Landmark book offers a journalist's look at Federal Reserve Board

Secrets of the Temple: How the Federal Reserve Runs the Country, by William Greider. New York: Simon & Schuster. 798 pp. $24.95. William Greider's superb but lengthy book on the Federal Reserve System suffers from a basic problem: It really is three books in one.

It's an ``inside story'' of this extremely important institution that governs the nation's monetary policy and thus, to a large extent, the ups and downs of the business cycle.

For many years, ex-politicians or journalists have given us the inside story of events in the White House or Congress. Greider, by 34 interviews with governors and ex-governors of the Fed, with presidents of Fed regional branches, and with top administration officials on the economic and financial side, tells a good deal about the debates and squabbles within this secretive ``temple.'' He reveals some surprises, questionable actions, and useful insights.

It's a beautifully written history of the Fed, which was created by Congress in 1913, combined with an analysis of it as a political institution. Greider, a journalist, has boldly tackled the monetary and political-economic issues of the last 100 or so years.

Often the book uses what some journalism teachers have called the ``sandwich technique.'' There is a slice of history; then a colorful anecdote to bring it down to everyday experience; then a slice of information on the financial and economic system of the nation; and so on. The technique is commonly used in difficult magazine articles in an attempt to keep the reader's attention.

To some degree it works in this book. For many, it might provide a less formidable means for getting an education on the Fed than a standard textbook. Indeed, the book should become standard reading for economics students, young journalists, or others who have to know something about central banking and the economy. And it's also an advocacy book. Though Greider remains relatively calm and reasoned in taking positions, this element is the most controversial.

He argues, for example, that the Fed has periodically overdone monetary tightness. There is, of course, little question about that regarding the depression. Economists Milton Friedman and Anna J. Schwartz pretty well proved that point in a seminal book published in the 1960s. Greider claims that the Fed's attempt to repress the double-digit inflation of the late 1970s and early '80s, by causing the deep 1981-82 recession and sometimes-slow growth in the years thereafter, has done great social and economic damage to the nation. In combination with President Reagan's federal tax cuts, budget deficits, and restraints on social spending, the Fed's high-interest-rate policy has badly redistributed income from the poor and less than well-to-do to the wealthy.

Greider almost sings the praises of inflation, on grounds it tends to rob the lender (who is more likely to be in the upper-income classes) in favor of the poorer borrower.

``The triumph [over inflation] was hollow, however, for the nation,'' he writes. ``Its moral promises to the victims were not kept. For the entire society, its predicted benefits were not realized. Paul Volcker and the central bank had taken the country and nations around the world through great suffering - the long contraction and its human tragedies, massive failures, dislocated lives, the pain of the continuing liquidation and the losses of deflation. The moral justification offered throughout was that the pain would be worth it.... This moral promise, in the end, could not be kept.... Once money was stabilized, the economy still faced the same underlying problems it had encountered in the era of inflation - only they were now more severe.''

Greider reminds those in secure jobs or owning financially sound businesses of the horrors of deflation for those less fortunate. He spells out numerous policy mistakes made by the Fed. But what he fails to offer is a suitable alternative to fighting inflation with tight money. Inflation cannot be left untackled. It eventually distorts the economy. It can explode into hyperinflation, such as those episodes that twice destroyed the currency of Germany. Or it results in other massive economic dislocations, such as occur in Latin America, where the distribution of income is generally even worse than in the United States.

Nonetheless, the Fed could have carried out a less stern monetary policy in the 1980s and allowed more growth, though hindsight makes the argument easier. Volcker's reputation suffers in this book. Greider's populist view that the Fed has a bias in favor of bondholders could well have some merit.

Greider stands on sounder ground in advocating reform of the economic management of the nation to coordinate fiscal and monetary policy. Most other governments, he notes, have an arrangement by which unelected central bankers are subservient to the elected government. Greider suggests the Fed be made an agency of the Treasury Department.

Some other aspects of this excellent book could be criticized. It is often repetitive. Greider's exploration of the psychology of money becomes somewhat ``pop.'' His account of the failure of ``monetarist'' economics in the 1980s is not balanced by the recent explanations by these economists of what happened.

Basically, however, this landmark book is the best journalistic-style look at the Fed in modern times. It's a noteworthy achievement.

David Francis is on the Monitor staff.