Reminted House Populist Set for Brawl With Fed Bankers

Visitors to the House Banking and Urban Affairs Committee should be forgiven today if they are confused about the century they live in.

That’s because they will see an old-fashioned political brawl over money and monetary policy, pitting a Western populist, Banking Committee Chairman Henry B. Gonzalez (D-Tex.), against the prim and proper central bankers.

Such disagreements have sporadically flared in Congress, especially during prolonged recessions. Yet the last time such a debate really captured the American imagination, robber barons with names like Carnegie, Morgan and Mellon still dominated the economy.

And so it may seem as if William Jennings Bryan--the three-time Democratic presidential candidate at the turn of the century who campaigned for easy money and an inflated currency--has come down from the political heavens to do battle.

Gonzalez, an aging liberal from San Antonio, is not demanding anything quite as extreme as Bryan. “This is not radical reform and there is no cause for the Federal Reserve to proceed as if barbarians are at the gate,” he said.

But Gonzalez will still confront 15 of the highest ranking officials in the Federal Reserve system, including Chairman Alan Greenspan, and demand to know why they believe the nation’s powerful central bank should continue to be insulated from the American political process.

The Fed, Gonzalez will argue, has too much sway over the economy not to be more directly accountable to voters and elected officials. Through its power to influence the direction of U.S. interest rates, the Fed can largely decide when to accelerate the economy or when to slow down an economy that it believes is threatened by inflation.

Yet the Fed’s isolation, Gonzalez says, often results in that power being mishandled. The Fed now represents the interests of Wall Street, not Main Street, he says, and worries far too much about bond traders and investors and not enough about consumers.

To remedy that, Gonzalez has introduced legislation to require that all 12 members of the Fed’s principal policy-making body--the Federal Open Market Committee--be appointed by the President and approved by the Senate. He would also broaden congressional oversight of the Fed’s budget and mandate greater disclosure of monetary policy decisions.

The President now appoints, subject to Senate approval, the seven members of the Fed’s board of governors. All seven sit on the Federal Open Market Committee.

The other five committee seats are filled on a rotating basis by the presidents of the 12 district Federal Reserve banks. Those 12 are appointed by each district bank’s board of directors, which are dominated by local business executives and bankers, subject to approval of the Fed’s board of governors.

The Open Market Committee votes in secret to determine the direction of interest rates and monetary policy and controls the most important policy lever at the Fed’s disposal: the power to set the federal funds rate, which largely determines the direction of short-term interest rates.

The Fed leaders are sure to tell Gonzalez that the integrity of a nation’s currency--and to a large extent its economic security--depends on the independence of its central bank. Let the President, Congress and the voters in on monetary policy and that integrity will disappear, they are likely to say. The Fed would never again be able to take tough actions to rein in inflation.

“The lure of short-term gains from gunning the economy can loom large in the context of an election cycle, but the process of reaching for such gains can have costly consequences for the nation’s economic performance and standards of living over the longer term,” warned Greenspan last week. “The temptation is to step on the monetary accelerator, or at least to avoid the monetary brake, until after the next election.”

But Gonzalez does not seem to pose a serious threat to the Fed. The Administration does not support his proposal and most members of his own committee oppose it. Yet the hearings should provide a debate over money politics rare in the 20th Century.