Most of the criticism of the Federal Reserve's new monetary policy has been muted, while the kudos -- especially from abroad -- have been extravagant. Thus, on balance, the austerity policy of what has already come to be known as "the Volcker era" has met with praise, even though it has produced chaotic effects in financial markets, and its end result is far from clear.
General, those approving of the Fed's unprecedented actions on Oct. 6 see them as necessary to control inflation, stablize the dollar in foreign exchange markets and put a brake on excessive bank credit expansion.
The "pro" Volcker view is that for too long the United States had been conducting what essentially was an easy-money policy, disguised somewhat by high interest rates. Because no one was doing anything to control inflation, both business and consumers had the right to expect prices to continue to go up. That being the case, why not borrow money -- even at higher rates -- and pay it back later in even cheaper dollars?
"For the United States," former Ford administration exonomist Alan Greenspan told a congressional committee, "there is little leeway for policy maneuvering in the monetary area . . . The problems reflect earlier inflationary pressures. Unless and until we can reverse them, a restoration of balance in our economy will remain illusive."
Down deep, liberal economists feared the consequences of the Fed's new policy on the economy. But the better-known among them kept most silent. Lesser-known figures have not. Prof. leonard A. Rapping of the University of Massachusetts, in a letter to The New York Times (Oct. 28), said: "Regrettably, our central bank has only the equivalent of nuclear weapons in its arsenal for controlling inflation."
In the same edition, Edward A. Ross, senior consultant for the Venture Development Corp. of Wellesley, Mass., noted the "Fallacy" holding that "good old-fashioned recessions" will cure inflation. The downturns of 1958, 1970, 1974 and 1979 (and that's all of them in the past 25 years) were accompanied by sharp increases, not decreases, in the rate of inflation, he points out.
The veteran economist Leon H. Keyserling, President Truman's CEA chairman, makes similar points in a new study of events over the past 60 years. He warns that money crunches inspired by the Fed produce "economic stagnation and recession," rather than recovery.
Privately, both Treasury Secretary G. William Miller and Economic Council Chairman Charles L. Schultze initially opposed the Fed's new emphasis on money-supply targets (although they were willing to see monetary policy made tougher by more traditional means).
But the play was out of their hands: having failed to evolve and national economic policy themselves, Carter's advisers abdicated leadership to Volcker. Any public disagreement with the Fed, they feared, could have precipitated an immediate worldwide finanical crash, starting with a panicky flight from the dollar.
But the intimidation will wear off. The critics will become more articulate. Already there are signs that the political urgencies are persuading Cabinet members to voice some doubts.
The Fed's own credibility, in passing, received a major blow from two mistakes in counting the money supply in two consecutive weeks ending Oct. 3 and Oct. 10. In that period, the Fed published reports on the money supply that were off by $3.8 billion.
The Fed says that its operations were unaffected by these monumental goofs. But it's enough to make one wonder about any policy so heavily dependent on a single indicator of what's going on in a complex economy.
The test for Fed policy ought to center on whether it brings inflation under control, and at what cost. The outlook isn't good, because even Volcker admits that high interest rates won't affect the oil sheiks. And everyone knows that if high interest rates slow down industrial expansion, that will worsen, rather than improve, the weak U.S. record on productivity.
Basically, the conventional wisdom that endorses the Fed's action is relying on recession as the planned cure for all economic evils, whereas we used to think of recession as the result of bad or stupid policy. The kevserlings and skeptics like Rapping and Ross are debunked as impractical. But they shouldn't be written off. The "Volcker era" is fraught with dangers, and neither its policies nor its predictions should be taken on faith.