Greider's "Secrets of the Temple"

William Greider's 1987 book "Secrets of the Temple: How the Federal Reserve Runs the Country" is a must-read on the history of the Fed, and especially the making of economic policy in the 70s and 80s.

http://www.amazon.com/Secrets-Temple-Federal-Reserve-Country/dp/0671675567/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1231009674&sr=8-1

[I should add that if you want a more conspiratorial view of the Fed's history, read The Creature from Jekyll Island: A Second Look at the Federal Reserve by G. Edward Griffin]

Some excerpts:

“Above all, money was a function of faith. It required an implicit and universal social consent that was indeed mysterious. To create money and use it, each one must believe and everyone must believe. Only then did worthless pieces of paper take on value. When a society lost faith in money, it was implicitly losing faith in itself. In the advanced economies of Western capitalist nations, this fundamental social bond had been managed for several centuries by ordinary mortals, working in institutions devoid of religious trappings…

The money process, nonetheless, still required a deep, unacknowledged act of faith, so mysterious that it could easily be confused with divine powers…The mind confers real value and elaborate power on these mere scraps of paper. It infuses money with potent psychological meanings, a surrogate for mortal anxieties and yearnings that lie deep and unexpressed in everyone…The Federal Reserve, quite literally, protected money’s illusions…This shared illusion was as old as stone coins and wampum, a power universally conferred by every society in history on any object that was ever regarded as money – seashells, dogs’ teeth, tobacco, whiskey, cattle, the shiny minerals called silver and cold, even paper, even numbers in an account book…At each stage of history one could see money retreating from concrete reality…

The money illusion was transferred to a new object with the rise of demand deposits, better known as checking accounts. Instead of currency, the paper money created by banks, people hesitantly came to accept that money also existed simply as an account in the bank’s ledger, redeemable by personal drafts or checks…It took generations for the public to overcome its natural distrust of checks, but by 1900 most people were persuaded…The nationalization of currency issuance, completed with the creation of the Federal Reserve in 1913, simply continued this arrangement. A new dimension of trust had added to the illusion. Finally, the last prop for the money illusion was kicked away in this century: the gold standard was abandoned…Next the money itself disappears. Money becomes truly invisible…As computer technology advances and money terminals are placed in every outlet of commerce, the plastic cards will displace both checks and currency as the medium of exchange."

"Richard Syron, a vice president of the Boston Fed who served for a time as special assistant to [Paul] Volcker, suggested that the institutional temperament and structure of the Federal Reserve System most resembled the Catholic Church, in which he had been raised.: ‘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…We even have different orders of religious thought like Jesuits and Franciscans and Dominicans only we call them pragmatists and monetarists and neo-Keynesians.’

“The Federal Open Market Committee met to deliberate on the money supply eight to ten times a year, but its decisions were made in secrecy…Internal reports and memos, the economic analysis that supported the decisions, were kept confidential for five years. A full transcript of the committee deliberations was never available, because it was no longer kept. The FOMC used to make a transcript of its deliberations available to the public after the five-year waiting period, but even that historic record was discontinued in the mid-1970s. When Congress was enacting the Freedom of Information Act, Federal Reserve Chairman Arthur Burns decided to abolish the full transcript, lest litigation force it into public view prematurely and embarrass Fed officials. No other agency of government, not even the Central Intelligence Agency, enjoyed such privacy.”

“New money was created not only by the Federal Reserve but also by private commercial banks. They did it by new lending, by expanding the outstanding loans on their books. Routinely, a bank borrowed money from one group, the depositors, and lent it to someone else, the borrowers…But if that was all that occurred, then credit would be frozen in size, unable to expand with new economic growth. On the margins, therefore, bankers expanded their lending on their own and the overall pool of credit grew – and the bank credit turned into money…How could such a system possibly work? Why didn’t it collapse and produce social disaster? The short, simple explanation was: trust…bankers would use this magic prudently. Banks would make sound loans that would be repaid, and they would always keep enough money on hand so that any individual depositor could always withdraw his when he needed it…

Bankers, however, could be dangerous. They were human, after all. Left to their own impulses, they might be tempted to expand their loans and create new money infinitely…They were restrained from doing this by the Federal Reserve. The ultimate purpose of the central bank was to control the society’s overall expansion of debt…If new credit expanded recklessly, beyond the realistic capacity of the economy to expand its output, then the future would deliver failure and disorder…To expand the money supply or contract it, the Federal Reserve created more reserves for the banking system or withdrew reserves – using its two small valves, the Discount lending directly to banks or the open-market purchase and sale of U.S. government securities.”