KENNY MALONE, HOST:

Late last year, President Trump was making very strong statements about what the Federal Reserve should do, or more specifically, what the Fed should not do. He did not want the Fed to raise interest rates again.

NOEL KING, HOST:

Right. The day before the Fed met in December, the president tweeted that it was incredible that, quote, "the Fed is even considering yet another interest rate hike." Then, the next day, he warned the Fed not to, quote, "make yet another mistake."

MALONE: Presidents love low interest rates because they make it easy for people to borrow money, to buy stuff and for businesses to borrow and hire people. But low interest rates also drive up inflation, and part of the Federal Reserve's job is to keep inflation low.

KING: The day after Trump's tweet, Fed Chair Jerome Powell, who was appointed by President Trump, announced that the Fed had, in fact, raised interest rates. He did the opposite of what the president wanted him to do.

MALONE: The Federal Reserve is independent, and this is a phrase you will hear - Fed independence. And what happened in December - president saying, don't raise rates, and his Fed chair saying, we raised rates - that's Fed independence. And there is a story of how Fed independence came to be and a specific day that I am henceforth going to call Fed Independence Day. And good news, everybody. You've got three days. It's the fourth of March.

(SOUNDBITE OF CESAR GIMENO LAVIN AND GILES PALMER'S "OVER THE BORDER")

KING: Hello, and welcome to PLANET MONEY. I'm Noel King.

MALONE: And I'm Kenny Malone. Today on the show, the story of how the Fed got its independence and how it had to fight to keep it.

KING: And by fight, we mean literal fight. The president and his Fed chair got in a physical altercation.

MALONE: OK. Fed Independence Day, as I'm calling it, is because of what happened in this country on March 4, 1951.

KING: In the years before 1951, the Fed took orders from the Treasury, basically from the president. We were fighting World War II, and so when the president said to the Fed chair, you better set interest rates so it's cheap for the government to borrow money to pay for the war, the Fed said, yeah, OK.

MALONE: But after the war, inflation started rising. And the Fed chair said to the president, look; it is our job to deal with inflation. You need to let us raise interest rates. President Truman said no.

KING: And by early 1951, inflation had hit 21 percent. The price of everything that Americans bought was rising by 21 percent a year. So Truman finally gave in. On March 4, 1951, his Treasury Department agreed to leave the Fed alone. The Fed, not the president, would set interest rates for the country. The Fed was free - sort of.

MALONE: Yeah. This agreement was known as the Treasury-Fed Accord. And the Treasury-Fed Accord is not a law or even an official rule. This really was just a handshake deal. The president, at that moment, was agreeing to not mess with the Fed. So the real test would come when another president came in and decided, I don't like this agreement.

(SOUNDBITE OF ARCHIVED RECORDING)

LYNDON B JOHNSON: Bill, I just want to thank you for your most thoughtful and generous letter. And I appreciate it so much.

KING: This is President Lyndon B. Johnson. And this phone call happened just a few days after Johnson became president in 1963, which was just a few days after John F. Kennedy was assassinated.

MALONE: Johnson had been thrown into office, and so he started checking in with all the important people. And in this call, he is introducing himself to Fed Chair William McChesney Martin.

KING: What Johnson's saying in this call is, you're the expert. I'm here to listen.

(SOUNDBITE OF ARCHIVED RECORDING)

JOHNSON: Well, you just assume that you're starting with someone who doesn't know much about your shop. And then you start to tell me what I ought to know about it.

WILLIAM MCCHESNEY MARTIN: Well, I certainly will help in every way that I can, Mr. President.

JOHNSON: Well, I think you're a patriot, and I'm mighty glad you're around.

MALONE: As far as we know, this is the first call between President Johnson and Chairman Martin. Sounds cordial, but their relationship would deteriorate spectacularly. Well, Bob, why don't we just - why don't we start by having you introduce yourself?

BOB BREMNER: Sure. I'm Bob Bremner. I authored a book on William McChesney Martin. I have kind of a corner on William McChesney Martin. It's the only book out there.

KING: Bob's going to be our guide through the Lyndon B. Johnson-William McChesney Martin story. So here goes. Johnson and Martin were two very different types of people. Johnson was this tall, imposing guy raised in Texas.

BREMNER: Well, Lyndon Johnson had a reputation for being a manipulator. He remembered slights, he exchanged favors, and he played them like fiddles.

