Table Of ContentTHE PRESSURES ON AMERICAN
MONETARY POLICY
THE PRESSURES ON AMERICAN
MONETARY POLICY
by
Thomas Havrilesky
Duke University
~·
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Springer Science+Business Media, LLC
Library of Congress Cataloging·i n-Publication Data
Havrilesky, Thomas M.
The pressures on American Monetary Policy I by Thomas Havrilesky.
p. em.
Includes index.
ISBN 978-1-4757-2230-7 ISBN 978-1-4757-2228-4 (eBook)
DOI 10.1007/978-1-4757-2228-4
1. Monetary policy--United States. 2. Board of Governors of the
Federal Reserve System (U.S.) I. Title.
HG540.H38 1992
332.4'6'0973--dc20 92-31889
CIP
Copyright © 1993 by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 1993
Softcover reprint of the hardcover 1st edition 1993
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, mechanical, photo-copying, recording,
or otherwise, without the prior written permission of the publisher,
Springer Science+Business Media, LLC .
Printed on acid-free paper.
TABLE OF CONTENTS
Page
PREFACE vii
INTRODUCTION
CHAPTER
One The Pressures on Monetary Policy: 11
An Overview
Two Executive Branch Pressures on 29
Monetary Policy: 1914-1991
Three Legislative Branch Pressures on 81
Monetary Policy: 1914-1991
Four Monetary Policy Signaling from The 117
Administration to the Federal Reserve
Five Federal Reserve Responsiveness to 155
Threat-Augmented Signaling
Six The Causes of Signaling from the 195
Administration and Threats from
Congress to the Federal Reserve
Seven Monetary Policy Signaling from Congress 221
to the Federal Reserve
Eight Banking and Other Private Sector 251
Influences on Monetary Policy
Nine The Power of Appointment and 285
Monetary Policy
Ten Implications for Monetary Reform 325
INDEX 361
To my parents,
Mike Havrilesky and Pauline Duranko Havrilesky
PREFACE
The basic motivation for this book is my lifelong interest in the
relationship between political processes and macroeconomic outcomes,
especially in the area of monetary policy. Monetary policy is an area
where political considerations regularly impact upon economic results.
When my fascination with this subject began thirty years ago, none of
the scholarly literature of that period engaged in modeling monetary
policy, even as a constrained maximization problem, not to mention
systematically linking it to politically-generated goals. My dissertation
at the University of Illinois in 1966 and my first published article (in
the Journal of Political Economy in 1967) addressed the modeling and
estimation of the concerns that propel monetary policy.
In the political and economic turbulence of the period from the
late 1960s through the early 1980s, it became clear that the directions
taken by monetary policy were changing with some frequency. Much
of my published research during that period dealt with formal control
theoretic models of monetary policy but some of it attempted to
measure these changes and showed that monetary policy reactions to
the state of the economy were not stable over time. Even during this
early period I suggested reforms which might reduce the resulting
instability in the economy. For example, my 1972 article in the
Journal of Political Economy suggested systematic penalties Federal
Reserve officials who failed to meet the goal of monetary stability by
tying their budgets or salaries inversely to the rate of inflation.
viii THE PRESSURES ON AMERICAN MONETARY POLICY
By the late 1970s it became obvious that (despite the formal,
control-theoretic equilibrium models which were flooding the
scholarly journals at the time), monetary policy's reactions to the state
of the economy shifted in a rather irregular pattern. Moreover, it was
equally apparent that since 1970 many of the impulses for these shifts
appeared to emanate from the executive branch of government. In
contrast, one strand of the work on the link between politics and
monetary policy assumed and continues to assume regular, election
centered shifts in monetary policy premised on the assumption that
Democratic Administrations always favor low unemployment and
Republican Administrations always favor low inflation and/or the
assumption that only new Administrations will accept the risk of
recession which arises from anti-inflationary policies. Another strand
focuses on formal game-theoretic models which converge rapidly to
equilibrium. Since the late 1970s my research has been premised on
the belief that the real world is not so stable. One reason for this is
that the adverse side effects (on interest, exchange and unemployment
rates) of the redistributive programs of politicians result in episodic
bouts of pressure on the Federal Reserve for monetary expansion.
