William Greider’s 1987 opus, Secrets of the Temple, is both an essential slice of the modern history of the Federal Reserve as well as a really solid, if occasionally muddled and partisan, analysis of the effects of central banking on the economy.
The book traces two narratives. It gives a summary of the events, people and ideas which shaped the creation of the Federal Reserve and takes us to the inside of the Fed under Paul Volcker.
By weaving nuggets of history of the Fed’s origins, its effect on the economy, its inner mechanics, as well as detailed accounts of discussions held behind the curtain of secrecy surrounding their operations, Greider spins a grand narrative that takes us from the Middle Ages through the twilight years of the Carter administration and up to the heights of the Reagan administration. Through the process, he exposes the policy actions and interventions which have driven the boom-bust business cycles which people largely perceive as “capitalism”.
Through the course of this magnificently written book, Greider reveals the details of the impact of an institution which sits squarely at the center of American finance and politics whose power and primacy goes largely unchallenged. Though Greider is no libertarian, his book succeeds in uncovering the absurdities and deceptions of central banking and fiat currency, the perverse incentives it breeds in the economy, the capitulation of both parties to the cult of monetary policy, the effects of regulatory capture on the Fed itself and its subsequent failure to regulate the banking industry it oversees. Most importantly, he exposes the illusion of an institution allegedly immune to partisan politics or pressure which not only fails at achieving its stated aims, but aids and abets the banking cartel which owns it, exacerbates moral hazard, incentivizes speculation, misallocation and overconsumption, amplifies the risk it purports to mitigate, destroys price discovery and capital formation, fuels the warfare/welfare state which feeds from it and aggrandizes the power of the state at the expense of the average citizen.
The book opens by laying out the political and economic climate of 1979 which drove Jimmy Carter to makes his national appeal for sacrifice. The Iran hostage crisis, the OPEC oil embargo and record inflation were white hot political fires for which Carter was ill prepared. From there, we are taken through the corridors of power on Capitol Hill, to the canyons of Wall Street and inside the inner sanctum of the Eccles building with direct accounts from insiders on the negotiations and actions which shaped history.
This book is also a rare feat from a liberal. It’s a polemic that addreses monetary policy and the role it plays in shaping economic outcomes and economic policy initiatives with a high level of intellectual honesty all while demonstrating the subordinate and deferential role party politics play in relation to Fed actions. There is a lot to praise in this book. Despite his pretensions of espousing radical thought, the conclusions he draws have proven themselves ineffectual in light of current events and are terrifying in their ramifications.
Far and away, the most significant achievement of the work is the unveiling of the cultish mysticism which surrounds the Fed. He uncovers what I believe is the fundamental deception at the heart of all state power; the intentional conflation of statecraft with divine powers of insight and benevolence to lead the unwashed masses.
Richard Syron, former vice president of the Boston Fed and special assistant to Paul Volcker, likens the Federal Reserve to the Catholic Church:
The System is just like the Church. That’s probably why I feel so comfortable with it. It’s got a pope, the chairman; and a college of cardinals, the governors and bank presidents; and a curia, the senior staff. The equivalent of the laity is the commercial banks. If you’re a naughty parishioner in the Catholic Church, you come to confession. In this system, if you’re naughty, you come to the discount window for a loan. We even have different orders of religious thought like Jesuits and Franciscans and Dominicans only we call them pragmatists and monetarists and neo-Keynesians.
Greider elaborates further:
But the Federal Reserve did also function in the realm of religion. Its mysterious powers of money creation, inherited from priestly forebears, shielded a complex bundle of social and psychological meanings. With its own form of secret incantation, the Federal Reserve presided over awesome social ritual, transactions so powerful and frightening they seemed to lie beyond common understanding.
He sums it up pretty effectively with one elegant sentence:
The money process, nonetheless still required a deep, unacknowledged act of faith, so mysterious that it could easily be confused with divine powers.
Herein, I contend, is the secret behind the great confidence game called fiat currency to which we so willingly submit. Money has value because the almighty government say it does, Citizen.
In a subsequent chapter, he unravels the psychological and religious symbolism associated with money fairly convincingly. He traces money’s origins back to the Catholic Church and weaves in the observations of Marx, Veblen, Freud, mythic connections to the devil and even a theory tying it to the excrement of a child. Since money was formerly controlled by the church, it was used primarily to instill guilt and control the masses. It’s little surprise that politicians and religious leaders are still keenly attuned to the psychological symbolism of money and exploit the guilt inducing power to their own ends.
