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Published by EH.NET (August 2011)

Stephen H. Axilrod, Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke (revised edition). Cambridge, MA: MIT Press, 2011. viii + 225 pp.? $25 (cloth), ISBN: 978-0-262-01562-2.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

This book is truly from ?inside the Fed.?? The author served the Board of Governors from 1952 to 1986, nearly half the time as senior advisor for monetary policy to chairmen Arthur Burns (1970-78), G. William Miller (1978-79), and Paul Volcker (1979-87).? He also observed William McChesney Martin, Jr. (1951-70) in action as chairman of the Federal Open Market Committee, and has kept in touch with the making of monetary policy under Alan Greenspan (1987-2006) and Ben Bernanke (since 2006).? Axilrod?s accounts of policymaking as seen from inside the Fed are interesting and informative, as are the ?anecdotes,? as he calls them, which reveal the personalities and methods of Fed chairmen, including their working relationships with advisors, fellow governors, and other central bankers.
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Axilrod doesn?t deny that theory influences policy, but he suggests that the personal characteristics of chairmen and their sensitivities to the public and political circumstances are also important.? Burns, for example, was unable to deal effectively with the Great Inflation of the 1970s for several reasons.? Although he had been a student of the consistencies embodied in business cycles, he seemed to see ?each cyclical episode as embodying a unique set of events,? of which money was only one.? Rising inflation during 1974-77, when the real fed funds rate turned negative, caused the market to perceive ?that the Fed was doing too little to contain money growth to a pace that would significantly restrain inflation, and the institution?s anti-inflation credibility substantially eroded.?
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Although Burns possessed substantial persuasive powers in small groups, aided by an explosive temper, his effectiveness as inflation-fighter was hampered by his inability even ?to attempt to exercise powers of persuasion and logic dramatically and compellingly enough in public speeches and congressional testimony so as to evoke the public support that might have made it easier for the Fed itself to pursue a stronger anti-inflationary policy.?? Such a ?task may seem too Herculean,? but it should be remembered that Volcker?s shift was only a year or two in the future, and Burns had a president in Gerald Ford who probably would have supported a genuine attack on inflation (which the Whip Inflation Now ? WIN ? campaign against greed was not).? Burns was further limited by his lack of a potentially persuasive policy, of something more than a maneuver ?inside the box.?
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Paul Volcker, on the other hand, ?combined great sensitivity to shifting trends in political economy (he could see what the country would now accept) with a willingness to take dramatic action,? and see it through.? When a New York Fed official said ?the Fed was in the process of ?experimenting? with a new approach to policy [as it shifted from interest-rate to money targeting], Volcker … went ballistic …. The idea of an ?experiment? was anathema to him because it suggested a lack of conviction at the Fed and would most certainly not help us regain market credibility.?? Some of this might be hindsight on Axilrod?s part, but he had no difficulty finding concerns for credibility among successful Fed chairman such as Martin, Volcker, and the early Greenspan before it became a part of economic models.
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He does not give high grades to Bernanke or the later Greenspan in this respect.? He shares what might be the consensus belief that the Fed contributed to the recent crisis.? Its opposition to inflation seemed half-hearted after 1998, and belief in the Greenspan-put — that the Fed would underwrite the large risks being taken — contributed to its loss of credibility, Axilrod believes.
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Bernanke inherited a difficult situation and didn?t improve on it.? The Fed seemed unaware of speculative and inflationary pressures, and the real fed funds rate became negative before the Fed belatedly shifted to tight money.? Its reactions to the crisis were unusual, and how it will deal with its gargantuan balance sheet is unknown.? There may ?be no very significant technical difficulties in either reining in the monetary base or at least minimizing the extent to which some larger than normal monetary base can be transformed into excess public liquidity.? But the Fed?s ability to undertake effective monetary policies in so complicated and uncertain a transition requires more than technical capacity.? It also requires from its chairmen … a public stature that enables him to perform effectively on the national stage, [which] does not yet seem to be firmly within Bernanke?s grasp.????
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?My experiences at the Fed suggest that a great leader for monetary policy is differentiated not especially by economic sophistication, but by his or her ability to perceive when social and political limits can and should be placed to make space for a significant, paradigmatic change in the approach to policy should it be required, as well as by the courage and bureaucratic moxie to pull it off.?? ?Native good judgment and plain old common sense,? as well as ?an intuitive feel for markets,? are also important.
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He gives no formal ranking of the chairmen, but there is no doubt that Volcker would be at the top of his list, probably with Martin second, although the latter had no ?powerful, dramatic crises to deal with.?
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Unsurprising in a ?lifer,? Axilrod?s stories of people and policies at the Fed reveal institutional beliefs that might improve our understanding of American monetary policy.? One belief that has often found expression among the governors and the staff is that the Fed is fighting inflation, which is hard to swallow when we know that inflation is fully explained by the Fed?s injections of reserves.? Statements to this effect possess the characteristics of a state of denial in an organization that has caused the greatest inflation in U.S. history, and make sense only if it means that the fight is against other, primarily political, interests for the independence to conduct a stable price policy.? There is even less reason, in light of his delivery of inflation leading up to the 1972 election, to call Burns ?unfortunate in the particular decade, the 1970s, where fate placed him as chairman … in years of quite strong inflationary winds.?? The relatively stable conditions in Martin?s term might not have been all luck. ???
One reason why the governors and senior staff have resisted academic influence is the Fed?s immersion in the money markets that are barely evident in economic theories.? The groups have different models for different interests.? There has been a circle-the-wagons reaction to the nearly universal academic disapproval of monetary policy during most of the postwar period.? Axilrod?s recollections in this area are ambivalent.? In the early 1960s, he believed that monetarist Karl Brunner?s description of the Fed?s control of the money stock ?was telling us nothing that we didn?t already know.?? However, Axilrod?s account of the Fed?s growing interest in money seemed to reflect a similar development among economists.?

