He was once called the Harry Truman of the Federal Reserve. It was, by all accounts, a well-deserved reputation. During his tenure atop the St. Louis branch during some of the most tumultuous years, Darryl Francis would attain the status of a true maverick. Clear-minded and resolute, Francis didn’t care which way Economics was turning, only ever interested in the facts which supported, or denied, his theories.
It was the late sixties and seventies, the world wrestling with tremendous upheaval seemingly in every direction. The computer revolution transformed more than computational power. There was also that small thing with inflation.
We have Mr. Francis largely to thank for what has become the St. Louis Fed’s FRED database. Not only is it likely the absolute best, most comprehensive publicly available economic and financial information sources in the entire world, it is also easy and simple to use for even the most novice operator (compared to nearly all in Europe which appear to have been designed by aggressively hostile IT specialists on order from some backward econometrics to keep it inaccessible via forced frustration).
Francis had insisted on the aggregation of information and making sure it was made available to the public rather than withheld exclusively within the pages of obscure academic volumes for the sole use of Ivory Tower specialists.
As someone who accesses FRED dozens of times each and every day, weekday and weekend, I say, God bless Darryl Francis. But that’s only where his contribution begins, not where it ends.
He also bucked another of Economics’ Big Trends, the growing convergence between computerization and stochastic modeling. Milton Friedman had started the philosophical movement with Positive Economics, the idea of putting the discipline on the same mathematical footing as the so-called hard sciences like physics.
There was also the longstanding underlying desire from way back on the part of researchers to quantify an economic system, to map it out down to the smallest minute detail. The amount of computational power becoming available just then was staggering, putting the goal for the first time within reach – or so it seemed.
Economists elsewhere at the Federal Reserve turned more and more to these econometrics trying to fill large gaps in their understanding of how money interacted with financial processes to influence the economy. And Darryl Francis resisted the movement. Where every other branch staff was devoting more and more effort to the computerization of Economics, he remained firm.
A former employee and later Cleveland Fed President, Jerry Jordan, recounted in the summer of 2001, not long before Francis would pass away, that:
“As everyone knows, St. Louis did not follow the Board down the path of gargantuan models of the economy. Instead, we focused on direct empirical tests of rival conjectures about monetary and fiscal impulses, as exemplified by what became known as the St. Louis model…”
Francis was also a nonconformist in his voting career, too, very much related to what appears to have been his growing distaste for these newfangled theories and methods. Sure, the system and economy were becoming messier by the month, by the day it seemed, yet, according to Francis, anyway, this required getting back in touch with the basics, not running around a computer formulating increasingly detached esoteric theories based instead on subjective assumptions offered up just so some overly convoluted math could be solved.
Becoming St. Louis branch president in January 1966, Francis didn’t become a voting FOMC member until March 1967. Jordan recalls how in just his third vote Darryl Francis would be the lone dissenting member arguing for tighter monetary policy in light of growing, persisting consumer price inflation. He would continue to dissent on a number of further occasions, amounting to about a third of all ballots Francis would cast during intermittent years (St. Louis rotated with Atlanta and Dallas as voting members) between 1967 and 1974.
Oftentimes the only voter to do so.
Francis did not vote against the majority, however, in June of 1971 even though consumer prices were firmly back on their destructive track following a very brief and only modest retreat during the 1970 recession. This was only two months before the Nixon Administration would stupidly attempt to counteract the Great Inflation using wage and price boards.
Yet, the FOMC was opting to continue its policies more concerned about the fragile state of the recovery. While he didn’t vote against them, Darryl Francis did sound the alarm. The memorandum of discussion for this particular policy meeting contains one of those all-time lines that you just wish more people were aware of; perhaps it deserves its own place forever spotlighted on FRED.
There was an argument among loose factions, the majority feeling interest rates which were rising at the time could “choke off the business recovery.” President Francis was having none of it, with the text simply stating, “He thought interest rates had been a very poor guide to the thrust of monetary actions.”
Indeed, sir.
Squaring off against Francis was staffer and future FOMC Board Member J. Charles Partee. Unlike our St. Louis rebel, Partee was well within the new clique leaning hard into econometrics.
Theirs was no direct confrontation, of course, no verbal Cage Match underway over top the finely-appointed conference table at Fed HQ. Rather, each man spoke for his own part when his turn came. Even so, these polar opposite positions represented a chasm in thinking that should have been settled by the empiricism of observation. That it didn’t end up that way is more than accidental for a half century of often shameful actions.