Another one of the great masterstrokes of the book is how he exposes Democratic establishment’s utter fealty to Fed orthodoxy, its origins in Progressive Era “reform”, and even if inadvertently, reveals the Fed as a pretty blatant form of socialism.
The Federal Reserve is very much a product of Democratic policy. It was created by Democrats and has been shepherded by Democrats through the years. It is more than a little ironic that the party which actively foments antipathy towards capitalism and trades in on this populist anger is solely responsible for the creation of state sanctioned institutions which have polluted and deformed the incentives of the market and enshrined a culture of cronyism.
In his own words:
The Federal Reserve was, more profoundly, an important prototype for the modern liberal state. For the first time, a governing arrangement would explicitly mix public and private interests in a manner that was elaborated many times later in different ways. However inadvertently or reluctantly, the creation of the central bank committed the federal government to a direct role in managing the private economy, and, once involved, it could no longer pretend to be aloof. It was, in fact, the beginning of the end of laissez-faire.
The conspicuous silence, or knee-jerk defensiveness, on all matters of monetary policy explains the ascendancy of a party which panders to working class sensibilities and the disaffected, but caters to the demands of the banking sector and benefits in proportion.
A big turning point for the Democrats which illustrates this phenomenon was their role in passing the Monetary Control Act of 1980
. This law paved the way for a myriad of deformations including a disincentive to save through the abolition of Regulation Q and towards increased speculation in the market, increased regulatory capture of the Fed, and increased moral hazard by raising deposit insurance limits for member banks.
The incident that perfectly captures the Democrats’ ignorance, mendacity and manipulativeness around monetary policy is Robert Byrd’s impotent attempt to rally legislative support to rein in the Fed in the wake of the 1981 contraction. The Balanced Monetary Policy Act of 1984 was simultaneously toothless, half-hearted and calculated. Nowadays, Democrats seem content to grill the Fed Chairman in committee simply to get a few sound bites worth of righteous indignation which can be transferred to a propaganda meme. By conveniently sidestepping monetary policy, the Democrats focus exclusively on the perverse side effects and then shamelessly ply on populist fears and prejudices in order to accumulate more power for themselves. Whether it is actual or willful ignorance, intentional deflection or all three, the Democrats’ refusal to engage with issues of monetary policy reveal a party so craven in its lust for power, it is nothing less than a vile pathology.
He also gives a brief but detailed account of the formerly dueling orthodoxies of Keynesian fiscal stimulus versus Chicago school monetarism. Two views which once represented two opposing poles in an ideological spectrum have joined forces in a harmonious union to stoke aggregate demand and create a “wealth effect”.
As Nancy Teeters, Jimmy Carter’s “liberal” appointment to the Board of Governors and doctrinaire Keynesian confirms:
I think I’m very much a central banker now. You’re in a position where your views on money, credit and banking are not really a reflection of your political party or your positions on economic issues. It’s not really a political job. I understand the whole milieu of what we’re doing, the continuous decisions, the mystique of central banking.
Bless you, Child. The Lord will shower you with blessings for your service to His House.
Throughout the book, Greider repeatedly tries to draw a contrast between Volcker’s monetarist “restraint” and Teeters’ “courageous” Kenynesian desire to open the spigots, but it comes across as more partisan propaganda. As the past ten years alone of Fed policy attest, Volcker’s discipline feels like a modest attempt to stave off the parasitic addiction to monetary crack on which the banking sector so hungrily feeds.
Worse still, the bureaucrats are pretty open about the internal pressure to conform to the institutional orthodoxy based on salary increases.
Larry Roos, former president of the St. Louis Fed explains:
These are very real influences on how vociferous a Reserve Bank President is going to be about dissenting. It’s subtle, but it’s real. If one is a young, career oriented president who’s got a family to feed, he tends to be more moderate in his opposition to the governors than an older person like myself who’s more independent.
Excellent! Pursue a career at the Fed so you can agree with the prevailing opinion of your superiors!
The details of Arthur Burns’ tenure are just as bleak. By all accounts, Burns was a craven, manipulative autocrat who was intolerant of independent thought and was unafraid to manipulate both numbers and the will of his subordinates in order to get his way. When the Carter administration was elected, he switched his demeanor and became an obsequious sycophant.
This culture of groupthink also resulted in regulatory capture. The bank lending to LDC’s in the early 80’s and the subsequent squabbles over leverage and capital ratios eerily mirrors the squabbles over the same phenomena which arose in the wake of the 2008 collapse.