MALONE: He was a man who did all the things to get people to do what he wanted them to do.

BREMNER: That's correct.

KING: Bill Martin wasn't like that. A journalist once called him the happy Puritan. His father was in banking. Martin looked like a banker. He was skinny. He had rimless glasses. Later on in his life, he became friends and tennis partners with that biographer, Bob Bremner.

MALONE: Did Bill Martin ever tell you any jokes? Any jokes?

BREMNER: You know, not a joke teller. And I remember finding in his papers a file saying, humor, and it didn't have anything in it.

(LAUGHTER)

BREMNER: Honest to God.

MALONE: Well, is it true that William McChesney Martin loved more than anything in the world trying to explain the Federal Reserve to people?

BREMNER: Absolutely.

MALONE: Really?

BREMNER: Absolutely, yeah.

KING: What were some of the analogies or metaphors he used? What did he compare it to?

BREMNER: Probably the most famous was his comment that the Federal Reserve's role was really to take the punch bowl away just as the party got going.

MALONE: The punch bowl analogy - business journalists use this all the time. And the idea is low interest rates are like the booze at a party. And the Fed's job is to be the responsible adult, to raise interest rates - take the punch bowl away before the party gets out of hand - before inflation starts to take off.

KING: OK, so when Lyndon Johnson becomes president, Bill Martin was already the Fed chair. And one of the first things that Johnson does is to push a big package of tax cuts that Kennedy had been working on. Johnson told Congress that passing these cuts was a way to honor Kennedy. And it worked; the cuts passed.

MALONE: And then there were the two wars. Johnson inherited the Vietnam War from Kennedy, and then he got us in deeper. And at home, Johnson launched the War on Poverty. This is where Medicare and Medicaid came from, and tons of other social programs. So these two wars were expensive.

KING: Because of all this government spending, a lot of money was heating up the U.S. economy. Plus, people are getting these tax breaks, so it's getting even hotter. This is great for Johnson because people are happy, and Johnson wants, eventually, to be re-elected.

MALONE: But William McChesney Martin is watching all of this and thinking, huh. This is the kind of stuff the Fed needs to pay very close attention to because this kind of spending could very likely lead to inflation.

So he starts warning Johnson, we're in serious trouble. I think the Fed is going to need to raise interest rates. We are headed for, quote, "an inflationary mess."

KING: And Johnson is like, yeah, well, I've talked to other smart people, and, quote, "they don't agree with you."

MALONE: This is the classic fight. The Fed wants to raise interest rates because it's worried about the economy in the long run, and the president wants low interest rates because they are good for the economy now.

BREMNER: The stage was set for problems. So the question is, what can a Fed chairman do? And in this particular case, what did Martin do to try to telegraph the Fed's intent and the concerns the Fed had? So the one thing they can do is give speeches.

KING: So we have a frustrated Fed chair. And as it happens, he gets an elegantly timed invitation, which leads to, as far as we can tell, the worst commencement day speech in history.

MALONE: Yeah. Bill Martin gets invited to Columbia University to speak at the graduation day luncheon. So you can imagine campus is buzzing with bright-eyed kids in powder blue caps and gowns. And you know how commencement day speeches usually sound. They're all, "Oh, The Places You'll Go." That is not what Martin does.

KING: No. He starts his address not by saying, follow your dreams, or some such. He says, when economic prospects are at their brightest, the dangers of complacency and recklessness are greatest.

MALONE: And then he ups the ante by saying, we find disquieting similarities between our present prosperity and the fabulous '20s.

BREMNER: And here's a Federal Reserve chairman talking about, you know, we are in a situation today that is very much like the situation that led to the Great Depression. Now, what - that's pretty tough stuff.

MALONE: But what is he saying? Like, what is he saying to these kids exactly? Like, we're - if we're not careful...

BREMNER: No. He's really speaking to the president, and that's the problem for the kids.

(LAUGHTER)

MALONE: This moment, where the Fed chair is actually saying the words danger signals and Great Depression in the same speech, makes the front page of The New York Times the next day. The stock market plunges. And when President Johnson gets word of this, he is seething. He asks his attorney general, can I fire this guy?

