The Color of Money
Murray, Alan S.
The Color of Money by Alan S. Murray I was granted an audience with Paul Volcker twice during his tenure as Federal Reserve Board chairman, and both times the opening ritual was the same. My...
...As anyone who lived through the late 1970s in this country should know, inflation doesn't stimulate "optimism" or boost the "animal spirits" of businessmen...
...editor of Rolling Stone magazine' Much has been written about the central bank in the past, but for the most part, the authors have been economists or financial analysts, who are more interested in the mechanics of money than its politics...
...The point here is that stable money is more than just an obsession of the "creditor class"-as Greider suggests...
...Instead, it does the opposite...
...Reasonably stable money is good economic policy...
...Simon & Schuster, $24.95...
...The benefit to the borrower occurs only because the lender is temporarily fooled by inflation...
...The maturing of selfgovernment was forever stunted ." Greider's analysis breaks down, however, because of his insistence on seeing monetary policy as a class struggle...
...The most surprising revelation of the book is the story of an instance in 1984 when Volcker effectively overruled his own policy-making committee, empowered by law to set monetary policy...
...Like his institution, he is aloof and disdainful of the messy ways of democratic government...
...There's a powerful counterargument, which is that you don't want politicians messing around with monetary policy for their own benefit...
...The lesson of the last two decades is not that inflation is preferable to disinflation, as Greider suggests...
...But he was required, under the law, to obey the consensus of the Open Market Committee (filled at that time with Volcker loyalists...
...It is because of those questions that I was anxious to read Secrets of the Temple, a new book on the Fed written by William Greider, national Alan S. Murray is chief economics correspondent for The Wall Street Journal and co-author of Showdown at Gucci Gulch: Lawmakers, Lobbyists and the Unlikely Triumph of Tax Reform...
...On one level, Greider's book fulfills the promise...
...The laws governing the Fed required little accountability...
...Neither Congress nor the White House...
...The money question was the political expression of a struggle over shares" The idea resurfaces repeatedly throughout the book and becomes more insistent as it progresses...
...Greider is right to complain that the distribution of wealth and of income has become more unequal during the 1980s...
...Inflation encouraged the future and, if kept to reasonable proportions, it stimulated general optimism:' he concludes...
...My colleague and I were ushered into his office, and we stood in silence while "the chairman," shrouded in cigar smoke, continued to work without raising his head or acknowledging our presence...
...I knew what instructions he was giving the New York desk," Anthony Solomon, president of the New York Federal Reserve Bank at the time, told Greider...
...Greider promised a different view: an indepth look at how this enigmatic institution fits—or doesn't fit—into the fabric of democratic society...
...But in truth, the majority of members of Congress were reluctant to increase their own control over monetary policy...
...Even Oliver North might have been shocked by that arrogant assumption of power...
...And it is more than an anal obsession, or an oedipal rebellion—suggestions Greider also makes...
...He was taking too much leeway personally...
...A lender won't continue to make loans at 10 percent, once he realizes that inflation has risen to 15 percent...
...The stern father Ironically, the Federal Reserve had its philosophical roots in the populist uprisings of the late 1800s, when farmers and small businessmen rose up against the power of the big banks...
...Reforms made in the 1930s diluted the power of the banks over the Fed but left intact an unusual, hybrid government institution with little direct accountability to the public...
...As long as the stern father was present to indulge their excesses, to clean up their mistakes and restore order, the elected government would continue to act like children," he writes...
...Over the years, Congress had acquiesced to this undemocratic state of affairs...
...Rather, it is that stable prices are preferable to either inflation or disinflation...
...He always operated in secret, and he was proud of his ability to give evasive answers that obscured the central bank's most important actions, even when those actions were sending shock waves through the lives of every American...
...Even Greider, I suspect, would be a bit uncomfortable with that prospect...
...But as it accelerates, it creates tremendous uncertainty about the future...
...The chairman concluded that the Fed had raised interest rates too high earlier that year, threatening a premature end to the economic expansion...
...By the end, he has worked himself into the conviction that a return to inflation is to be welcomed with open arms...
...There's an awful lot of power there held by unelected people," an "administration official" —apparently Treasury Secretary James Baker—is quoted as telling Greider...
...But as Greider shows in detail, Fed officials have seldom been called on to account for that suffering...
...From time to time, members called for reforms that would restrict the Fed's independence...
...Once he realizes that prices are going to rise at a 15 percent pace, he demands higher interest rates...
...Greider chronicles the tremendous pain caused by Volcker's efforts to rein in inflation...
...He is a brilliant technocrat, and he is rightly credited with taming inflation at a time when few thought it could be done...
...Never mind that the Fed had the power to bankrupt thousands of small businesses, to erode a lifetime's savings, or to throw millions of people out of their jobs...
...The creation of the Federal Reserve represented a great retreat from democratic possibilities...
...They knew that even small changes in policy could wreak havoc, and they were loath to take responsibility...
...But the bankers managed to frame the new institution in a way that gave them effective control...
...He didn't have to tell any elected official that he was about to embark on a course that could result in widespread bankruptcies or unemployment...
...Secrets of the Temple...
...And I thought he was not faithfully observing the instructions of the FOMC...
...He wanted to ease policy and bring down interest rates, but the members of the policy committee— known as the Federal Open Market Committee—opposed him, fearing that lower rates might encourage inflation...
...People and businesses become afraid to make the longterm investments that the economy needs if it is going to grow and if living standards are going to rise...
...He exposes the technocrats who guide Fed policy as ordinary mortals susceptible to their own errors, miscalculations, pride, and embarrassments...
...William Greider...
...The farm crisis, the Third World debt problems, and the plight of U.S...
...The trend probably has far more to do with tax and budget changes than with monetary policy...
