Opening Fed’s Closed Doors : Author William Greider Delves Into Secrets of Nation’s Financial ‘Temple’

Paul Volcker used to wince when reporters and lawmakers would call him the second most powerful man in America.

As chairman of the Federal Reserve Board for eight years, Volcker always acted a bit offended when it was noted that the Fed’s control over the nation’s purse strings granted him immense sway over the fate of the U.S. economy.

“Who, me?” Volcker might suggest with a shrug. “You can’t mean me.”

William Greider thinks we’ve been understating the case.

A Watershed Period

In “Secrets of the Temple: How the Federal Reserve Runs the Country,” Greider has written a mammoth, compelling account designed to show that during much of the watershed period from 1979 to 1987 when Volcker ruled behind the Fed’s closed doors, he wasn’t just the second most powerful person in the country after the President.

On the questions of money, jobs, and the health of the economy where the government really affects Americans’ daily lives, Greider contends Paul Volcker was No. 1.

“The community of elected politicians acquiesced to (the Fed’s) power,” Greider writes. “The private economy responded to its direction. Private capital depended on it for protection.” The leaders of the Federal Reserve, he argues, decide “who shall prosper and who shall fail, yet their role remained opaque and mysterious.”

About five years ago, Greider determined that he wanted to get beneath the veil that shields the Fed and its appointed officials from public attention. For all the hundreds of thousands of words written annually by financial experts and economic reporters about its actions, America’s central bank remains--to most people--a mystery.

And when he began, Greider confesses, it was a mystery to him too. “I think I knew about monetary policy what most people think they know, which is the six cliches and aphorisms,” he says now. “I knew perfectly well I didn’t know that much about it.”

Greider, you may remember, is the former Washington Post editor who had a moment of fleeting fame when he wrote a stunning magazine article in November, 1981, for the Atlantic Monthly revealing the confessions of David Stockman, then President Reagan’s budget director.

Stockman, in a series of off-the-record breakfast meetings with Greider throughout most of his first year in office, had candidly described the chaotic decision making and frequent deceptions involved in persuading Congress to implement Reagan’s radical economic program.

When Stockman acknowledged that “none of us really understands what is going on with all these numbers” and described the tax cuts for nearly all Americans as a “Trojan horse” primarily to benefit the wealthiest taxpayers, official Washington--like Claude Raines in the movie “Casablanca”--was shocked, just shocked at the public expression of the private doubts of Reaganomics’ brightest cheerleader.

The storm of controversy that nearly led to Stockman’s resignation from the Reagan Administration also swirled around Greider, who left the Post shortly after the article was published to write on political issues for Rolling Stone magazine. Given all the attention devoted to the federal government’s budget deficits, Greider decided he would focus his powerful reporting skills and crusading liberal political zeal on the secretive Federal Reserve.

‘Only Half the Story’

“It dawned on me all through the Stockman episode that I was only following half the story (of economic policy),” he says, “and probably not the more important half.”

Greider--barely known to the reading public in comparison with his famous friend, Post reporter Bob Woodward--proves in “Secrets of the Temple” far more sophisticated in penetrating and explaining the inner working of the Federal Reserve than Woodward was in his books supposedly aimed at revealing the similarly closed world of the Supreme Court and the Central Intelligence Agency.

Even Greider’s critics--and there are many who dissent from Greider’s controversial thesis that the Fed’s quelling of inflation in the early 1980s served primarily to benefit big banks and rich Wall Street bond holders at the expense of the vast majority of Americans--acknowledge that Greider’s lively storytelling sets a high standard for a deeper understanding of the hidden history of our recent past.

Reviewing it in the Wall Street Journal, Paul H. Weaver, a media fellow at the conservative Hoover Institution in Palo Alto, called Greider’s book “a fascinating if not always persuasive work that people will be contending with for years. . . . What might have been just another inside-Washington potboiler (becomes) a gripping portrait of American economic civilization.”

John H. Makin, director of fiscal studies at the right-of-center American Enterprise Institute, wrote in the International Economy, a new Washington-based magazine, that “serious students of monetary policy and members of the Federal Reserve Board should not be put off by (Greider’s) populist appeals.”

Makin notes that the vividness of Greider’s economic history is epitomized by the book’s early chapter titles in which “the ‘Choice of Wall Street’ to restore faith in the ‘God-Almighty Dollar’ was Paul Volcker, who made ‘A Pact with the Devil,’ Milton Friedman, to use monetarist-style money-supply control to slay the inflation dragon.”

Makin agrees that “Greider spins a fascinating tale about the Fed’s titanic battles with itself, Congress, a fickle President and the President’s men to control inflation.”

And those who share Greider’s political beliefs, such as Robert Kuttner, who reviewed the book in the Washington Post, are ecstatic that Greider has “written a good-humored yet deadly earnest populist manifesto, rediscovering and bringing up to date the money question.”

Open to Debate

But even though his conclusion--that the pain imposed on America’s heartland was too costly a price to pay for bringing the spiraling inflation of the 1970s back down to earth--is open to searching debate, what sets Greider’s book apart is the historical sweep and detailed reporting about the little-understood institution.

Greider is following in others’ footsteps--Cary Reich in Institutional Investor, Paul Blustein (now of the Washington Post) in the Wall Street Journal, and a handful of reporters for major newspapers from the Chicago Tribune to the Los Angeles Times have peeled away some of the Fed’s veneer to tell parts of the story--but no one before Greider has attempted such an ambitious undertaking.

Greider proudly acknowledges that he has written a book with radical ideas about the particular American version of capitalism, but insists that his reporting is grounded in the real politics of money. Managing the nation’s currency, he shows, inevitably shapes the distribution of wealth, the pace of economic growth, and the winners and losers in the constant struggle for personal gain.