The Federal Reserve, for all its legendary power, behaved in this crucial matter much like other regulatory agencies of the federal government. It yielded to the ambitions of the industry it was supposed to regulate, instead of enforcing the larger public interest. Federal Reserve officials might worry that the largest commercial banks, the Fed’s primary constituency, were pursuing a dangerous course, but the Fed lacked the will to discipline them.
Greider never defines “public interest”, but complete intellectual honesty and philosophical consistency is apparently not his aim.
Despite his hackneyed and pious recriminations, his account of the collapse and bailout of Continental Illinois in 1982 not only foreshadows what happened in 2008, but ends up reinforcing the perception that the Fed creates moral hazard and has no real ability to prevent reckless leverage or lending activities. The playbook of events was a microcosm of everything that came to pass in the collapse of 2008 only on a much bigger scale. Small bank borrows heavily from the Fed to finance some risky wildcat oil and gas deals, sells the loans upstream to some bigger banks resulting in “systemic risk”, FDIC and Fed step in to engineer a bailout in order to forestall additional panic. Debates between bureaucrats ensue with the head of the FDIC arguing for allowing a collapse and Volcker and dittoheads basically insisting that the government must forestall the impending financial contagion. Sound familiar?
What is perhaps equally staggering about this account is the sheer folly of central planning. Chapter after chapter, one is left with the distinct impression that these alleged philosopher kings are simply megalomaniacal ideologues making it up as they go. If they aren’t kowtowing to political pressure, cloaking their actions in obfuscatory smokescreens or in the thrall of groupthink, they often seem to have no fucking clue what they’re doing. It’s as though they’re playing a game of economic whack-a-mole. Tighten here and hope for the best. Loosen there because the first move didn’t produce the desired outcome. Should the Fed focus on money supply growth or GDP targets? Can the Fed accurately measure money aggregates? If the outcome produced perverse incentives, the administration would impose controls to offset the effects. Rinse, repeat. His account of the disastrous credit controls and the subsequent erratic attempts to loosen the money supply in the run up to the 1980 election illustrates this phenomenon perfectly.
Despite all that is revealed, Mr. Greider is a liberal and his pro-statist bias surfaces on many occasions.
Greider is certainly not unbiased in his analysis of monetary history. Despite his expert deconstructions of the Fed and the illusory power it wields over the money supply, he takes a pretty standard view that an inelastic hard money base is incompatible with an expanding economy and that deflationary cycles are always bad. He cites Lincoln’s expansion of the money supply with government specie to finance the Civil War as salutary, but describes the subsequent contraction and return to hard money as a catastrophe.
Though he appears to concede that the Fed induces business cycles, he seems totally fine with price controls and other fiscal countermeasures to offset the effects of monetary policy.
The 1981 inflation, for instance, was driven by escalating prices in oil and agriculture, both of which might have been contained temporarily by direct controls and other aggressive government policies. Some people would have been hurt but far fewer people.
His passing mention of the Fed’s role in fueling the run up of asset prices which lead to the crash of 1929 is remarkably casual and blasé:
The surplus money flowed, instead, into financial markets-artificially inflating financial values and fueling the run-up of stock prices that ended abruptly in the autumn of 1929.
My goodness. It’s almost as if history is repeating itself, isn’t it?
So just remember these rules, kids. Money is illusory, and it’s evil. Proponents of hard money are evil and deflation is bad. But government driven money supply expansion to finance war helps the middle class. And a Fed fueled frenzy of speculation which leads to a crash? Nothing that can’t be mitigated by a few government controls or better policy if the Right People are in charge.
He even manages a very subtle, but very insidious inversion of conventional outlooks towards libertarian thought. He takes the view that the credit boom of 1830 unleashed by the Jackson administration ushered in unprecedented capitalist progress. At the same time, he cites Bray Hammond’s comments on this these actions as “reckless, booming anarchy” and appears to frame them as the sentiments of regressive, hidebound ideologue. But it was this so-called “anarchy” which produced “fundamental progress” according to Greider. While this concession towards the creative energy of capitalism is an admission one rarely hears from liberals these days and hardly an expression of anarchy in any way that modern libertarians advocate, he’s also validating the virtues of the expansion of credit by government fiat.
