SECRETS OF THE TEMPLE How the Federal Reserve Runs the Country By William Greider Simon and Schuster. 798 pp. $24.95
MOST OF US first encountered "the money issue" in high school or college history texts, where we learned that for some inexplicable reason, 19th-century Americans had a bizarre obsession with the currency. In repeated episodes that students dutifully memorized but seldom grasped, fringe parties regularly proposed cranky remedies like 16-to-1 ratios between gold and silver. And oddly enough, ordinary people apparently spent a good deal of their time debating monetary arcana.
As William Greider explains in his masterful Secrets of the Temple, the 19th-century fixation with money was no oddity. Before the creation of the Federal Reserve in 1913, private Wall Street banks -- the famous "money trust" of populist oratory -- served as the de facto central bank, and they didn't serve Main Street America very well. Whenever an economic contraction struck, money in the provinces dried up, local banks ran short of currency, loans were called and farmers and local businesses went broke. The concern with the money issue was no fringe obsession, but a basic economic concern and a deeply political one at that. Whenever money was plentiful, whether because of greenback dollars or frontier banking or accidental gold discoveries, the heartland could expand. Ordinary people could prosper. When money was tight, Wall Street did nicely, thank you, but Main Street didn't.
The money question, then as now, was both a class conflict between financial capital and productive enterprise, as well as a conflict between caution and boundless optimism, between the old money of the past, representing the financial haves, and the aspirations of the have-nots. The invention of the Federal Reserve, as Greider recounts the tale, was one of the great ironies of American history. After one banking panic too many, Wall Street conservatives appropriated an idea from the populists. Money creation would be taken out of the hands of private banks and vested in a quasi-public agency. Yet far from being democratized, the "money issue" would be effectively removed from public discourse, secreted in an esoteric temple of central banking, with political accountability largely limited to other bankers and bondholders. In the great compromise of 1913, central banking was relocated to Washington, yet safely kept on Wall Street.
Despite its removal from democratic debate, money remains an intensely political question. Greider's achievement, in this monumental yet readable book, is to demystify the money question and restore it to popular dialogue, where it of course belongs. In effect, he has written about six different books, and rolled them into a single coherent and riveting story line. Greider has a unique combination of journalistic gifts. He manages to combine the irreverence, story-telling ability and droll appreciation for irony of a Mark Twain, with a fine capacity to uncomplicate esoteric but crucial economic questions. Bankers, after all, are no brighter than the rest of us. If they can understand the Fed, so can we.
On one level, Secrets of the Temple is a virtuoso investigative history of the Volcker era at the Fed, and a devastating account of the Reagan administration's financially perverse, yet politically shrewd economic policy. It is also an enlightening treatise on the mythic, cultural and financial aspects of money, the mechanics of central banking, and the Fed as a political creature. Most importantly, Greider has written a good humored yet deadly earnest populist manifesto, rediscovering and bringing up to date the money question.
GREIDER, perhaps best known for his conversations with David Stockman, is obviously very persuasive at getting people to talk, for he has gotten dozens of normally circumspect central bankers to tell delicious tales. There are more than a handful of bombshells in the book, but Greider is astute enough to let them serve as expository guideposts rather than mere sensational revelations. The best such disclosure is the discovery that when the Federal Reserve in 1979 disingenuously ceased targeting interest rates and ostensibly converted to the monetarist dogma of manipulating the money supply, this was Volcker's deliberate and cynical device for creating a painful bout of disinflation while avoiding the direct political blame. Many people inferred the game after the fact; Greider gets the players to admit that this was their intent going in.