‘Didn’t Have Good Choices’

“I know there will be a tendency to say I’m making Volcker the villain of the story, but that’s not my intention at all,” Greider said in an interview in his tiny office in downtown Washington. “He didn’t have any good choices, that’s true, but what I’m saying is that there is something wrong in a system that allows the credit-expanding system to get out of control and then tends to single out the weakest, most vulnerable players--farmers, home builders, small business and manufacturers in general--for punishment to bring it back under control.”

The worst aspect of the current system, Greider contends, is that the Fed’s priest-like control shields democratically elected political leaders from accepting responsibility for both the pleasures and pain of managing the U.S. economy.

In a time-honored ritual, politicians are happy to claim credit when economic times are good, but when times are bad they rely on little more than ineffectual, blustery attacks on the Federal Reserve aimed at deflecting the wrath of their hard-hit constituents.

What’s more, the Fed, worried as well about a political backlash when it imposes its harsh anti-inflationary cure of high interest rates, has frequently fallen back on incomprehensible incantations.

‘Did What We Did’

Volcker, for instance, once responded to a reporter’s straightforward question about the effects of a policy move by saying: “We did what we did, we didn’t do what we didn’t do, and the result was what happened.”

Fed officials, for all their own human foibles, gutsy decisions and embarrassing mistakes along the way, did know what they were doing, Greider indicates. But they didn’t think it was crucial to tell the rest of us.

In October, 1979, shortly after Volcker took over as Fed chairman, the central bank finally moved to cut inflation by trying to control the money supply, letting interest rates soar to unprecedented heights.

“There wasn’t any question that the board knew that recession would follow,” ex-Fed governor Philip Coldwell told Greider later. But Volcker, when asked at the time if the move would lead to slower growth and higher unemployment, denied the consequences of his actions. “I don’t think it will have important effects in that connection,” he said.

Even when he finally eased the Fed’s grip on the economy in 1982 after breaking the back of inflation by driving unemployment above 10%, Volcker couldn’t bring himself to tell the truth.

Last October, the Fed dropped its 3-year-old experiment with controlling the money supply as a failure. But Volcker called it nothing more than a “small, technical matter.” Asked how “Joe Sixpack” should react to a move that allowed the nation’s current 5-year-old economic expansion to get under way after the worst recession in nearly 50 years, all Volcker could say was:

“I don’t think Joe Sixpack should be concerned in the least about the fact that (one measure of the money supply) is distorted . . . I think if you give Joe Sixpack that impression, you are doing him and the country a disservice.”

Perhaps Greider’s most interesting argument is his insistence that the Fed’s goal of stable money and minimal inflation is an impossible dream. Robust economic growth requires rising prices and lower interest rates, he argues. What’s more, most Americans--as homeowners and debtors--gain more from inflation than they lose.

That’s true, critics acknowledge, but only to a limited degree. Allowed to continue beyond modest levels, inflation eats away at the prospects for long-term growth by encouraging excessive borrowing and consumption rather than savings and investment. And in competition for foreign markets, it also ultimately puts the United States at a disadvantage against other countries that manage to keep labor and production costs under control more successfully.

Moreover, Greider’s own suggestion to move toward higher prices in combination with lower interest rates may itself be impossible to achieve now that investors are perpetually wary of any sign that the Federal Reserve might allow inflation to erode the value of their assets.

“I don’t quite know how you set up a system that tolerates inflation,” says Lyle Gramley, a key Fed governor during the early 1980s who now is chief economist at the Mortgage Bankers Assn. here.

“Looking back, it was a very, very difficult period, and we did make mistakes along the way,” says Gramley, who was interviewed at length by Greider several times for his book. “But what were the alternatives? If we at the Fed hadn’t acted to take the sting out of inflation, it would have perpetuated a process that would have made the economy weaker and weaker.”

Critics contend Greider also exaggerates the Fed’s preoccupation with protecting the interests of wealthy creditors and its insulation from other outside political pressures.

“The Fed is influenced by Wall Street, but also by Congress, the executive and the Fed bureaucracy, a hotbed of pro-growth Keynesian economics,” Weaver writes. “Greider seems to forget that the Fed was a pro-inflationary force in the 1970s, and that the inflation it created was overwhelmingly repudiated by the American people, who opt for price stability every chance they’re given.”

Like Robert Caro before him, who emerged from Long Island’s Newsday to write revealing biographies of New York power broker Robert Moses and former president Lyndon Johnson, Greider’s leap from newspapers to books points to some of the inherent shortcomings of daily journalism in explaining crucial events of our time.

Reflecting on the response to his 1981 Stockman article, Greider realized that “the sum of the parts was more powerful because it was a comprehensive narrative, not splintered into daily stories. The press, including myself of course, was usefully serving its smaller audience of the governing elite but not communicating very clearly with the larger public.”

Greider, who briefly tried to make it as a playwright after graduating from college, first became a reporter on a small paper in Wheaton, Ill., then moved to the Washington Post after a stint in Louisville, Ken.

A Good Guy

He was one of the few heroes in Timothy Crouse’s inside look at press coverage of the 1972 presidential campaign, “The Boys on the Bus.”

Greider “sweated out the longer meaning-of-the-campaign stories,” Crouse wrote. “While working on a longer story he would stop drinking and grow tense. When he finally finished it, he would float around in a kind of mystic high for a day.”

“I was young then,” is all Greider will say now about those days on the George McGovern campaign trail. Always restless with conventional journalistic formulas, Greider says he left the Post after the Stockman “brouhaha . . . because I realized I should be writing and reporting, not managing and editing. I was 45 years old, and it was a neat way to kick over the traces and try something different.”