"A central bank has to be independent because one cannot really trust the politicians--they are all a rotten lot and any of them might seek to get out of a hole by printing money."
Present-day supporters of Paul A. Volcker and the independence of the Federal Reserve Board are more circumspect in their language, but this pithy defense of the independence of central banks--attributed to former chairman of the West German Bundesbank Karl Blessing--sums up many of their arguments.
One senior Federal Reserve official put it this way: "The Fed is not subject to annual, semiannual, biennial or quadrennial political pressures." This makes it possible to run "a monetary policy more in the public interest."
Translated, that usually means one which is more restrictive, less inflationary, and more painful in the short term at least than policies which--it is presumed--elected officials would be tempted to follow.
New York economists Charles Lieberman and H. Erich Heinemann defended Fed independence thusly: "The central bank needs the freedom and flexibility to pursue a stable policy without one eye peeled for voter reaction. With elections every two years, a politicized Federal Reserve is likely to lead us down a dangerous path."
This "dangerous path" is presumably to be avoided by following politically unpopular policies, which elected officials cannot be expected to do, but central banks can.
But should politically unpopular policies be forced on the electorate?
Would the advocates of a fairly independent Fed (no one claims that it is completely independent) be happy with a similar group of experts, whose power is not directly a result of the electoral process, being responsible for carrying out foreign policy, or for raising taxes, or spending public money? "That would probably not be very wise," commented the senior Fed official.
However, he still defended the present structure where Congress delegates its constitutional authority to "coin money" to the Federal Reserve, and the Fed can make policy decisions that do not have to be approved formally by either the administration or the Congress. In the long-term, policies made by a semi-independent Fed will better serve the public he believes.
Moreover, "in a purely political sense, it the Fed has served a very useful purpose . . . as a whipping boy," he said.
Again, there is a serious question of whether Congress and the administration should have such a "whipping boy," whose actions have an enormous effect on the economy, but for which neither the president nor the Congress is directly accountable.
Some of those who now suggest a change in the Federal Reserve structure, such as Sen. Edward M. Kennedy (D-Mass.), argue that President Reagan has been able to evade responsibility for present high interest rates and recession by blaming the Federal Reserve, even though the Fed is carrying out policies endorsed by the administration.
It is not just Reagan critics who worry about this aspect of Fed independence. Treasury Secretary Donald T. Regan himself recently remarked that with "an independent Fed you also give the administration a chance to weasel out of its current difficulties by blaming the other guy."
Regan and his Treasury colleagues have done a fair amount of weaselling in the last year. They have repeatedly blamed the Fed's inability to ensure smooth growth in the money supply for high interest rates. This charge does not have many serious takers. It is "ridiculous" one Federal Reserve official said, and "nonsense" according to Charles Schultze of Brookings, chairman of President Carter's Council of Economic Advisers.
However, Schultze believes both that the nation benefits from the Fed's relative independence and that talk of changing this "is at the moment a red herring" that could obscure real policy problems, rather than indicate a way of solving them as Kennedy aides suggest.
The formal independence of the Fed from Congress and the administration may not be as important as its more fundamental independence from popular pressure, he says. This independence is by no means absolute. "I don't think we're immune from political pressure," Fed Governor Nancy Teeters said. Volcker himself has said that the Fed could not continue for long with policies that do not command broad public support, and most others agree.
But Schultze argues that the delicate balance of economic power between Congress, the administration and the Federal Reserve, as well as the extent to which the Fed is constrained by public opinion, has been altered fundamentally by the advent of monetarism in public policy. Judging monetary policy in terms of targets for the money supply has allowed the Fed to escape much of the responsibility for interest rates that people used to think it had, he believes.
This in turn probably has enabled the Fed to pursue a much tighter policy with much higher interest rates than it could have done if it was still using interest rates to guide monetary policy.
Whether you think that's good or not depends largely on whether you believe a strong anti-inflation monetary policy is worth the near-term pain. It also depends on whether you believe a semi-independent Federal Reserve should be able to choose such a policy, or whether the choice should rest more directly with a politicized administration and Congress.