BREMNER: And the attorney general disappointed him by saying, there's no way you can unseat him, except for cause. And unfortunately, policy differences do not constitute a cause. So, Mr. President, you're stuck with this man.

KING: A guy like Johnson - that must've been - that must've chafed.

BREMNER: Oh, I mean, nobody told Lyndon Johnson no.

KING: Yeah.

BREMNER: Nobody.

KING: Think about this now from Johnson's point of view. William McChesney Martin and the Fed have an enormous amount of power. They get to decide how much it's going to cost to get a mortgage or a student loan. A handful of technocrats in the Federal Reserve get to make those decisions, not me, the president of the United States, who is a representative of all the people. And to be fair, some people today feel exactly the same way. Why did these unelected technocrats get so much power?

MALONE: So after Bill Martin's Columbia speech, Johnson is furious. He gets on the phone and starts talking to people about his Fed chair - about Bill freaking Martin.

(SOUNDBITE OF ARCHIVED RECORDING)

JOHNSON: Hello.

JOE: Good morning.

JOHNSON: Hi, Joe (ph).

JOE: How are you?

MALONE: You'll hear Johnson in this call saying, like, I can't control Bill Martin. He has control of the board. I've met with him half a dozen times. I can't do anything.

(SOUNDBITE OF ARCHIVED RECORDING)

JOHNSON: But I've done everything I know how. Met with Martin half a dozen times. I haven't got control of that board. He's got control of it.

MALONE: So Johnson is livid, but he's starting to understand that Martin is going to do this. He's going to raise the interest rate. So instead of begging Martin not to, he begs Martin to wait - wait until Johnson can pass a budget in the new year - big priority for the president.

KING: And this is all happening in the fall of 1965. And Johnson slips into full manipulator mode. He's about to have surgery, and he even tries to use that as leverage.

BREMNER: Johnson was going in to have his gallbladder taken out. And he said, you wouldn't raise rates on me - would you, Bill? - while I'm in the hospital? And Martin said, oh, no, Mr. President. We'll wait until you're out.

KING: So Martin does wait, but he doesn't wait long. On December 3, Martin's Fed takes a vote on whether to raise the interest rate by half a percent, and they vote to do it.

MALONE: Johnson is at his Texas ranch recovering from surgery when he finds out what Martin has done.

BREMNER: He can't control him. He has worked as hard as he can. He's threatened. And yet, Martin has gone and done this. And he can't believe it.

MALONE: So Johnson summons Martin to the ranch. Martin flies down. He's called into Johnson's office. We don't know exactly what was said in that office, but here is Bob Bremner's description.

BREMNER: And Johnson is just fit to be tied, starts right off. You know, this is something that can affect my entire term. You knew that this would have this impact on me, and yet, you went right ahead. You ran a rapier right through me. You and the Federal Reserve have put yourself above my presidency. And you totally disregard my wishes and my policy goals. It's a despicable thing to do.

And then there is a reference to the fact that Johnson was so angry that he pushed Martin against the wall.

MALONE: Physically pushed him against the wall?

BREMNER: Physically pushed him against the wall.

MALONE: The president of the United States...

BREMNER: Yes.

MALONE: ...Laid hands on...

BREMNER: Yes.

MALONE: ...His Fed chair?

BREMNER: Yes.

MALONE: And what does Martin do?

BREMNER: Well, Martin says, Mr. President, we have not put ourselves over your presidency. I told you I was going to do this. I told you personally. I told your administration that we were going to do this. I've given you a lot of advance notice. But I do have the very strong conviction that the Federal Reserve Act placed the responsibility for interest rates with the Federal Reserve Board. This is one of those few occasions where the Federal Reserve decision has to be final.

KING: This is a huge moment. And here's why. Remember Fed Independence Day - March 4, 1951? That Treasury-Fed Accord was really just a handshake deal. This moment tested the handshake deal. William McChesney Martin is standing up to Lyndon B. Johnson and saying, no, this agreement is real. The Fed is not going to be bullied into doing what the president wants.

BREMNER: Yeah. I mean, if you want one single moment when the Federal Reserve defined its independence and what that meant to somebody who was out to squash it as much as possible, that's it.

KING: The thing about Fed Independence Day is that it's really not just one day. There's the Treasury-Fed Accord - the fourth of March. There's the day Johnson shoved Martin for acting independently - the sixth of December. And it didn't stop there.

