-growing economy is not because consumers aren’t buying. It’s because businessmen aren’t investing. There’s very little new investment. The stock market keeps going up and businesses are buying back their stock at higher prices. That’s a sign of pessimism.
Not long ago, a study done for the Harvard Business Review asked 10,000 Harvard graduates who are officers of major corporations why they are not investing. They didn’t list monetary problems such as interest rates or inflation at all. They listed real problems such as taxation, poor infrastructure and overregulation. Regulation raises costs, and the business community considers this hostile so they’re sitting on their hands. Now, I believe that most businessmen are not corrupt. But there are bad apples, and the more regulation we have, the more opportunities there are for the bad apples to run amok. In my view, if our government was less powerful, we’d have less corruption. There would be less incentive to bribe officials to get special privileges. The best way to reduce money in politics is to reduce administrative discretion and the ability to grant favors.
For a while, I had a part-time job with the American Enterprise Institute, and I got to know Newt Gingrich. Newt came there for a while after he left the House. When he moved on to his next political quest, because we knew each other, he would call me from time to time and ask, “What do you think about this or that?” One day, when he was running for president, he called and asked, “What do you think about the budget deficit?” I said, “The solution to the budget deficit is easy: You want to get the biggest sensible cuts in spending per dollar of tax increase.” He said, “I’m not in favor of any tax increase.” I responded, “But there are others who are. You’re not going to get an agreement unless you agree to a tax increase.” He said, “I can’t agree to any tax increase.” Now that’s uncompromising. As much as I might share his view that we must get as many sensible and humane cuts in spending as possible, we all know that any agreement will have to include some sort of tax increase.
Looking ahead, we have unfunded liabilities of more than $100 trillion, mostly for healthcare. We have spent and promised to spend vastly more than we’re ever going to be able to pay back. We must have a long-term plan to fix this, and it won’t work if it’s draconian. That isn’t going to fly politically. It has to be done in a sensible and humane way. In addition to those problems, we have, for better or worse, huge amounts of regulation, which discourage businesses from investing. Other than Paul Ryan (R-Wis.), who is chairman of the House Budget Committee, few in Congress are suggesting ways of handling this. It’s politically toxic. But the closer we get to a crisis, the harder it’s going to be to solve. There are many ways to fix these problems. We have lots of people with good ideas, and we need to start exploring those ideas. And believe me, it will take compromise. Now, there’s a good chance that the parties won’t be able to make a deal, unfortunately. I hope they will, but who knows? What we need now are real leaders. Who are we going to get? I have no idea.