By the mid 1980s I became convinced that sufficient evidence
was available that would demonstrate realistically how monetary policy
is related to political phenomena. Since that time my research
program has been to investigate and to measure the political and
private sector pressures on monetary policy and to show how the
monetary authority assimilates and responds to them. This book
reflects that research program
While addressing a program of this magnitude requires knowledge
of economic history and political and monetary institutions together
with modern macroeconomic theory, a good deal of progress was made
by following up hunches with time-consuming empirical work.
Without the help and inspiration of my colleagues in encouraging my
hunches and my students in providing the manpower to follow up on
them this process could never have succeeded. I have been assisted by
discussions of my research program with readers of earlier drafts of
this book. These discussions have been invaluable and stimulating.
Readers of all or parts of the book include: Elmus Wicker, Chris
Waller, Robert Auerbach, Kevin Grier, William Barnett, Neil Beck,
Richard Froyen, George Kaufman, Ray Lombra, Ed Kane, Roy
Preface ix
Weintraub, Robert Eisenbeis, Thomas Mayer, James Buchanan, Phil
Brock, Thomas Willett, Raburn Williams, Edward Tower, Dudley
Wallace, Martin Bronfenbrenner, Roger Waud, Richard Timberlake,
Milton Friedman, Murray Wiedenbaum, Henry Chappell, Rob
McGregor, William Keech, James Granato, John Gildea, Alex
Cukierman, Thomas Ferguson, Wyatt Wells and Robert Schweitzer. Of
this list of colleagues, John Gildea, Henry Chappell and Roger Waud
were indispensable.
Computational and proofreading assistance were provided by
Beth Ann Beck, Paul Harrison, Dek Terrell, Alex Hartemink, Todd
Gilmer, and Stan Paskoff. Research assistance came from Heather
Havrilesky, Maria Lawrence, John Haldi, Jason Jordan, Tony Rojas,
Brian Abell, Charles Medrano, Roberto Laca, Chip Gage, Charles
Wickliffe, Carmen Jones, Jon Blank, Ed Mitchell, Matt Bernstein,
Tom Opdycke, Lisa Herskowitz, Tim Miller and Steve Rosen. Special
thanks go to Paul Harrison and Alex Hartemink whose statistical skills
helped immensely in putting the final package together.
Typing and editorial assistance were provided by Forrest Smith
and Joyce Hemphill at Duke and Rose Antonelli at Kluwer. Boundless
credit goes to Forrest Smith for his patience and skill in managing this
book's production process. I would like to thank the Federal Reserve
Board for releasing the directives of the Federal Advisory Council and
the Duke University Research Council and the National Science
Foundation for grants which financed parts of this book.
Thomas Havrilesky
Durham, North Carolina
THE PRESSURES ON AMERICAN
MONETARY POLICY
INTRODUCTION
The Organization
This book deals with the American monetary policy. In order to
understand the subject one needs to know about the workings of the
Federal Reserve System. This introduction provides an overview of
the organization and structure of the System.
The structure of the Federal Reserve System was designed to
disperse power along regional lines, between the private sector and the
government, and among bankers, businesspeople, and the public. This
has resulted in the evolution of the Federal Reserve System to include
the following entities: the Federal Reserve Banks, the Board of
Governors of the Federal Reserve System, the Federal Open Market
Committee (FOMC), the Federal Advisory Council, and the member
commercial banks.
Federal Reserve Banks
Each of the twelve Federal Reserve districts has a Federal
Reserve Bank in a city in the district, some of which have several
additional branches in other cities in the district. The three largest
Federal Reserve Banks in terms of assets are those of New York,
Chicago, and San Francisco--combined they hold over fifty percent
of the assets of the Federal Reserve System. The New York Bank,
