(Critical Survey of Contemporary Fiction)

SECRETS OF THE TEMPLE is a big book with a correspondingly big agenda. It is a history of the Federal Reserve Board (the Fed) under Paul Volcker-- the action taken, their financial and political context, and the consequences for the national economy--but other major themes run through the narrative as well.

The tremendous impact the Fed’s actions have upon politics and the economy lead to the theme expressed in the book’s subtitle: “How the Federal Reserve Runs the Country.” The Fed is a quasi-governmental appointed body, yet its power rivals that of Congress and the presidency. As Greider explores the implications of this, he presents a history of the Federal Reserve System and explor res the monetary history of the United States.

Closely related to the Fed’s power is another major theme: the nature of money and the modern financial system. Indeed, the social, political, and economic importance of finance is so profound that the book could have been aptly subtitled “the triumph of money” (which is in fact the title of the final chapter). The discussion includes a daunting psychohistory of money (Sigmund Freud makes a surprise appearance) and a fascinating history of the Populist movement active at the turn of the century.

There is a wealth of objective information presented, but ultimately Greider has a point to make: Decisions about money are also political and social decisions. By ceding monetary authority to the Federal Reserve, the American political system has implicitly chosen capitalism over democracy. The Fed makes the tough political decisions, and it has repeatedly chosen financial considerations over the needs of the real economy. It is unfortunate that the book’s length will scare some people away, because here is a clear, thought-provoking presentation of an important and little-understood topic.

Sources for Further Study

Business Week. January 25, 1988, p. 18.

Commonweal. CXV, May 6, 1988, p. 280.

The Economist. CCCVI, February 6, 1988, p. 87.

Forbes. CXLI, February 22, 1988, p. 104.

Fortune. CXVII, February 1, 1988, p. 108.

Library Journal. CXII, December, 1987, p. 100.

Los Angeles Times Book Review. December 13, 1987, p. 1.

The Nation. CCXLVI, January 23, 1988, p. 93.

The New York Times Book Review. XCIII, January 17, 1988, p. 7.

The Wall Street Journal. January 6, 1988, p. 13.

Secrets of the Temple

(Literary Masterpieces, Volume 7)

William Greider, a political journalist with Rolling Stone and formerly assistant managing editor for The Washington Post, understands the relationship between politics and the economy. He has written perspicaciously on both in national magazines and has published a book titled The Education of David Stockman and Other Americans (1982). In Secrets of the Temple: How the Federal Reserve Runs the Country, Greider has written a remarkably clear exposition of monetary policy, its importance to economic development, and its interaction with politics. Greider is primarily concerned with the Federal Reserve System (commonly referred to as “the Fed”) during the tenure of Paul Volcker. To set the stage and illuminate the operations of the Fed, however, he provides a review of monetary policy throughout the nineteenth century, the origins of the Fed in 1914, its workings during the 1920’s and restructuring in the 1930’s, and its emergence after World War II as the primary economic regulator. Indeed, next to the president himself, Chairman Volcker became the most influential man in the United States. What he and the Board of Governors decided has economically helped or hurt every American.

Given the Fed’s enormous power, why do Americans know so little about it? Greider’s answer is that the Fed has always kept a low profile, lest it become the center of public controversy and have its traditional independence threatened by popular politics. That independence has always been prized by the private bankers who shaped the system in the beginning and who continue to dominate it. They have a vested interest in keeping the Fed cloaked in as much mystery as possible.

The Federal Reserve System was established in 1914, in response to mounting public pressure, the burning resentment of smaller banks against the banking establishment of the East, and the realization by the big banks themselves that the old monetary system provided neither flexibility nor reliable stability. In fact, the big banks—J. P. Morgan, National City, Kuhn, Loeb—led the way, making sure that government control was minimized. As Greider makes clear, big bankers such as Morgan actually had less control over the money supply than the Populists and other reformers had thought, in large part because the United States was so closely tied to the international financial markets. The Federal Reserve System strengthened the influence of the big banks, however, even as it allowed for greater flexibility in the currency. The country was divided into twelve districts, each with its own Federal Reserve Bank, owned and operated by the member banks within that district. In return for Federal Reserve notes, members had to place part of their commercial paper in their district bank. The money supply was regulated in two ways: first (for years thought to be the most important) by raising or lowering the discount rate the Federal Reserve Bank charged banks for loans, and second (eventually recognized by some as equally important) by buying or selling government bonds to enlarge or constrict the money supply and its own lending power.

Coming under intense scrutiny because of the Great Crash of 1929 and the subsequent Depression, the Fed was reorganized in the 1930’s, under the able leadership of Marriner Eccles, a very conservative Utah banker who became a convert to Keynesian economics even before John Maynard Keynes was well known. Eccles recognized immediately the power of the Fed to enlarge or restrict the money supply and its consequent relationship to inflation and recession. Eccles was behind the legislation in 1935 that gave the Board of Governors oversight of all Federal Reserve banks, including their loan policies. The Federal Open Market Committee, composed of seven governors and five Reserve bank presidents rotating on and off, made the decision to buy or sell government bonds. During World War II, Eccles understood Keynesian economics enough to urge that the mounting government debt should be reduced through taxation as soon as possible. He feared the inflationary tendency of extended budget deficits and argued in the late 1940’s for reducing the money supply. His successor, William McChesney Martin, almost certainly applied the brakes too hard during the 1950’s, precipitating three significant recessions and holding back economic expansion. Interestingly, Richard M. Nixon blamed the 1960 recession—and Martin—for his defeat by John F. Kennedy for the presidency.

Under Kennedy and Lyndon B. Johnson, the “New Economics” of tax cuts and budget deficits stimulated the American economy into remarkable growth between 1961 and 1968. Martin argued for restraint, but President Johnson urged him to raise the discount rate only gradually. Greider insists that the Keynesians failed to apply the brakes as Keynes himself had insisted they should; part of the reason was the continued military spending and crisis atmosphere of the Cold War. To that was added the rising expense of American involvement in Vietnam. Too many dollars were in circulation, especially...

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