To Partee, interest rates were exactly how we hear them today.
“…recent rates of growth in the money supply--and the rates of growth projected by the staff over the next few months—are clearly excessive by almost anybody's standard. Such rates of growth, if continued for long, would threaten to fuel new inflationary forces in the economy over the longer term--by which I mean by late 1972 and 1973. Perhaps, at the higher interest rate levels that have now developed, monetary expansion would slow of its own accord later in the summer.”
Nonsense, countered Francis. Though his comments came later on in the discussion, you can appreciate what was a direct rebuke of this entire line of thinking.
“However, a rise in money and bank credit also had expansionary effects on the total demand for goods and services and, in time, placed upward pressure on prices. With expectations of greater sales and a higher rate of inflation, demands for credit might be expanded at a faster rate than the supply of credit created, and net upward pressure on interest rates would result.”
It was practically ripped right from Knut Wicksell, the perfect and consistent inverse of the Great Depression when demand only for safe and liquid drove public and posted rates down toward zero, the supply of credit to most of the economy painfully nonexistent.
But the maverick was far from finished in his lesson. Reaching back into that rich and relevant economic history, Francis might as well have told Partee to stick his high-rate-tightening effect where the sun don’t shine, ‘cause it wasn’t found in the practical records being housed at St. Louis or anywhere else.
“Mr. Francis observed that in most periods of economic recovery and rapid expansion interest rates had risen, and monetary aggregates had increased rapidly at the same time. Unless a rise in interest rates occurred at a time of marked slowing in the growth of monetary aggregates, he preferred to interpret a rise in rates just as he would a rise in price of commodities--that is, as one indicator of rapid expansion.”
The rest of the seventies proved Darryl had it exactly right, yet conventional “wisdom” continues to prevail upon Partee’s theory. It even survived after Congress(!) reprimanded the Federal Reserve repeatedly toward the end of the decade, passing one reform act after another trying to legally pound some sense in their thinking to replace the “gargantuan models of the economy.”
One of the first of those, the Federal Reserve Reform Act of 1977, actually handed the “central bank” the third of its mandates – yes, there are three commanded by Congress and the law, not two. It instructs policymakers at the FRB to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
By the time the Act was passed rates were hardly moderate. In fact, back in ’71 when Partee and Francis were squaring off, the former had conceded the situation by then had already been experiencing “higher interest rate levels.” It had only gotten worse, not as a contradiction but more validation.
What does it say about an institution when being a rebel means being the only one who sticks to theory grounded in long-established empirical history? It says enough. And that was fifty years ago.
Econometrics won the political battle.
Consumer price pressures in 2023 have come way off and not because of any work from the Federal Reserve as Partee’s FRB descendants will claim. Rather, the ongoing disinflation which now features more than a growing hint of deflation points toward something else, something we’d have to go all the way back to Darryl Francis for anyone there to truly comprehend.
Over the last five months – up to and including July 2023 – the US CPI has risen at a 2.2% annual rate. Converting that by back-of-the-envelope math, no need for supercomputing calculations, it works out to around 1.8% equivalent for the PCE Deflator meaning already below the FOMC’s current 2% target.
But that’s not all; core prices have slowed materially for the second straight month (+0.16% m/m June and July). The services (less rent) CPI is in even rougher shape, having increased at just a 0.6% annual rate from February to July amounting to a substantial six-month period. These are alarming not comforting developments, every bit consistent with a weakening economy with no hint of actual inflation anywhere.
And they are only echoed by worse numbers around the world especially in forward-looking producer prices. The latter set have been thoroughly deflationary for months in anticipation of what we’re only now witnessing in the US CPI.
By the way, you can easily, conveniently look up every single one of these stats including their entire series histories right now on FRED.
The question many around the current FOMC are asking is if this current run of disinflation is just temporary, a modest reprieve before something like a purportedly tight labor market or the current modest fluctuation in oil prices reverses us all back to higher CPIs in the second half of the year reminiscent of the second half of the seventies. It’s what their econometrics says is entirely too possible.
Most people believe this because they know nothing of the St. Louis model.
Our experience in 2023 adds another chapter to the ever-expanding empirical volume. Darryl Francis’s legacy should be more than just the presence of the St. Louis Fed’s database. The real challenge is to get everyone to understand the information they contain.