Another loathsome manifestation of his statist bias surfaces in his lionization of Charles W. Macune and the Texas Populists. Aside from his laughable and contemptible reference to Keynes’ praise of the latter as “a brave army of heretics”, he lays his cards on the table by saying that the government was “the ultimate guarantor of the future” which derives its power from the “mutual consent given by all.”
Bravo, William Greider. Apparently, all heretical, transgressive and radical thinking are the product of seeking solutions from the institution which possesses the power to initiate violence. No, wait. I meant to say THE MUTUAL CONSENT GIVEN BY ALL.
He starts to pour it on thick in recounting the ascension of Marriner Eccles, the Republican Mormon from Utah who ran the Fed during FDR’s years, into the halls of power.
Greider claims that “Eccles had the uncommon courage to articulate this thinking before it became fashionable”.
Apparently, his “courage” was articulating the array of government fueled demand-side spending that was eventually codified in Keynes’ General Theory before Keynes’ famous work was published.
Greider portrays Eccles as the true architect of the New Deal. He lays out the entire contemporary liberal economic playbook, everything from minimum wage to mortgage financing, in his confirmation hearing and the FDR administration were more than happy to carry it out. The grand irony is that the playbook hasn’t really changed since then.
His analysis of the origins of so-called “supply side” economics is deeply partisan. He makes repeat mentions of Andrew Mellon’s advocacy of lowered tax rates for the wealthy, but fails to mention that both JFK and Keynes advocated similar policies. Though he rationalizes the Reagan deficits and tax cuts and the attendant stimulation of aggregate demand each created as an inversion of Keynesian theory, he also fails to mention that Reagan’s expansion of the warfare state was in and of itself inherently Keynesian. It was simply an application of the theory which didn’t fit the liberal narrative or agenda.
His repeated conflation of hard money advocacy with “conservative” statist economic policy is also particularly odious. Not only does he insinuate that Reagan’s closet belief in the gold standard was linked to the tax cutting agenda he eventually pursued, his portrayal of Jude Wanninski as a ideological zealot who infected the thinking of the administration reeks of partisanship.
He was a relentless advocate for gold. He was a close adviser to representative Jack Kemp and other conservative reformers. Now, with Ronald Reagan in power, Wanninski kibbitzed his friends in the White House and at the Treasury and and even dined infrequently with the chairman of the Federal Reserve. No one could say whether Wanninski had any influence on government policy, but important people listened to him.
And it doesn’t stop there.
These fetid piles of shite are further surpassed by his revolting attempts to inject gender politics into his argument. He argues that Volcker’s policy of tough medicine in 1981 was somehow the product of the masculine culture at the Fed. He cites the theories of unnamed feminist critics and refers to some generic tendencies in women to be more attuned to compassion and negotiations. He caps off this steaming pile of fecal matter by referring to Nancy Teeters’, the sole hardline Keynesian, as the lone voice of dissent in that time whose “bravery” in advocating for looser money would have forestalled economic devastation.
That’s right, proles. The appointment of Janet Yellen has COMPLETELY changed the nature of the Fed. The policy initiatives are BRAND NEW in contrast to her male predecessor.
By Greider’s logic, she’s ushered in a whole new standard of idiotic pandering dressed up as compassion which we can totally attribute to the fact that she has a uterus.
Where’s Carmen Segarra when we need her? Clearly, we need a True Government Heroine. Preferably, a strong womyn POC, too. Because everyone knows that power is totally transformed by genitalia and skin color.
His most nauseating cop out by far is his idiotic and contemptible conflation of religion and free market economics. Sadly, it’s a belief firmly held amongst liberals to this day, and somehow, the unclouded belief in the state is accorded total deference and escapes this very analysis.
Every important economic theory, one could say, relied upon an unstated subtext drawn from religious convictions. To declare correct principles for the functioning of the economy, one would first have to make certain assumptions about the larger nature of life itself-about God’s purpose and humanity’s obligations and the moral law that derived from the relationship of deity and mortals.
Perhaps it would be useful to examine how this analysis applies to liberals’ relationship to the STATE, Bill. But no. He pushes this moronic nonsense even further.
In this context, Keynes and his followers were the heretics. They were secular humanists who claimed men and women could manage human affairs for themselves.
The latter sentence would be a fantastic argument if it didn’t include deference to the doctrine of Keynesian statist economics, but that’s not what Greider is saying. He’s just flattering the smug elitism of modern liberals. He also seems conveniently oblivious to Keynes’ own warnings of the pernicious effects of inflation.
