Chairman of the Board of Governors (1948-1951)
In early 1948, President Harry Truman appointed Thomas Bayard McCabe Chairman of the Board of Governors of the Federal Reserve System. McCabe remained at the Federal Reserve only until March 1951, but as head of the Fed, he was a pivotal player in the negotiations leading to the Treasury-Fed Accord.
Thomas Bayard McCabe was born on July 11, 1893, in Whaleyville, Maryland, to William Robins McCabe and Beulah Whaley McCabe.
Upon graduating from Swarthmore College with an A.B. degree in economics in 1915, McCabe chose to return to his hometown of Selbyville, Delaware, to work with his father in banking. But soon thereafter, he received a letter from his adviser at Swarthmore telling him that his decision to return home was a mistake. McCabe was inspired by the letter to reconsider his decision. After following up a contact from college, McCabe moved to the town of Chester, Pennsylvania, and began work with a small one-mill paper company. His service to that paper company would last a lifetime, helping it to become the multinational Scott Paper Company. McCabe temporarily left to follow his country into World War I. He enlisted as a private in 1917 and advanced to captain by 1919.
At the age of 26, McCabe returned to civilian life and to the Scott Paper Company. He advanced rapidly, moving up from assistant sales manager to become the president and CEO by age 34. Thomas McCabe's association with the Federal Reserve began in 1937 when he was appointed to be a director of the Board of the Philadelphia Fed. He also served as a member and chairman of the Business Advisory Council for the Department of Commerce. When the United States entered World War II, McCabe directed his public service toward the war effort. Some of the positions he held included executive assistant to Edward Stettinius on the Advisory Commission of the Council for National Defense, deputy director of the Division of Priorities, and deputy lend-lease administrator.1
Prior to his appointment to the Board of Governors, McCabe had served Truman as the Liquidation Commissioner for the federal government. In that position, he was responsible for managing the disposal and sale of excess war materials. During the war, the Fed cooperated with the Treasury by pegging the interest rates on government securities. Although wary of the economic implications of that policy, the Board of Governors and the regional bank presidents supported it because of the high priority placed on winning the war. The day after the attack on Pearl Harbor, that solidarity was expressed in the issued statement:
The System is prepared to use its powers to assure that an ample supply of funds is available at all times for financing of the war effort and to exert its influence toward maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government's requirements. 2
After the war ended, the policy of supporting the price of government securities remained in place.
The death of Board governor Ronald Ransom in 1947 gave Truman the opportunity to make a new appointment.3 Truman chose Thomas McCabe to fill that position, and furthermore signaled his intention to make him the next Chairman eventually. McCabe took office as Chairman in April of 1948 and inherited a Federal Reserve System that was unable to conduct independent open market operations. The Treasury still insisted that the peg be maintained. Initially, McCabe's actions as Chairman did not receive any resistance from the Treasury. Soon after his appointment, the economy slipped into a recession in early 1949. The recession called for a loosening of credit restrictions and meant that the most favorable policy was to lower interest rates. On June 28, 1949, the FOMC asserting this policy, stating:
The Federal Open Market Committee, after consultation with the Treasury, announced today that with a view to increasing the supply of funds available in the market to meet the needs of commerce, business, and agriculture it will be the policy of the Committee to direct purchases, sales, and exchanges of Government securities by the Federal Reserve Banks with primary regard to the general business and credit situation. The policy of maintaining orderly conditions in the Government security market, and the confidence of investors in the Government bonds will be continued. Under present conditions the maintenance of a relatively fixed pattern of rates has the undesirable effect of absorbing reserves from the market at a time when the availability of credit should be increased.4
The Treasury was pleased with this statement as the Fed subsequently reduced reserve requirements. Those reductions led to an increase in the demand for bonds by commercial banks. Bond prices rose, resulting in cheaper debt financing for the Treasury.
But the economic rationale for expanding credit soon faded as the economy began to accelerate again in late 1949. Hostilities broke out in Korea in June of 1950, providing additional stimulus. War made it likely that the Treasury would need to raise more debt. The mix of economic expansion, artificially low interest rates, and a new round of debt financing was destined to generate serious inflationary pressures on the economy. In response, the Fed raised the discount rate in August 1950.5 The intention of this increase was to discourage banks from borrowing money from the Fed, but the move led Secretary of the Treasury John Snyder to publicly criticize the FOMC.
Conflict between the FOMC and the administration ensued. Thomas McCabe, Marriner Eccles, and Allan Sproul, who was president of the New York Fed, pressed for a relaxation of the interest rate peg. They argued that the inflationary pressure generated by the peg would undermine war financing by creating inflation. After months of intense sparring in the public eye, the Treasury backed down and settled its argument with the Fed through the Accord.6
However, the chairmanship of Thomas McCabe was a casuality of the conflict. Snyder told Truman that he could not work with McCabe any longer.7 McCabe resigned effective March 9. McCabe's three-year tenure as Chairman of the Board of Governors was short, but it forever changed the Federal Reserve. His removal could have been seen as a last ditch effort by the Truman Administration to regain control of the Fed after it was liberated by the Accord. The President appointed William McChesney Martin, Jr., then assistant secretary of the Treasury, to replace McCabe, but Martin proved to be just as stalwart a defender of the Fed's independence. McCabe left the office on March 31, 1951, and Martin took over on April 2. Thomas McCabe returned to his home in Swarthmore, where he continued his service as president of the Scott Paper Company until 1962. He then served as chairman of the board until he was 75. McCabe died on May 27, 1982, at the age of 88.
1See Barnard S. Katz, ed., Biographical Dictionary of the Board of Governors of the Federal Reserve (Westport, CT: Greenwood Press, 1992), p. 168.
2 See Clay J. Anderson, A Half Century of Federal Reserve Policymaking 1914-1964 (Philadelphia: Federal Reserve Bank of Philadelphia, 1965), particularly chapter 7, "World War II: Pegged Rates."
3Katz (1992, 169).
4 Thomas B. McCabe, Reply of the Chairman of the Board of Governors of the Federal Reserve System (Washington D.C.: Board of Governors of the Federal Reserve System, November 1949), p. 34.
5Katz (1992, 170).
6For a detailed account of the events surrounding the Treasury-Fed Accord, see Robert L. Hetzel and Ralph F. Leach, "The Treasury-Fed Accord: A New Narrative Account," Federal Reserve Bank of Richmond Economic Quarterly 87 (Winter 2001): 33-55.
7See Hetzel and Leach (2001, 51).
Amanda L. Kramer