Supreme Court of Money

The Constitution divided the Government into three branches, but now there are really 3 1/2--with the Federal Reserve System being the half. It has so much latitude in money and banking that it is equal in independence to the Executive, Legislative and Judicial branches. The seven Federal Reserve governors can be removed only "for cause," and none ever has been. Since they are appointed for 14-year terms, they can stay in Washington while Presidents come and go. Exempt from Civil Service rules, the board in Washington and the twelve regional Federal Reserve banks hire and fire whom they please.

This independence and geographical dispersion were exactly what Congress had in mind when, spearheaded by Virginia Senator Carter Glass, it created the Federal Reserve after a fight in 1913 between easy-money Westerners and hard-money Easterners. The Westerners wanted to be sure that the Fed would never be dominated by Wall Street.

The Fed even finances itself. It makes a profit buying and selling Government securities, turns most of the earnings over to the Treasury ($5.9 billion last year), but keeps whatever it chooses as its own budget and tells no one what it does with the money. Several times Congress has asked to look at the Fed's books; the board has said no.

Its independence seldom brings fame.

The chairman is fairly well known, but, says Senate Banking Committee Chairman William Proxmire, "I bet only half a dozen members of Congress could tell the names of all the members of the board, and most people think that Ml is a gun used in World War II." Few Washington cab drivers know the Fed's address on Constitution Avenue.

Besides determining the nation's money supply and, indirectly, interest rates, the Federal Reserve is also a kind of superbank. It lends money to member commercial banks, audits their books, writes the rules under which they operate. It can approve or disapprove mergers between banks, or tell a bank whether it can open a new branch in London. The Federal Reserve enforces ten laws enacted to protect borrowers, and wrote the rules that banks must follow to make sure that women can get loans as easily as men.

The atmosphere at Washington headquarters has long been one of scholarly leisure. Governors, whose sumptuous offices are fitted with marble fireplaces, work comfortable 8:45-to-5:15 hours and have plenty of time for reading and contemplation. Members of the Federal Reserve's superb staff, which produced the Government's first computerized model of the economy in 1968, can take a few months to study some obscure financial problem. According to persistent legend, Reserve employees also indulge in a good deal of partying and high living. Fed people say the stories are exaggerated, though the board long had its own tennis courts, and today its staffers almost monopolize some supposedly public courts near the building.

Under Miller, the work pace has picked up considerably. A month after he became chairman, the board finally resolved an issue that had been hanging fire for years. It will permit banks, starting Nov. 1, to pull money out of customers' savings accounts to cover overdrafts in their checking accounts. This will have almost the same effect as paying interest on checking-account balances. The small saver can deposit nearly all his money in a savings account, earning interest, and have it withdrawn to cover checks.

Miller is moving to solve the Federal Reserve's worst internal problem: declining membership. Nationally chartered banks must join the Federal Reserve System, but state chartered banks can choose whether to belong or not; in the past two years they have been dropping out at the rate of almost one a week, weakening the board's ability to control the money supply. Since 1965, the share of bank deposits regulated by the system has decreased from 86% to 72.5%.

The reason for the dropout rate: the Fed requires that banks keep substantial funds on deposit with it as a safety reserve. Citicorp Chairman Walter Wriston complains that belonging to the Reserve System cost his bank $80 million last year. The solution would be for the Federal Reserve to pay interest on the deposits that it holds. Miller wanted to do that on his own authority, but Proxmire and House Banking Committee Chairman Henry Reuss protested that he was stretching the board's independence too far. At a hearing two weeks ago, Reuss bellowed at Miller: "The Federal Reserve can go jump in the lake!" Miller angrily blasted back: "If you tell me I can't write a memo, that's not acceptable." Last week Miller sent to Congress a proposal to pay 2% interest on member bank deposits.

If the bill passes and more banks join, they will be entering a many-layered system. The regional Federal Reserve banks carry out most of the workaday functions, such as clearing checks and distributing currency and coins to member banks. The New York City bank also buys dollars with foreign currencies in order to prop the greenback's price, acting under orders from a board committee that consults with Treasury Under Secretary Anthony Solomon about how much to buy and when.

The regional bank presidents, along with the seven board governors, serve on the Federal Open Market Committee, which makes the key decisions on money supply and interest rates. But only five of the twelve regional presidents vote on the FOMC. The president of the New York bank, now Paul Volcker, is a permanent voting member; the other eleven regional presidents rotate the remaining four votes.

The board in Washington is the final authority. A succession of forceful chairmen--Marriner Eccles (1936-48), William McChesney Martin (1951-70), Arthur Burns (1970-78) and now Miller--have caused the other governors to fade into public obscurity, but they still have influence. Next to Miller on the current board, J. (for John) Charles Partee, a former head of the Fed staff and wise student of the economy, has the most clout. Henry Wallich, a former Yale professor, is the board's contact man with foreign central banks. A refugee from Germany, he lived through insane inflation there in the 1920s; he likes to tell of the day that his mother handed him a billion-mark bill so that he could buy a ticket to a swimming pool. Stephen S. Gardner, a former chairman of Philadelphia's Girard Trust Bank, is an economic moderate, and Philip Coldwell, once head of the Dallas Federal Reserve Bank, is a hardline conservative who considered Arthur Burns too liberal. Philip Jackson, an Alabama mortgage banker, is noted more for his hunting prowess than his impact on policy.

The seventh seat was vacated by Burns, and Carter has decided to appoint a woman to an institution once so male chauvinist that it took Eleanor Roosevelt to crash the men-only rule in the board's dining room. The successor is Nancy Teeters, 47, the chief economist of the House Budget Committee. She was chosen largely because she has strong liberal views that she argues forcefully; Carter sees the board, Miller excepted, as a hotbed of Hoover Republicanism.

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