Fuss Over the Federal Reserve

You have been the most costly public official in the history of the world.

This judgment, delivered at his desk-pounding best by Texas Democrat Wright Patman two weeks ago, was an expected but more than usually hyperbolic condemnation of William McChesney Martin. At each of his 18 yearly appearances before congressional committees, Martin has been routinely scourged for his chairmanship of the Federal Reserve Board, which Populist Patman blames for tight money and high interest rates. This year Patman has plenty of company. More critics than ever, ranging from academe to the new Administration, are taking aim at the nation's central bank.

Bill Martin is the perfect fall guy. His Federal Reserve is one of Washington's most powerful but least understood agencies; it treasures its independence from President, political parties and pressure groups. Martin and the six other governors of the Federal Reserve manipulate the levers that control the nation's money supply and interest rates. Today, as a result of their actions, money is tight and costlier to borrow than at any time since the Civil War. To their distaste, bankers have to turn down customers seeking loans; businessmen have to put off some projects because credit is so expensive; brokers watch helplessly as investors shift out of stocks into high-yielding bonds; customers have to pay more in carrying charges for a house or car.

Radical and Erratic. Bankers have been baffled by what many call the Federal Reserve's erratic and clumsy attempts at monetary "fine tuning." Even some of the Federal Reserve System's twelve regional banks have been resisting the board. Last week the New York Federal Reserve Bank reported that its officers had disagreed with board policy all through 1968, usually favoring even higher interest rates than the board voted. Some White House economists and many bankers argue that the board's autonomy must be ended.

Most of the critics are directing their fire from grounds first staked out by Economist Milton Friedman, who contends that the nation's money supply should be expanded within a fairly steady range of 2% to 6% a year--just enough to match the "normal" pace of economic expansion (TIME, Jan. 10). To go above or below these limits, he says, is to invite inflation or deflation. The board in recent years has shifted radically and rapidly from tight money to easy money and back again, sometimes increasing the money supply at an annual rate of 12%.

Even the board's apologists admit that, since about 1965, it has repeatedly overreacted to political considerations. It is widely agreed that the board let the money supply shoot up much too fast late in 1965, contract too sharply in mid-1966 and then rise too rapidly in 1967 and 1968. The great rises of the past two years have fueled inflation, which the board is now trying earnestly to stop. Since December, the money supply has not grown at all, and bankers cannot meet the increasing demand for loans. Martin's foes were jubilant when the $42,500-a-year chairman recently confessed to a three-year "heritage of errors" in economic policymaking by the board, Congress and the Administration.

Mixed Quality. Criticism of the board seems to increase with the arrival of each new "Administration. In 1961, because the incoming Kennedy Administration feared that the Federal Reserve might not go along with plans to stimulate the then-sluggish economy, some New Frontiersmen spread the fiction that it was a "tradition" for the Federal Reserve chairman to offer to resign. Martin never took the hint. Today's Federal Reserve governors are mostly Democratic appointees and, for the first time in many years, the board stands to the left of the Administration. But President Nixon has pointedly asked Martin to stay on until his term expires next Jan. 31.

In the imperfect art of managing money, Martin and his Federal Reserve have bumbled often. Yet they have many strengths. The 62-year-old chairman is one of Washington's most astute politicians and a master at wringing consensus from the diverse personalities among the seven Federal Reserve governors and twelve presidents. No one doubts Martin's courage. When politicians were unwilling to raise taxes to slow inflation and narrow federal budget deficits, the board did the job by restricting money. Then Martin calmly absorbed the resulting criticism, most notably after the "credit crunch" of 1966. To blame the Federal Reserve for that, says Arthur Okun, who was Lyndon Johnson's chief economist, is "like scolding a driver who just avoided hitting a jaywalking child because he stopped short with four feet to spare."

Try a Little Steadiness. The issue comes down to the question of whether or not the board's independence should be curtailed. Paul McCracken, Chairman of the President's Council of Economic Advisers, would prefer much less short-term monetary tinkering by the board. Like many others, he feels that the board would do better to pay more attention to developing long-term policies for steady economic growth. McCracken would also like to see the Reserve coordinate its policy more closely with the White House. He would probably not go as far as some former Johnson economists, who argue that the President should have something like veto power over the Federal Reserve's monetary moves. "If you can trust the President of the U.S with the atomic bomb," argues a Johnson Administration official, "why can't you trust him with money?"

The answer is that not even a President can be fully trusted with money because he is inevitably a political creature--and any moves to tighten money are political poison. European central bankers are particularly happy that Martin has so much power. They figure that politicians have a clearly inflationary bias and that the U.S. needs a man with Martin's independence and integrity to take the necessary, if politically unpopular, steps required to help stabilize demand and prices. When rumors went around in 1967 that Martin might not be reappointed as chairman, some European central bankers observed that his departure would so shake foreign confidence in Washington's money policy that the U.S. would lose $1 billion in gold. Considering that gold sells officially for $35 an ounce, the bankers must reckon that Bill Martin is worth his weight in gold--12,000 times over.

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