Secrets of the Temple/Volcker/Origins of the Federal Reserve System:
Judis, John B
BOOKS At the mouth of the money supply SECRETS OF THE TEMPLE How the Federal Reserve Runs the Country William Greider Simon and Schuster, $24.95, 798 pp. VOLCKER Portrait of the Money Man...
...Yet few Americans have blamed the Fed for the miseries of the past decade...
...But in the meantime Greider has provided a brilliant and telling analysis of Reagan-era economic policy.sis of Reagan-era economic policy...
...Greider quotes an exchange between Volcker and a group of farm state legislators who had traveled to Washington in 1986 to argue for lower interest rates...
...Chicago Tribune reporter William Neikirk's biography, Volcker: Portrait of the Money Man, typifies the press reaction to Volcker...
...Greider is correct in this sense: the timing and perhaps reach of recessions are determined by political decisions, whether by the executive branch or the Federal Reserve...
...These leaders were not simply motivated by individual self-interest, but by a conviction that American capitalism was in crisis and required a sharp change in course...
...Against the advice of a prescient Bert Lance, Carter nominated Volcker and then passively stood by while he caused a recession...
...When interest rates skyrocketed, they could claim that it was because of market forces rather than because of any decision on the Fed's part...
...Investors were increasingly putting their money in real estate and precious metals rather than in new factories...
...The other effect was a precipitous decline in America's trade balance...
...In Secrets of the Temple, William Greider, political columnist for Rolling Stone and former Washington Post editor, lifts the veil off the mystery of the Fed...
...But in Secrets of the Temple, Greider does not appear to recognize market forces-that is, the constraints that the capitalist system places upon individual decision...
...Both were acting within a system that controlled them as much as or more than they controlled it...
...But Volcker and the bondholders' actions must be viewed from another dimension as well...
...It stanched the double-digit inflation of the seventies, but at the cost of two recessions, one of which was the worst since the Great Depression...
...He shows how the Fed's seemingly neutral, technical decisions were political choices that favored the wealthy and powerful over the wage-worker and small businessman...
...John B. Judis Since August 1979, when Paul Volcker became chairman of the Federal Reserve, the Fed has been the pre-eminent institution in American economic life...
...Economists had derided Friedman's arguments-Friedman, for instance, blamed the Great Depression on monetary policy-but Volcker announced in 1979 that he was adopting Friedman's methods...
...Greider can argue that the Fed could have used controls on food and energy prices rather than a recession to curb inflation, but the inflationary pressures of the late seventies also reflected a decade-old set of expectations that could not easily have been curbed...
...Meanwhile, a Democratic Congress, intimidated by Volcker, acquiesced...
...Reagan officials, led by Beryl Sprinkel, currently the chairman of the Council of Economic Advisers, pressured Volcker into precipitating the 1981 recession...
...Greider's book falls short not in its journalism, but in its theory of contemporary capitalism...
...To say they were acting as an "interest group" is like saying that when commodity speculators alter the price of grain they are acting as an interest group...
...On the other hand, banks and bondholders saw the value of their long-term assets reduced by inflation, as the rate of inflation climbed above the rate of interest at which their assets appreciated...
...But it remains un-proven that without direct control over corporate investment decisions, governments can avoid recessions altogether...
...By raising interest rates and cutting inflation, the recession increased the earnings of the creditor classes...
...The awkward little secret of the American system was that modern recessions did not flow ineluctably from mysterious natural forces in the business cycle," he writes.' 'Recessions were induced by the federal government...
...Greider understates the degree to which Volcker and the bankers were part of a self-conscious policy elite acting within a system over which they had only limited control...
...But Volcker and the bondholders were part of a broader leadership that, during the last decade, turned away from the limited Keynesian intervention and labor-corporate cooperation (favored by the Committee for Economic Development and other policy groups) toward deregulation, tight money, and even union-busting in order to reduce costs and raise profit rates...
...Like the populist, Greider favors inflation over deflation and a publicly rather than privately controlled currency system...
...Volcker was also supported by the financial press...
...Curiously, Volcker's only consistent critics were the late Reagan appointees to the Federal Reserve Board, Preston Martin, Martha Seger, Manuel Johnson, and Wayne Angell...
...About as many Americans know that M-1 is the measure of cash and checking account deposits in circulation as know the difference between a bit and a byte...
...Even if their real wages declined, their home values skyrocketed, and credit was readily available...
