Why William Dudley’s advice may destroy the Fed

What happens when the nation’s central bank decides to attack the president of the United States? William Dudley, former president of the Federal Reserve Bank of New York, believes the Fed should fight to defeat President Trump. He wants the Fed to consider a more restrictive policy to undermine the president. His thoughts, published in a Bloomberg Opinion column, are interesting as an opinion piece. As policy, they are reckless. His follow-up piece, an attempt to dampen the firestorm he created, continues to be tone deaf to American politics, policy and history. 

There are many people who disagree with Trump. In fact, most Americans disagree with the president based on the popular vote in 2016 and recent polls that continue to show his approval ratings well below 50 percent. Yet, Dudley’s recommendations ignore what happened the last time the central bank of the United States decided to fight a president. The outcome was good for the president, and bad for average Americans. For Americans concerned about Trump’s policies, Dudley’s ideas may unwittingly help him.

All of this has happened before.

Back in the 1800s, the central bank was called the Second Bank of the United States and was a brainchild of Alexander Hamilton. It was an early version of a central bank. Its purpose was sound money and a healthy economy. While it was imperfect, and had its share of scandal, the economy benefited. The bank’s president, Nicholas Biddle, was a well-regarded banker with a steady hand on the tiller of the economy.

Enter President Andrew Jackson. A rich landowner and slave owner, Jackson protested the power of the rich. He was one of the richest men to be president, in a similar position to that of our current president. He supported tariffs. He attacked corporations, while being a member of the moneyed elite. He attacked people he thought did not deserve to live in America. He also hated the power of the nation’s early central bank, conceived by Alexander Hamilton. He wanted to destroy it.

Bank President Biddle’s error was to use the power of the central bank against the president of the United States — Dudley’s proposal. Biddle decided to protect the bank and entered the realm of politics. Biddle weaponized the Bank of the United States in the exact same way the William Dudley is recommending to the Fed today. He strayed from defending the bank based on public policy and used inflammatory rhetoric against President Jackson. He invoked Jackson’s destructive policies against indigenous peoples and said that Jackson “thinks that because he has scalped Indians and imprisoned Judges, he is to have his way with the Bank.” 

Biddle’s politicization of the central bank led to its destruction by Jackson. Biddle sought to influence popular opinion against the president, he was tone deaf to rising populism and how to play the game. He contracted the credit of the United States economy, not dissimilar to Dudley’s recommendation to the Fed today, to force a recession that would discredit the president. The collapse of the economy made Biddle and the Bank unpopular, not Jackson. If history repeats itself, Dudley’s proposal could make Trump more popular.

Biddle’s recession led to ruin for the economy, vindication for Jackson and the end of the Second Bank of the United States. For the American people there was a high cost to pay: The Panic of 1837 and a depression. 

And William Dudley’s recommendation? The course of populism is hard to predict. His ideas may unleash forces that undermine an independent Fed, the long-term viability of the U.S. as a financial center and the U.S. dollar as a world reserve currency.  

Jonathan Lewis is the chief investment officer for the U.S. division of global asset manager Fiera Capital. The views expressed in this article are those of Jonathan Lewis and do not necessarily reflect the views of Fiera Capital Inc., any of its affiliates, or any of their respective clients.