Making Money Policy: Is It Time To Rein In The Fed?

May 14, 1987|By Bernard D. Nossiter.

In an administration not noted for original economic thought, James C. Miller, the budget director, has raised a remarkably astute pair of questions. Who, he asks, elected the Federal Reserve Board and why should it create an election-year slump by curbing the money supply?

Miller`s lack of respect has earned him the sobriquet of ``Miller Lite``

in Washington, a place that can stand everything but a fresh idea. He is, however, no cheap-money, populist radical, but a certified pro-market, anti-regulation conservative economist. His heretical questioning of the Fed`s sanctity has been repudiated by White House Chief of Staff Howard Baker, by a press spokesman and others whose economic expertise has been hitherto unknown. So attention should be paid to Miller`s blunt remarks--particularly since the Federal Reserve Board has been restricting the supply of money and raising interest rates since late March but just got around to admitting as much after Miller spoke out.

Paul Volcker, the formidable chairman of the central bank, has said that tighter money is supposed to stop the dollar from falling further against the yen. Capable as Volcker is, it is not clear why he knows better than markets the proper relationship between two currencies. The large U.S. trade deficit with Japan suggests that still further dollar devaluation may be required. Otherwise, the balance can be righted only by higher protectionist barriers than those already raised to choke off trade.

There is nothing in the charter or history of the Federal Reserve Board to make it responsible for fixing exchange rates. There is, however, a notorious precedent. In the depths of the Great Depression, the Fed`s board overruled Chairman Eugene Meyer and tightened money to prevent an outflow of gold. That helped assure that a disaster would become a catastrophe.

Today, a few simple facts again suggest that the Fed has things exactly upside down. Unemployment is officially put at over 6 percent (count the discouraged and the unwilling part-timers and the rate is nearer 10 percent); more than 20 percent of the nation`s plants are idle. This is evidence of serious slackness. There is no evidence of too much money chasing too few goods. What is wanted is easier money, not higher interest rates, to employ jobless men and activate manufacturing plants.

It is now largely forgotten, but the central bank was not created to run monetary policy. It was set up only to ensure that credit needs could be met throughout the country. Over time, the Fed has gathered to itself the power to dictate the volume of money and level of interest rates by adding and subtracting bank reserves.

Apart from Germany, with its terrible history of inflation, unemployment and Nazism, no major nation permits anything so important as its money supply to be determined exclusively by unelected officials. Britain is typical; the Bank of England takes orders each morning from the Treasury.

The case for an independent central bank rests on the belief that money is too important to be left to politicians. No doubt. But the alternative, a central bank whose chiefs enjoy power without responsibility, is even less appealing. If an elected administration runs an inflationary policy or prolongs a slump, voters quickly feel the consequences. They can curb the errant administration every two years and drive it from office every four.

In fact, a sober Fed chairman never strays too far from an administration, lest these very questions of control be raised. In the past, Fed chairmen regularly lunched with the budget director, Treasury secretary and chairman of the President`s Council of Economic Advisers. But this is not happening now, and Miller rightly fears that Volcker`s tightening could cost the Republicans the 1988 election. More likely, Volcker, who reads the political calendar, will ease up later this year to avoid an outright clash. Nevertheless, Miller`s questions remain unanswered.

It is time that Congress, which once freed the Fed from the Treasury`s wartime control, re-examined the entire question. Congress may well conclude that Miller is right, that nonresponsible control of money is absurd, that the central bank should be put where it belongs, inside an administration that must regularly face voters.