Whatever the intellectual causes and effects between academia and the Fed — I believe each underrates the other — Axilrod?s bilingual discussion of the development of monetary policy over time, particularly the logical and empirical connections between money and credit, is a genuine contribution to our understanding of monetary policy and the institution that makes it.?

This book by a uniquely placed participant is an interesting and informative read on its own, but those who would like to learn more about Axilrod and his times are advised to read some of the many writings that offer different perspectives of the same events, for example, Allan Meltzer, who confirms Axilrod?s warnings about lagged reserve accounting when it was adopted (A History of the Federal Reserve); the Bank of England?s Charles Goodhart, who gives Axilrod an almost equal share with Volcker for the 1979 policy shift and calls him the second most important person at the Fed, (?Review,? Economica, Jan. 2011); and William Greider, who wrote that Chairman Miller?s lack of expertise made Axilrod ?an extraordinarily powerful bureaucrat.? Axilrod contradicts this by saying that the staff tended to have ?more influence when the chairman was strong than when he was not. … I always had the feeling that in Miller?s time … my views? were received ?with a bit less intensity.?? An author and defender of the modified monetarist model that replaced interest targeting in 1979, Axilrod finds no sense in the statements ?by a policymaker or two [that] the new policy was simply a cover so that the Fed could raise interest rates while ducking direct responsibility.?? It should be noted that one of the offending parties was Volcker (Volcker and Tyoo Gyohten, Changing Fortunes).

John H. Wood, Reynolds Professor of Economics, Wake Forest University, jw@wfu.edu, is the author of A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005) and A History of Macroeconomic Policy in the United States (Routledge, 2009). A current research project connects the economics and politics of William McChesney Martin, Jr. at the Fed and as president of the New York Stock Exchange. His Federal Reserve experience has been as a fellowship student at the Federal Reserve Bank of Chicago for two summers, an economist at the Board for three years and the Federal Reserve Bank of Dallas for two years, and further visits at the Federal Reserve Banks of Dallas, Chicago and Philadelphia.? He remembers looking down enviously from his window in the Flow-of-Funds section at the noon tennis match of which Axilrod writes, although he eventually got a chance with the afternoon group formed by Dewey Daane when he joined the Board.

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