Greider also effectively documents that the Fed badly botched the job. Because the measured "money supply" in fact reflects borrower behavior as well as central banker intent, M-1 proved extremely slippery, a "wayward lodestar" in Greider's fine phrase. As a consequence, the 1981-83 recession, induced by badly managed tight money, was far deeper and more damaging than necessary, leaving a prolonged legacy of real interest rates higher than at any time in America's economic history. When inflation was finally slain in 1983, Volcker emerged as the hero of the opinion-leader class (which suffered few of the effects), revered by Democrats and Republicans alike. But in Greider's careful account, Volcker is exposed as not only excessively puritanical, imposing unnecessary suffering, but often inept as well. Greider further sheds new light on the awful symbiosis between the Reagan administration's loose fiscal policy and the oppressive monetary policy that Reaganism has allowed the Fed to justify.
At bottom, Greider's basic point is that the Federal Reserve is profoundly undemocratic, principally loyal to the bond market rather than to the larger productive economy. Bondholders, above all, want high real returns, usually at the expense of easier money and economic expansion. "Stability" is an overrated virtue. Except during unusual periods, such as the New Dealer Marriner Eccles' tenure as Fed Chairman during the 1940s, when real interest rates were kept low, the Fed is the instrument of creditors. The claim of central banking to be a neutral, technical pursuit, according to Greider, masks "the political content of economics and the social ritual of capitalism." Lately, tight money has triumphed over economic possibility yet again. "The political system, by embracing stable money as its preeminent goal, by allowing the Federal Reserve to set the governnent's economic policy on its own, was unwittingly deferring to the bond market, too -- and acquiescing to the same reactionary values. In the name of stability, the past was defended, the future was denied."
Greider's framework also helps put the appeal of Ronald Reagan into better perspective. Finance, he writes, is "an exchange across time." For Greider, the real conflict of classes is not just between rich and poor, but between established wealth and economic possibility. Viewed through that lens, Texan wildcatters may be billionaires, but they are also populists, because they are high rollers in a way that bondholders are not. And so is Ronald Reagan. In that surprising sense, Reagan has more in common with Andrew Jackson than with Andrew Mellon. Indeed, the Volcker era at the Fed ended when he was finally outvoted (and in effect voted out) by Reagan's loose money appointees.
It serves the Federal Reserve right that the definitive book on its doings has now been written by a populist. William Greider will be criticized largely on three grounds: as radical, as too cavalier about the risks of inflation, and as verbose. The first of these is fair; his book is splendidly radical -- on a subject that only a radical would dare deconstruct.
But while Greider does point out, repeatedly, that deflation serves the creditor class and that inflation is often both pro-expansion and pro-redistribution, he stops just short of advocating inflation as deliberate policy. Rather, he takes the sound money class to task for overdoing disinflation. More precisely, he contends that the allocation of credit, though disguised as the decision of free markets, is inevitably political and ought to be explicitly democratized, as an alternative to the more punishing (and usual) course of alternating deflating or inflating the entire economy to serve monetary ends.
And though Secrets is long, it is rarely long-winded. Occasionally, Greider overreaches in dramatizing the effect of Fed policy upon the heartland ("Robbin Craven, a twenty-eight year old unemployed steelworker in Homestead, Pennsylvania, tried a series of part-time low-wage jobs. . .") A book as broad as this one sometimes overruns its own chapter outline. But for the most part the writing is so good that if the text sometimes sprawls, it rarely sags. The reader may wonder occasionally why the author has taken him on a particular digression in a particular chapter, but the scenery is so rewarding that the trip is usually well worth the detour.
Secrets is populist in yet another aspect, which makes one cherish Greider as a fellow journalist. His is one of those rare books in which a non-specialist takes on a difficult topic with fresh eyes; spends several years getting his mind around it; combines meticulous reporting with expository virtuosity; and renders a treatment that is both more comprehensive and more accessible (and hence more democratic) than the conventional treatment by the experts. In that respect, Secrets is in a class with perhaps a half dozen such books of our time; it recalls J. Anthony Lukas' Common Ground, David Halberstam's The Best and the Brightest, and Richard Kluger's Simple Justice. Among these, Greider's subject is probably the most foreboding, and his achievement is thus all the more impressive.
Robert Kuttner, who often writes on economic matters for Book World, is the author of "The Life of the Party: Democratic Prospects in 1988 and Beyond."