...Anyone who watched the Volcker Fed in action had to wonder: how can a government based on democratic principles allow so much power to be concentrated in the hands of such an autocratic individual...
...The debate over monetary policy, he writes, conceals "the deeper political conflict among classes of citizens...
...It was one of his many ways of arrogating power...
...The president appointed Fed governors, but they held 14-year terms that assured their independence...
...The paradox for democracy was obvious: the Washington institution that was most intimately influential in the lives of ordinary citizens was the one they least understood, the one most securely shielded from popular control...
...But it's wrong to finger Volcker's anti-inflation policy as the principal culprit in this change...
...And as Greider tells us repeatedly, only 10 percent of Americans own 86 percent of the nation's financial wealth...
...Volcker instructed the New York Federal Bank to ease anyway, despite the committee's directive to the contrary...
...He got his desk to take major action that went way beyond the framework of the directive...
...The human suffering that resulted from that decision was enormous...
...Greider shrewdly compares the relationship between Congress and the Fed to that between unruly children and a stern father...
...As Greider points out, the "money question" was the subject of great debate during most of the nineteenth century, when William Jennings Bryan stirred thousands with his famous "cross of gold" speech, calling for an abandonment of the gold standard...
...At the same time, the income going to the bottom fifth dropped to 4.6 percent from 5.1 percent...
...That's an awful lot of power with darn little accountability...
...And how can the economic fate of the nation be entrusted to an institution run by unelected officials, accountable to virtually no one...
...Central Bank officials were surprisingly candid in their discussions with him and enabled him to remove the veil of mystery surrounding monetary policy...
...And while the American people may not have much say in the Fed's activities, the majority of them would agree that inflation is harmful to their way of life...
...The Fed had tightened too much in early 1984, and it was flirting with recession...
...But maybe there is a middle ground somewhere...
...The unusual arrangement went unnoticed by most people...
...If the president controlled monetary policy, at least you would have someone accountable for it...
...In the short run, to be sure, inflation may stimulate growth...
...He explains the arcane actions of the Fed in clear prose and faithfully traces the stark human consequences of those actions...
...Even that constraint proved too much for the independentminded Volcker...
...But Volcker also represents what is most troubling about the Federal Reserve...
...To help a new borrower, inflation must rise even higher, say 20 percent, and trick the lender yet again...
...But ultimately, that suffering isn't the cost of maintaining a stable money policy...
...Well-to-do homeowners, for instance, may benefit nicely from inflation, while renters suffer...
...Perhaps the most important failure of Greider's Marxist analysis, however, is that it ignores the effects of inflation on overall economic growth...
...So why not use inflation to reduce the holdings of the wealthy and help the struggling debtor...
...Union members whose hefty paychecks are guaranteed by cost-of-living agreements might not feel the pinch of higher prices, but non-union workers can see their earnings gradually erode...
...Especially in its early stages, inflation benefits debtors—who can pay back their debts in cheaper dollars—and punishes creditors—who are stuck with those cheaper dollars...
...After all, the president does have to answer to the public...
...The chairman held only a four-year term, but that term was set so that one president could saddle his successor with an uncongenial central banker...
...I can't remember how long the silence lasted—perhaps only 10 or 20 seconds— but it was long enough to make it clear that we were sand fleas in this man's universe...
...Paul Volcker has been widely praised as representing the best of "the Fed...
...As it turned out, Chairman Volcker was right...
...In response to a reporter's question, Volcker once said gruffly: "We did what we did, we didn't do what we didn't do, and the result was what happened ." The response typified his attitude towards an informed public...
...Fed efforts to raise or lower interest rates, often taken in spite of strong opposition from the administration and Congress, have had the capacity to cause vast changes in economic fortunes, and immense human suffering...
...Random House...
...Moreover, many of the distributional effects of inflation that Greider favors are only temporary...
...Rather, it is the enormous cost of wringing inflation out of the economy once it has taken hold...
...With admirable diligence, he delves deeply into not only the history of the Federal Reserve but also the history, psychology, and mythology of money, telling a series of fascinating stories that reveal the character of this unusual institution...
...Commerce Department figures show that the percentage of income going to the top 20 percent of families rose to 43.7 percent in 1986 from 41.6 percent in 1980—a big move in such a short period...
...But in truth, inflation's winners and losers are not divided along neat class lines, as Greider suggests...
...What Greider fails to note is that the trend toward regressivity actually began in the late 1960s and took firm hold during the inflationary 1970s...
...But in the twentieth century, the Fed succeeded in convincing the public that monetary policy was an arcane undertaking that need not concern the average American...
...If Greider wants to improve income distribution, he should look to tax policy and budget policy...
...Nevertheless, the Fed chairman's autocratic action raises serious questions...
...The easier policy that the Fed chairman forced on his fellow central bankers was, in retrospect, the correct one...
...manufacturers were all largely results of Volcker's decision to boost interest rates to fight inflation...
...And to maintain this charade indefinitely, inflation must spiral ever upward at an accelerating pace, always staying ahead of the bankers' expectations...
...could affect private lives with the immediacy and universal reach of the Federal Reserve's power, its ability to send instant signals rippling through every family's financial decisions, to change the incentives in virtually every business transaction," Greider writes...
...I'm not sure it's good for a president to be held responsible for monetary policy when he has no control over it...
...Rising prices excited what Keynes called the 'animal spirits' of businessmen . . „A return to inflation would begin again to discretely redistribute wealth in a positive direction ." There is an element of truth to this analysis...
...Using monetary policy in an effort to redistribute wealth and income would be a wrongheaded and dangerous mistake...
...Volcker didn't have to consult with or inform Congress or the administration when he planned to push interest rates up or let them down...
...As the title suggests, he reveals the "secrets" of the Fed...
Vol. 19 • January 1988 • No. 12
