The independence of the Federal Reserve Board, the nation's central bank, is a myth.
The dominant force behind monetary policy is not the seven-member board of governors of the Federal Reserve nor the Congress that created the Fed in 1913 and "watches" over it today.
Instead, the President of the United States, the very person from whom the central bank is supposed to be insulated, is "the dominant guilding force behind monetary policy," according to Robert E. Weintraub, staff director of the House Banking Committee's subcommittee on domestic monetary policy.
Weintraub, speaking today to a session at the annual meeting of the American Economic Association, said that since the Truman administration the monetary policy followed by the independent central bank has always "fitted harmoniously with the President's economic and financial objectives and plans."
President Carter announced earlier this week that he would nominate his own Fed chairman, Textron, Inc., chairman G. William Miller to replace Arthur F. Burns, who has headed the central bank since 1971.
Certainly one of the major factors Carter considered in replacing Burns - an eminent economist who is well respected here and abroad - was the desire to have "his own man" heading the Fed to help insure that the monetary policy followed by the Fed does not thwart other economic policy actions taken by the administration.
However, Miller has said that he finds little fault with monetary policy this year. Burns, although he has sometimes been openly critical of Carter's policies and has continously warned of the dangers of inflation, presided over a Federal Reserve Board that permitted the money supply (checking accounts and currency in circulation) to grow about 8 per cent this year.
Last year it grew less than 6 per cent and it grew less than 5 per cent the year before that - when President Ford directed his attention mainly to cutting back on inflation.
Economists differ in how much emphasis they place on the role of the growth of the money supply on economic growth and inflation, but all agree that monetary policy is important to the health of the economy.
The Fed can go a long way toward offsetting the policies of the adminsitration. If the agency holds down on monetary growth, it could thwart moves by the adminstration to stimulate the economy and if it permitted the money supply to grow too fast, could erase anti-inflation moves by a president.
But, Weintraub said, a look at history shows that the Fed always takes action consistent with the objectives of the administration.
Not only are there many officials in the administration who once held Fed jobs and vice versa, but the "economic and financial objectives of presidents are not secret and the monetary policies that mesh with them are not hard to figure out."
Weintraub contended that the Federal Reserve has shifted the course of monetary policy - easing or tightening significantly, "in 1953, 1961, 1969, 1971, 1974 and 1977. Except for 1971, these were years when the presidency also changed hands." In 1971, President Nixon changed the focus of his policies from restrictive to stimulative and imposed wage and price controls to hold down inflation.
Since 1950, "much of the history of monetary policy can be explained just by noting who the president was when the policy under review was in effect," Weintraub concluded.
He also argued that despite the two year-old requirement the Fed chairman appears before Congress four times a year to relate specifis targets for money growth and explain those targets, the influence of Congress over monetary policy has not increased, with the President still the dominant factor.