That "Independent" Fed

The status of the seven-member Federal Reserve Board, The status of the seven-member Federal Reserve Board, sometimes called the supreme court of finance, has long been a subject of swirling controversy. In 1975, during a deep recession, Democrats in Congress charged that the board's chairman, Arthur Burns, who served from 1970 to 1978, had made the downturn worse by keeping too tight a grip on the money supply. His successor, G. William Miller, was attacked with equal vigor later on for the opposite reason: pumping too much money into the economy during the Carter years and thus fueling inflation.

Despite perennial complaints about the Federal Reserve's autonomy, the board has over the years usually taken its cues from the politicians in power. "There were three Arthur Burnses," observes Robert Weintraub, a senior congressional economist. "One for Nixon, one for Ford and one for Carter. The Fed has always done pretty much what the Administration wants."

Congress created the Federal Reserve in 1913 after a rash of financial panics showed the need for a central body to regulate the money supply and lend funds to banks caught short of cash. With the Treasury Secretary as chairman, the board at first was almost an arm of the White House.

In 1935 Congress moved to insulate the Fed from political pressure and passed a law removing the Treasury Secretary from the board. Even so, the board still tended to follow the presidential lead. When Dwight Eisenhower took office in 1953 on a promise to curb inflation, the Fed cooperated; money growth averaged only 1.8% a year during Ike's terms. When Lyndon Johnson later on needed easy money to help finance the Viet Nam War along with his Great Society domestic programs, the board once again cooperated; by the end of L.B.J.'s tenure, money growth was spurting at a rate of almost 8%. During the Nixon years, the board swung back and forth from tight money to loose following the Administration's own shifts in policy.

For the board's current chairman, Paul Volcker, perhaps the most frustrating task is figuring out what the President wants him to do. Administration critics have sometimes accused him of pursuing an overly restrictive monetary policy and at other times attacked him for being too expansive and unpredictable. If nothing else, having the Fed to kick around certainly seems a satisfying and time-tested diversion for policymakers in times of economic tumult.

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