David Levy - Vice President
Published May 1, 1989 | May 1989 issue
In conjunction with the publication of his memoirs, and to elicit commentary on the Federal Reserve System during its 75th anniversary observance, The Region recently interviewed George Stigler. One of the eminent American economists of this century and a leading member of the "Chicago School" of economicshe was awarded the Nobel Prize in 1982Stigler commented on the Fed's level of independence, the role of research in the development of economic thought, and other matters.
Read a review of Stigler's book "Memoirs of an Unregulated Economist."
Region: Thank you for agreeing to share your thoughts on the Federal Reserve.
Stigler: You're welcome, although I'm not as informed and as violent as my good friend Milton Friedman on this subject.
Stigler: Tom Sargent is here (at the Hoover Institute), of course, you know.
Region: Yes, he also continues to serve as an economic adviser to the Federal Reserve Bank of Minneapolis. We put an essay question to the students in the Ninth Federal Reserve District last year, and we plan a similar program this year with a different question. We're curious what your answers would be to these same questions. The question that we asked last year is: "Should the current structure and independent status of the Federal Reserve be maintained, or should it be modified to give Congress more control?"
Stigler: I'm not sure how independent it is at present. I assume that because of the appointing power alone, the president has some contemporary influence on the composition of the board. However, if he reappoints, he often is compelled by the statement that it will disturb the international situation not to reappoint the chairman. I assume that was why Volcker was reappointed once. So, I don't think the independence is complete. It's barely conceivable that in an organization which could be eliminated by an act of Congress, not that it would be an easy act to pass, that you could have an insulation of the measure of, say, the Supreme Court.
The behavior of the Congress seems to be much more motivated by special and particular interests than is the president. He has a much bigger constituency and, therefore, I don't really want to see their influence any larger than it is now where they demand that Mr. Greenspan appear frequently to explain what he's just done.
Region: So it is as it should be?
Stigler: Pretty much. I don't know how you would ever grade a question like that.
Region: We graded the question by how well they reasoned to their answer, how well they defended the points they made for or against independence.
This is the question that we are going to ask this year: "Federal Reserve Chairman Alan Greenspan has frequently told Congress that reducing inflation is the Federal Reserve's number one priority. Explain why you think Chairman Greenspan and Congress should be concerned about inflation and recommend policy actions that you think should be taken to reduce inflation."
Stigler: Well, I'm a monetarist in the sense of believing that the control over some money supply is important (which measure of money and over what periods, for example, are decisive questions in the control over the rate of growth of the price level). I think that the rate of growth of money is a critical variable in controlling inflation and that, for example, the massive troubles we are having with the savings and loan industry are, in part, the product of the fanatical inflation we had at the end of the '70s and the beginning of the '80s. Those alone are indications of the kind of costs that are imposed upon a society. It wouldn't be too bad maybe if you went completely crazy, like the South American countries, and let the inflation go on and everybody indexes on some more stable currency, and so forth and so on. But we aren't going to do that. We're going to put all kinds of strange regulations in: we won't let this go up, and we'll let this price go up. They cause immense distortions in an age of inflation. That's one of the great problems plaguing the Israeli economy.
Region: You hold in high esteem those academic institutions that foster important economic research, and in your book you cite examples of schools that have been successful in stimulating key work from teachers and students. What is your evaluation of the Fed's economic research efforts, in general or specific?
Stigler: I've worked primarily in the area of industrial organization and public regulation, but not in the area of monetary policy. So I'm not closely acquainted with most of the work of, for example, your very large staff of economists in Washington. In fact, I know a little more about what your excellent group in Minneapolis has done, and in St. Louis, than I do about what has been done in Washington. So I don't feel very competent on judging that. I've been told by Milton Friedman that one of the perversities of history is that when the quality of the Washington staff is high, policy is pretty poor, and in the years in which the policy has been good, the staff has been low-quality. Now, if you want to explore that, you'll have to interview him.
Region: What would you guess is the reasonif he's correct?
Stigler: I think one reason for it would be that he really decided that the staff had very small influence, indeed, upon policy.
Region: There is a reasonably large number of economists and researchers at the Board of Governors and at the 12 regional banks. If you were in charge of this group, would you see it important to be a decentralized or centralized system?
Stigler: Well, I think it's healthy having individual banks maintaining talented research centers. I think San Francisco has picked up some over time. One of the disadvantages of Washington is that it is a one-company town. It isn't going to have the same breadth and variety of studies. Studies that are quite outside of the common terrain, as say, rational expectations studies were a decade ago, are very likely to get short shrift in the Washington scene. But with independent research centers some will pick them up and some will criticize them, and that's the way to develop a subject. So I don't believe in monolithic research.
Region: In the past 50 years, the Federal Reserve System has changed and you, as an educator and an economist, have been witness to many of these changes, as well as the changes in the evolution of the financial services industry. What do you imagine will be the makeup of the financial services industry and what will be the role of the Fed? Where are we going with financial services and what will be the Fed's job?
Stigler: Well, I don't know what the trend is for sure. One thing that has been obvious is that there has been a diversification of enterprises so that banks are now getting into underwriting again, finally overcoming Glass-Steagall. Banking functions, in good part, have been taken over by the money markets and the brokers. I do more of my banking with Merrill Lynch than I do with Continental Illinois, and not just because of Continental Illinois' checkered history.
On the other hand, there are tendencies for proliferationif that weird Secretary of the Treasury would have had his way, this Fed would already be in charge of regulating security markets, or at least have a very powerful voice in them. I think that suggestion was crazy, and I don't know whether it will be adopted, but I do think that the current administration is going to be more interventionist than the Reagan administration. I don't know whether we won't have more intervention, either to separate or to bring together regulatory things. It looks to me like it is a campaign now to give the SEC the control over the Chicago markets, and I don't know whether they'll succeed or not. But I think there will be important changes.
And, of course, if you add the component that the capital markets are now highly international, a new game has entered in which a lot of things, if tried in the United States, will merely drive markets abroad. So if we pay attention to that I think we're going to have a much looser system of controls and less well-defined boundaries of what one kind of financial institution can do.
Region: There are some officials and staff people in the Federal Reserve that have a laissez-faire approach to the economy. Do you find that interesting coming from the Fed, a place where you would imagine the opposite would be true?
Stigler: Well, in one sense it would be sort of traditional since even if we go back to Ricardo or Smith, they were going to assign the central banking or treasury functions to the government, even though the Bank of England at that time was privately owned.
In a broad way, we all know that if you make commercial banking free [as it was, at times, in the past] you would find that the markets would become more informed and more reliable ... there hasn't been that same clash [over banking] that there is when you ask, for example, whether we should let agriculture do what it wants or whether we should control it, and so forth.
Region: I have one last question about the Federal Reserve: Was there anything not asked that you would like to add?
Stigler: Well, I don't know how much political freedom the Fed has. The Fed, for example, has some silly laws, like the Truth in Lending law and the right to change margin requirements for stockbrokers. Those are silly laws. I'm sure they don't want them. They've got to quiet the Congress at least to comply with the letter of the law, if not with its spirit. I wish they were not encumbered with such things. I'm not even sure that I want them to be encumbered with bank examinations. Not that I want to make the bank examinations less searching, but I look on the Fed as the central banker of the nation, rather than primarily as the regulator of other financial institutions, although, of course, it can't be insulated. And, indeed, Greenspan's courageous actions when the market broke that October are one indication why they can't.
Region: Thank you, Professor Stigler.