If taxation without representation could rally the colonists against the British Crown in 1776, tight money and ruinous interest rates might be cause for populist revolt in our own day. Federal Reserve monetary policy also has severe social burdens, measured by huge changes in aggregate output, income, and employment.
The imperious Fed, much like the English Crown two centuries ago, formulates and carries out its policy directives without democratic input, accountability, or redress. Not only has the Fed’s monetary restraint at times deliberately pushed the economy into deep recession, with the attendant loss of millions of jobs, but also its impact on the structure of interest rates and dollar exchange rates powerfully alters the U. S. distribution of national income and wealth. Federal Reserve shifts in policy have generated economic consequences that at least equal in size and scope the impact of major tax legislation that Congress and the White House must belabor in public debate for months. Popularized studies of Federal Reserve performance in recent decades convey the image of the Fed seated in its Greek temple on Constitution Avenue, with Chairmen Volcker and Greenspan elevated to the realm of the gods.
From centers of economic power around the nation – Wall Street, Capitol Hill, the White House, and corporate boardrooms – the classical Greek chorus intones its defense of Federal Reserve independence. On the surface, central bank independence seems an eminently reasonable, appealingly simple solution for an agonizingly complex and muddled process of making economic policy in this postindustrial, electronically linked, and computerized global economy. The independent central bank is an institutional concept that complements well the counterrevolution now underway in U. S. budget policy.
Washington’s fiscal policy is locked into a deficit-cutting mode for the near future, while Congress is determined to retreat from all discretionary spending, regulatory intervention, or measures to improve equity in the distribution of national income and wealth. With the federal fiscal policy on automatic pilot, the Fed’s monetary policy could be removed entirely from the inefficiencies and confusion of the democratic process. But this deceptively simple conception poses profound questions for the process of democratic representative government in the United States as it pertains to managing the nation’s economy. Federal Reserve independence has a direct impact on the daily lives of most Americans in their pursuit of happiness, of which their economic welfare is a major element.
Since World War II, the Federal Reserve, together with policy makers on Capitol Hill and the White House, gradually worked out strategies for achieving a balance between tolerable rates of unemployment and inflation. The government was determined to prevent the recurrence of the kind of massive unemployment suffered in the Depression of the 1930s. In 1944, President Franklin Roosevelt set forth the basis for his postwar domestic program in an Economic Bill of Rights. His number one priority was the right to a useful and remunerative job. Congress soon passed the historic Employment Act of 1946 with strong Democratic and Republican support.
It gave the federal government explicit responsibility to promote maximum employment, production, and purchasing power. (This was subsequently amended and strengthened in the Full Employment and Balanced Growth Act of 1978. ) In the 1950s and 1960s, both Republican and Democratic administrations pursued the generally accepted goals of full employment, sustainable growth, and minimal inflation. Economic managers shifted weight among the several objectives as the economy moved up and down over the business cycle. During those decades, American economists in the mainstream shared a broad consensus that backed counter cyclical policy aimed at a mix of full employment and reasonable price stability. We now look back on those decades as a period of “golden growth in U.
S. economic history. By the mid-1970s, however, the oil price shocks and the emergence of stagflation shattered the consensus among economists. Arthur F. Burns, chairman of the Federal Reserve Board, described the new world after the first oil price shock had driven the economy into a deep recession in testimony before Congress (October 11, 1974).
According to Bums, one of the nation’s most distinguished researchers of the business cycle, the recession was extremely unusual, because it was accompanied by galloping inflation and booming capital investment: said Burns, I