MALONE: In the years after Martin left the Fed, inflation started going way up until another Fed chair, Paul Volcker, had to assert Fed independence again. He raised interest rates even though farmers were blockading the Fed with their tractors.

KING: And then, in a smaller way, we saw this again in December when the president of the United States sort of warned his Fed chair, Jerome Powell, on Twitter not to raise interest rates, and Powell and the Fed did it anyway.

MALONE: It may sound like we're saying, maybe every day is Fed Independence Day. But, no, it is the fourth of March. And after the break, I have some very serious thoughts about how to celebrate.

KING: He does. You're going to want to stick around until after the credits.

(SOUNDBITE OF TIMOTHY PAUL HANDELS' "RETROSPECTIVE")

MALONE: All right, Noel King, I just want to try something that I've always sort of dreamed of.

KING: Shoot.

MALONE: OK, so you know how on the Fourth of July, for Independence Day, NPR has a bunch of its hosts read the Declaration of Independence on the air with, like, sweet music underneath?

KING: Yeah, I've done it.

MALONE: You've done it. For the fourth of March, for Fed Independence Day, we should be reading the Treasury-Fed Accord, the Fedcleration of Findependence, if you will.

KING: No, I will not.

MALONE: OK, we won't. But I do think we should go get the old document that was released on March 4, 1951, announcing the Treasury-Fed Accord. And I think what we should do is we should get the other hosts and get that sweet music and have them read this NPR-style.

KING: All right. I'm in. Let's do it.

(SOUNDBITE OF MUSIC)

MALONE: OK, this is super wonky, but here goes. (Reading) The Treasury and the Federal Reserve System...

KING: Have reached full accord with respect to debt-management...

NICK FOUNTAIN, BYLINE: And monetary policies to be pursued in furthering their common purpose...

RACHEL COHN, BYLINE: To assure the successful financing of the government's requirements...

JACOB GOLDSTEIN, BYLINE: And...

SARAH GONZALEZ, BYLINE: At the same time...

AILSA CHANG, BYLINE: To minimize monetization of the public debt.

MALONE: That's it.

KING: That's it.

MALONE: It's one sentence.

KING: Kind of confusing.

MALONE: It was basically a press release. But I am going to propose that henceforth, we shall read the Treasury-Fed Accord release every March fourth on PLANET MONEY, or as close as we can get to it. What do you think, Noel?

KING: Good.

MALONE: Yeah?

KING: Let's do it.

MALONE: All right.

(SOUNDBITE OF JULIEN PECLERS AND PHILIPPE BALZE'S "VENICE BAR")

MALONE: But we also have been trying to come up with a ritual for everyone else to celebrate Fed Independence Day, and we would like your help. We're looking for something.

KING: Yeah, something with a dollar bill maybe, something about how it holds buying power over time - maybe something with a punch bowl. Anyway, come up with a ritual, take a picture of it, put it on social media and tag us. We're @planetmoney. And we're going to put some of our favorites in our newsletter.

MALONE: You can also reach us by email. We are planetmoney@npr.org.

Today's episode was produced by Darian Woods and co-reported by Rachel Cohn. Today's show was edited by Jacob Goldstein. Alex Goldmark is our supervising producer. And Bryant Urstadt is PLANET MONEY's editor. A very, very, very special thanks this week to John Weinberg from the Federal Reserve Bank of Richmond for walking me through hours and hours and hours of the Fed's history. And the full name of Bob Bremner's book is "Chairman Of The Fed: William McChesney Martin Jr. And The Creation Of The Modern American Financial System."

And, Noel, by the way, I'm not joking about Fed Independence Day. I want this to happen. I want our audience to celebrate it.

KING: I believe you.

MALONE: Yeah, I know you do. My concern is that other people don't think I'm serious. And so I thought, Noel, we need a special greeting from the right person.

Go. Go ahead.

JANET YELLEN: This is Janet Yellen, former chair of the Board of Governors of the Federal Reserve. I want to wish everybody a very happy Fed Independence Day. Thank you for trusting the Federal Reserve and me with the privilege and the responsibility of conducting your monetary policy.

MALONE: Beautiful. Happy Fed Independence Day to you.

YELLEN: Same to you.

MALONE: Take care. Thank you.

YELLEN: You, too. Bye.

Copyright © 2019 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.