Overrule the ‘Fed’?

January 7, 1957

On Oct. 22, Elliott V. Bell, editor of Business Week, made a speech before the American Bankers Association which deserved and has received much attention, not because it contained anything new, but because it supported, in an unusually lucid and plausible form, increasingly popular Keynesian theories concerning who should manage our managed money, and how. These theories lead in practice to a philosophy of perpetual inflation.

Bell’s plan, in brief, is to subordinate the Federal Reserve Board to a “National Economic Council,” which would “coordinate” all monetary and “basic economic policies” of the government under the President, “who would have final responsibility for its decisions, and for resolving conflicts on basic matters.” As Prof. Walter E. Spahr has already pointed out, this proposal is substantially the same as that made by a research staff of the Committee for Economic Development in 1946. The CED group recommended that a central monetary authority under the President be created and “charged with developing and directing a unified program of fiscal, monetary, and price control action to maintain price stability and high employment.”

Spahr has also pointed out that if the proposed Economic Council is to have “the responsibility of determining the basic economic policies of the government,” even “Congress would be compelled to abstain from exercising the powers and responsibilities reposed in it under the Constitution. It would have to do what the council directed it to do. The President would become a dictator.”

INDEPENDENCE?

Bell declares that his plan “would preserve the independence of the Federal Reserve System.” In contradiction to this, however, he questions “whether under present-day conditions the Federal Reserve ought to be able to . . . go counter to the economic policies of the national Administration.” It is clear that the Bell plan would make the “Fed” impotent. If the Fed chairman, as member of the proposed council, wanted to raise discount rates, for example, and other members of the board (which would include the President, Secretary of the Treasury, chairman of the Council of Economic Advisers, “and other top-ranking economic policymakers”) wanted to lower discount rates, they could simply outvote the Fed chairman, who would have to go along with their decision. The Fed’s “independence” would become a bad joke, consisting in the freedom to be overruled.

“In no major country of the world today, except in the United States,” Bell declared, “is there a central bank that can legally, if it wishes, tell the head of its own government to go fly a kite.” Let us put aside the question whether the President is “head” of our government or merely its Chief Executive, subject to the laws of Congress and the decisions of the courts. The situation Bell describes, when you come to think of it, is precisely what the situation ought to be. His comparison is unfortunate. It reminds us of the atmosphere of perpetual monetary crisis, or of racing postwar inflation, in nearly every country today where the central bank can’t tell the government to go fly a kite.

ETERNAL BOOM

The experience of history is that, wherever the central bank is not independent of the government, the government is unable to resist the fatally easy course of financing its needs by borrowing from the bank. It is unable to resist the demands of pressure groups for higher wages, subsidies, price supports, and inflation. The government tries to “stabilize” the boom at its peak, and to prolong it to eternity. It turns the central bank into the central inflation factory. What keeps our own Fed relatively independent today is that its governors serve overlapping terms of fourteen years, and cannot be removed for refusing to inflate.

All proposals of the Bell type begin by asserting that “the state is responsible for maintaining the economic health of the community.” But the irony of such pious assertions of “social responsibility,” as the Guaranty Trust Co. has pointed out, is that they nearly always end by proposals for financial irresponsibility.