...ORIGINS OF THE FEDERAL RESERVE SYSTEM James Livingston Cornell, $22.50, 272 pp...
...Of course, the Reagan administration was initially worse...
...She complained about Volcker's dominating influence and about his smelly cigars...
...If there is a difference, it is that the progressive era leaders were more farsighted, while those of our day are touched by a kind of decadent nostalgia for things past...
...Greider could have benefited from reading historian James Livingston's book, The Origins of the Federal Reserve System...
...might have risked a recession even without higher short-term interest rates...
...In this respect they were merely the agents of broader, impersonal- indeed, global-market forces over which they had no control...
...Greider shows, however, that Volcker and the other governors were not moved by Friedman's arguments, but rather by political convenience...
...Greider himself acknowledges that the inflationary excesses of those years threatened long-term investment...
...Friedman had argued that the Federal Reserve could prevent steep recessions if it changed the way it regulated credit- keeping the money supply constant rather than adjusting interest rates...
...During the seventies, many middle-income Americans benefited from inflation...
...Livingston rejects Greider's view-derived from Gabriel Kolko's The Triumph of Conservatism-that Wall Street bankers devised the Federal Reserve as a means of protecting their separate interests...
...Such a remark reveals the important truth contained in Greider's analysis of Volcker and the Federal Reserve...
...Your constituents are unhappy...
...Instead, Livingston portrays a class-conscious corporate and financial leadership that came to a realization, beginning in the late 1890s, that the competitive capitalist system, including its chaotic banking system, had to be transformed...
...Secrets of the Temple is an effective antidote for the nostalgia that many Democrats are beginning to feel for the Carter years...
...Like contemporary financial leaders, they saw American capitalism at a watershed...
...Neikirk belittles the opposition of Martin and Seger...
...What Volcker responded to at the Fed was bondholders' reluctance to invest, which resulted in falling bond prices and rising long-term interest rates...
...He is both a populist and an arch-Keynesian for whom recessions themselves are political events...
...Take, for instance, the late seventies...
...Seger was never effective, Neikirk writes, "because of her limited background in monetary policy...
...Neikirk's book reads like a presidential campaign biography...
...Mine aren't...
...The Fed has always been insulated from popular criticism both by its structure-it is a semi-private institution composed of a presidentially-appointed board and bank-appointed regional presidents-and by the mysterious jargon in which its decisions are couched...
...Inflation, Greider argues, tends to redistribute income downwards...
...By using monetarist jargon, they could couch deeply unpleasant political decisions in purely technical terms...
...VOLCKER Portrait of the Money Man William R. Neikirk Congdon and Weed, $18.95, 240 pp...
...Greider portrays Volcker as succumbing to the special interests of bondholders in the manner in which a corrupt nineteenth-century congressman succumbed to the pressures of the Union Pacific...
...Greider puts the debate over money back into the explosive terms of the nineteenth-century populist...
...Look," Volcker said to them...
...The bondholders' actions were, of course, dictated by their views of the economy, but these views consisted of a quite ordinary and empirically justifiable skepticism about American capitalism's long-term prospects...
...Had the inflation continued unabated, the U.S...
...And Volcker prolonged the recession and high interest rates well past the point at which they were needed to stem inflation...
...These special interests, Greider says, pressured Volcker into putting the brakes on the money supply and causing a recession...
...Greider is too influenced by the nineteenth-century populists and their modern exponents, who see politics simply as the push and pull of special interests, whether benign or malevolent, and history simply as the resolution of these vectors...
...Greider explains what I had never clearly understood: how and why Volck-er used Milton Friedman's disreputable monetarist theory to create a recession...
...They became the Board's advocates for the small farmer and the unemployed, while Carter-appointee Lyle Gramley and Democratic Senate Banking Chairman William Proxmire and House Banking Chairman Henry Reuss backed Volcker...
...Greider contends that the Fed's decade-long assault against inflation reflected the "special interests" of banks and bondholders...
...We still await a comprehensive theory of contemporary capitalism...
...For instance, Volcker's most important decision, taken in October 1979, was to regulate the flow of credit by keeping "M-1'' constant rather than by adjusting the "Federal Funds" rate...
...Greider is certainly right, however, that in choosing its targets, the Fed forced small farmers and factory workers rather than Wall Street bankers and bondholders to bear the brunt of the recession...
Vol. 115 • May 1988 • No. 9
