The Flutist and Financier Who Runs Nation's Economy

The story goes like this: A friend bumped into Federal Reserve Board chairman Alan Greenspan at a party. He was curious about how Mr. Greenspan was faring in a job where one misplaced word can wreak havoc in financial markets.

"How are you?", the friend asked. "I'm not allowed to say," said Greenspan.

A sly joke? It's possible. Colleagues say the nation's top central banker has a secret talent for bon mots - despite the fact that he looks as dour as a basset that's just heard bad news.

But it's true that discretion is part of the Fed chairman's job. He presides over the mysterious ritual known as United States monetary policy, guiding short-term interest rates that affect millions of Americans. Wall Street studies his every word as if they were heavenly portents hinting which way rates will go next.

It's an autonomous system that makes the Fed chairman perhaps the second most powerful person in Washington. And it's a system in motion today, as Greenspan heads a rate-setting meeting in the Fed's imposing Foggy Bottom headquarters.

In fact, nations around the world have increasingly concluded that the Fed's power - antidemocratic as it is to some - is a key to US economic growth. Britain is only the latest to copy aspects of the US approach and give its central bank more power.

"There is academic evidence that says countries with independent central banks have lower inflation rates," notes Bob Litan, director of economic studies at the Brookings Institution.

Gift of antigab

The person who wields this power tends to be an unusual sort for top Washington officialdom. Presidents and Speakers of the House usually have to have the gift of gab to gain their positions. Fed chairman have the gift of anti-gab. They can talk for minutes on end without forming sentences, let along thoughts. Numbers are their passion. Statistics, such as new applications for unemployment insurance in the Northeast, are their touchstones.

They tend to be vaguely eccentric in respectable ways. Take Paul Volcker, chairman from 1979 to 1987. Tall and bald, Mr. Volcker is a fanatic fishermen. During his years in government he carried tackle in a giant travel tube to monetary conferences all over the world.

Greenspan, for his part, is an avid tennis player. Recently married to NBC reporter Andrea Mitchell, he likes to peruse economic reports while lying in the tub, soaking his back.

Bill Clinton makes much of his own sax hobby, but Alan Greenspan was an actual professional big band musician in the '40s. He played flute and saxophone in a band formed improbably enough by Leonard Garment, who himself later became Richard Nixon's lawyer during Watergate.

Greenspan "spent intermissions reading [novelist] Ayn Rand and general economics," writes Garment in his recently published memoirs. "Even then he was impressively obscure."

A subsequent career as a business and industry forecaster and Washington economist eventually won Greenspan the prize of appointment by President Reagan as Fed chairman in 1987.

Since then he's stuck closely to a moderately tight money policy, which are designed primarily to avoid a return to the double-digit inflation that occurred late in President Carter's administration.

How the Fed works

The theory of the Fed works like this: with short-term, government-controlled interest rates set by an independent chairman, members of the Fed board of governors, and five regional bank presidents, the chances for monetary stability are greater. The rate-setting mechanism is somewhat insulated from political pressure that might otherwise push it towards an easier-money policy which could overheat the economy, reigniting inflation.

It's a theory and approach that in recent years has been spreading across the globe. Some other nations - notably Germany - have long had powerful central banks. But early this month the newly elected Labor party government of Prime Minister Tony Blair set Britain down this path for the first time, moving the power to set short-term rates from the chancellor of the exchequer to the Bank of England.

France made a similar move in recent years, and Japan is weighing legislation to give the Bank of Japan more independence. New Zealand goes so far as to make its central bank governor subscribe to a public contract to meet specific inflation goals.

A Euro-style Fed

In Europe this trend has been driven by the approach of a single continent-wide currency, the Euro. If governments are to meet Euro standards they must keep their fiscal houses in order.

Beginning in 1999 a single European Central Bank is supposed to set monetary policy for all of Europe - or at least for all Euro states. But it remains to be seen whether nations with centuries-long identities and traditions will really cede this amount of power to an extra-national authority.

France, for instance, is already facing a significant degree of popular unrest due to the social spending cuts Paris has made to bring its budget deficit down, for Euro-qualification purposes.