A French Lesson for Sarbanes

May 17, 1993

Maryland Sen. Paul S. Sarbanes should take heed of what is happening in France before he proceeds with his long campaign to undermine the independence of the Federal Reserve Board.

In Paris, the new conservative government of Prime Minister Edouard Balladur has just given the Banque de France, a venerable institution founded by Napoleon, a measure of freedom somewhat comparable to the Fed's but less than that enjoyed by Germany's vaunted Bundesbank.

France's action reflects a national consensus for low rates of inflation -- a condition more prevalent in nations with independent central banks than in those that allow elected politicians to mess with monetary policy.

Despite the low U.S. inflation rate, despite the fact that Fed chairman Alan Greenspan, a Republican, supports President Clinton's economic plan, despite the Fed's superior performance relative to the mismanagement of fiscal policy by the executive and legislative branches over the years, Senator Sarbanes persists in his campaign. He dresses it up in a technical effort to deny presidents of the Fed's 12 regional banks their votes in setting interest rates and to vest this power solely with the seven Fed board members in Washington -- this on the theory that the Fed presidents are chosen by private bankers and have no public mandate.

As persuasive as this argument may be in the abstract, it has little relationship to the reality of how Fed decisions on interest rates are made. Rather, it is an opening wedge in an effort to make the historically independent Federal Reserve Board subject to the pressures of Democrats (like Mr. Sarbanes) who push incessantly for more government spending and easy money -- two time-tested ingredients of inflation.

Fortunately, President Clinton has decided for the moment that he has enough on his economic plate without overloading it with dubious changes in the Federal Reserve System. He probably has been advised, and rightly, that the kind of change advocated by Senator Sarbanes could send long-term interests rates through the roof. Now that France has wisely moved to give its central bank more independence from government control, perhaps Maryland's senior senator will reconsider as he prepares to face the voters next year.

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