Still, Greider manages to drop many big truth bombs for those whose minds are open. Not only does he cop to the drag the New Deal created for the economy, he reveals some other historical figures who adopted Keynesian policy to further their own political ambitions.
As it turns out, one the biggest proponents of Keynesian economics was none other than Adolf Hitler!
The pre-Keynes Keynesians included Adolf Hitler. After 1933, Hitler initiated the Third Reich’s version of government-induced recovery-borrowing vast sums to build superhighways and armaments. He was so successful that by 1936 the Depression was substantially over for Nazi Germany.
Are you listening, Krugman fans?
For the inequality warriors, Greider thankfully points the finger of blame in the right direction.
If one viewed the Federal Reserve’s policy of high interest rates as an implicit government program for redistributing incomes, its magnitude by 1982 was approximately as great as all of the government’s other income-transfer programs combined, the redistribution of income that was explicit and controversial. The vast flow of money distributed to various beneficiaries through Social Security, veterans’ pensions, welfare and the rest came to $374 billion, now about the same as the income distributed to wealth holders through the high interest rates, $366 billion. Interest payments reached a record share of the nation’s personal income in 1982, more than 14 percent, almost doubled from 10 years before.
He spells out the mechanics of the con game in very explicit terms.
To economists, the effect was called “monetizing” the debt-a circular game in which the central bank bailed out the treasury by inflating the currency. The circle went like this: The executive branch borrowed money from the private sector by selling new Treasury notes and bonds. The Fed then diluted the value of this debt by buying up old Treasury notes and bonds from the private sector and paying for them with newly created money. The Federal Reserve, in effect, wound up holding more and more of the government’s debt paper in its own cloistered portfolio-and the private economy ended up with a bloated money supply.
He even gives a direct testimony from Stephen H. Axilrod explaining how the Fed, in its allegedly benevolent attempt to keep price inflation in check, artificially suppresses employment.
If you have a lot of demand, you’ve got to keep interest rates to keep the demand from overheating the economy. When you’re trying to wring out inflation, you have to keep the economy below its potential. The nasty way of putting that is you have to keep unemployment high.
Nowadays, all you hear from the intelligentsia and the apparatchiks
is a lot of carefully crafted academic blathering about how the drop in the labor force participation rate is a natural phenomenon and can be attributed to generational attrition. Right.
If one still isn’t convinced of the malevolent nature of the Fed after all these revelations, he explains how the bailout of Mexico resulting from the LDC debt crisis hobbled growth in these countries and disadvantaged American producers simultaneously. If the dollar strengthened against international currencies, exports suffered. The contraction weakened demand for imports which subsequently thwarted debtor nations struggling to meet the terms of loans and punitive fiscal austerity mandates imposed by the Fed and IMF; a phenomenon that continues to play out on the international stage as Greece and Puerto Rico attest.
The main insight of this book which I hope that anyone (especially liberal, antiwar progressives) who opposes the state war machine gleans from this book is the unholy alliance between central banking and the warfare state.
If anyone had any doubts that the apparatus of the central bank aids and abets the war machine of the state, this book should hopefully settle that score. He doesn’t make it a centerpiece of his argument, but he lifts the veil enough for you to see it.
Every war, every one of them, was accompanied by a massive expansion of credit. Generally, the state can’t get it through straight up taxation, so they get it by expanding the money supply.
Ultimately, Secrets of the Temple is rewarding, informative and deeply revealing book which is somewhat undermined by Mr. Greider’s muddled thinking, partisan biases, and deference to the authority of the state.
His prescriptions for higher inflation and a globally coordinated effort to ward off trade imbalances has not only played itself out to disastrous results on the international stage in the wake of the Greenspan/Bernanke/Yellen era, but those who share his convictions are stoking increasingly louder pleas from the population for ever increasing government involvement in economic life.
Since we’ve entered an era where the American left has openly embraced a socialist running for president and policies that are exclusively focused on constraint of economic freedom, redistribution and confiscation, the reinforcement and strengthening of government cartels, the destruction of entrepreneurship, and unlimited expansion of the money supply with no apparent regard for hyperinflation, Bill Greider’s book is not only refreshing but perhaps one of the last attempts by an intellectual of the left to deal with monetary policy with an analysis which goes beyond smug condescension, avoidance or an open embrace of the printing press. Perhaps it’s one of the left’s last grasps at real honesty for a political coalition whose respect for human freedom is at best, minimal and at worst, nonexistent.