Money Gods / Demystifying the Fed

By Richard Hornik/Washington

Will the U.S. economy withstand the shock of the Black Monday stock-market crash, or will it slide into a prolonged recession? The answer will depend on the actions of consumers, companies, the President and Congress -- but perhaps most of all on the policies of the Federal Reserve Board. By controlling the nation's money supply, the Fed can willfully -- or often inadvertently -- speed up the economy or slow it down. Though the chairman and the six other Federal Reserve governors are appointed by the President, they become all- powerful financial gods once they get on the board, and their methods of operation are a complete mystery to most of the public.

As the Fed and the economy stand at a turning point, the timing could hardly be better for the appearance of Secrets of the Temple: How the Federal Reserve Runs the Country (Simon & Schuster; 798 pages; $24.95) by William Greider, the national editor of Rolling Stone magazine. Greider, whose 1981 Atlantic article revealed David Stockman's secret doubts about Reaganomics and caused the President to take his young budget director "to the woodshed," is once again at his provocative best. The book, which takes its name from the fact that in ancient times the creation of money often occurred in temples, is a lucid and colorful examination of how the Fed operates.

It is also a historical and analytical work of impressive breadth and depth. Greider sees the past 100 years of U.S. financial history as a continuous battle between the holders of the wealth, including investors and bankers, and the people who borrow the money, such as farmers, businessmen and consumers. In his analysis, Greider takes a viewpoint that is heretical to Wall Street. Like the prairie Populists of the late 19th century, he argues that moderate inflation is beneficial to the common man. Economic growth is spurred by inflation as long as it does not get out of control. More important, it eases debt because borrowers can pay back their loans with money that has been devalued. Stable money is the ideal, Greider believes, only for the holders of wealth.

Greider documents the fact that the Federal Reserve usually pursues tight- money policies that favor the interests of rather than borrowers. He holds the Fed responsible for virtually every recession that has occurred in its 74 years of existence. Like many economists, Greider argues that the governors were to blame for the severity of the Great Depression of the 1930s.

$ A notable exception to the Fed's pattern of austerity was the reign of Chairman Arthur Burns. Despite his reputation as an inflation fighter, Burns sometimes sanctioned stimulative policies. Part of his motivation seems, in Greider's view, to have been political, especially when the chairman expanded the money supply rapidly during Richard Nixon's re-election campaign in 1972.

Greider is especially tough on Paul Volcker, chairman from 1979 until this year, for bringing inflation down much too fast. Under Volcker, writes Greider, the "Federal Reserve was determined to drive the rate of inflation lower and lower, regardless of other consequences." The consequences, in Greider's opinion, were an unnecessarily severe recession in the early 1980s, a huge trade deficit and the debt burdens that still plague the economy.

Missing from Greider's book are prescriptions for how the Fed might improve its performance. He offers no clue about how the Reserve Board can consistently pursue more stimulative policies without letting inflation get out of control. But what Secrets of the Temple does admirably is explain clearly the difficulties and dilemmas that the Federal Reserve faces -- and the dire results of its mistakes.