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
Stigler: You're welcome, although
I'm not as informed and as violent as my good friend Milton Friedman on
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
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
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
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
Region: Thank you, Professor Stigler.