1988 BOOK PRIZE WINNER: CURRENT INTEREST : The Federal Reserve as a Temple of Sacrifice
When a besieged President Jimmy Carter decided to shake up his Cabinet in the summer of 1979, picking a new chairman of the Federal Reserve Board was almost an afterthought. Carter phoned his Treasury Undersecretary, Anthony Solomon, to ask whom he should appoint to replace the nearly anonymous G. William Miller, who was joining his Administration. Solomon gave him only one name: “Paul Volcker.” The President was surprised. “Who is he?” Carter asked.
Few people will ever ask that question again. And you can be sure that no President will treat the Federal Reserve so lightly again. Paul Volcker changed all that. Today, Volcker is known as the man who won the war against inflation. By pushing interest rates to unprecedented heights, the Federal Reserve triggered the worst recession since the end of World War II. In 1982, the unemployment rate pierced 10% for the first time in 40 years. But the widespread pain worked to end a wage-price spiral that threatened the future health of the economy. The accepted wisdom is that “Volcker rescued the country,” one economic journalist wrote, “and, in the process, became something of a hero.” It was a dirty job, but somebody had to do it.
The great value of William Greider’s powerful, populist critique of Volcker’s eight-year reign at the Fed, “ Secrets of the Temple: How the Federal Reserve Runs the Country, " is that it forces us to re-examine that accepted wisdom. Greider believes the cost of curbing inflation so abruptly was unnecessarily high and was distributed unfairly. Too many ordinary Americans--dispossessed farmers, laid-off factory workers--were victimized, while the wealthy profited and most of the rest of us escaped relatively unscathed. There had to be a better way of sharing the burden. And, worst of all, Volcker’s costly recession didn’t really resolve anything. The odds are high that the United States will have to go through the same vicious cycle all over again. “The government simply evaded the moral questions that arose from its actions,” Greider wrote. “If the economy was not healthier, if the benefits of stable money had not been realized, then what would the government say to all those people who had been sacrificed?”
It was no surprise that Greider’s book produced such an outcry when it was published early this year. The strongest criticism was aimed at Greider’s conclusion that some inflation is desirable because it rewards manufacturers, stimulates economic growth and redistributes wealth away from rich creditors toward middle-class homeowners and other debtors.
Robert Samuelson, a Newsweek columnist whose work appears in the Washington Post, the Times, and other newspapers, was Volcker’s most vigorous defender. Greider “never draws the crucial distinction between a little extra inflation and accelerating inflation. Only by fudging the issue can he maintain his enthusiasm for inflation,” Samuelson wrote in his New Republic review. “By the time (Volcker) arrived at the Fed, all the choices were bad. High inflation poses a dilemma. Tolerating it saps the productive economy and sows public cynicism. Crushing it hurts those who expect inflation to continue. . . . But blaming Volcker for this suffering, as Greider does, is silly. It’s like blaming generals for war. The recession’s victims were dupes of the idea that a little more inflation is harmless.”
I don’t think all of Greider’s critique is valid, but I think he is right about the damage from the Fed’s self-imposed mystique. What makes his book so special to me is that, like all readers of his book, I was forced to look at our recent past in a whole new light. More than three years ago, I wrote a long front-page story arguing that the Fed “has been flying by the seat of its pants during recent economic storms, depending less on infallible theory or sage philosophy than on the instincts and hunches of its members, on ad hoc responses to market pressures and, in large measure, on luck.” But that conclusion didn’t go nearly far enough. The truth is that Volcker often lied about what he was doing. The Fed, important as its freedom to maneuver may be, nonetheless has a responsibility to honestly tell the public about its actions.
Even if you don’t believe, as Greider contends, that central bankers decide “who shall prosper and who shall fail,” it is undeniable that Greider is right that the Fed is at the center of a crucial, ongoing political struggle over our nation’s economic priorities. In the 1980s, with the disarray over government budget policy, this was truer than ever. Managing the nation’s currency, Greider shows, inevitably influences the distribution of wealth and the pace of economic growth. And that’s not all. The people who run the Fed make mistakes like anyone else. To allow the Fed to shroud its decisions behind “scientific presumptions of economics,” as Greider puts it, is not only to seriously distort monetary policy itself, it also serves to “stifle a normal democratic debate on the question of money.”
Greider raises important questions that those of us who write regularly about the Fed have ignored for too long. “The news media are as conservative in their own way as other influential institutions of the governing elite. The press portrays reality according to a limited range of orthodox premises and, if ever any of these settled wisdoms is challenged, it will vigorously deny and defend,” he says. “Most people didn’t understand what was happening because nobody bothered to explain it,” Greider adds. “That’s profoundly anti-democratic. Look, even if I’m wrong, why didn’t Volcker explain that people were going to get crushed by the policy? Why didn’t the press explain it in terms that those not on Wall Street could understand? The reason is because to do so would be to put these questions up for public debate. In the end, that’s all I really want.”
In its own way, Greider’s book may already have started to move us in that direction. Under the new Fed chairman, Alan Greenspan, the central bank has become far more open than ever before. The various voices of different policy makers are now heard; disputes are aired. Reporters pay far more attention to the Fed than before. It may not be much, but it’s a start.
It’s been said frequently that history is written by the victors. But the victims need their own historians too. Among academics, there has been a new-found discovery of history written “from the bottom-up,” but so much of it is unreadable that it barely affects the public debate at all. That’s why Greider’s book is such an accomplishment. His book can be read with such pleasure that it is accessible to anyone who cares about the subject. Indeed, in “ Secrets of the Temple, " Greider may be remembered most for telling the epic story of our nation’s struggle to control inflation so clearly that the voices of the victims can be heard in the lofty towers of the victors as well.
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